COMMISSIONER OF TAXATION V PARK  FCAFC 122 (31 AUGUST 2012)
Recently, the Full Court of the Federal Court in Queensland held that the Commissioner of Taxation (“ATO”) was entitled to receive certain moneys in priority to claims by a second mortgagee pursuant to a garnishee notice (Section 260-5 of Schedule 1 of the Taxation Administrations Act 1953 (Cth)) which it served on the purchasers.
This case demonstrates that a second mortgagee could lose its priority (in terms of receiving full payment of all moneys payable to it under the terms of its mortgage) when it allows a mortgagor to sell the mortgaged property; especially when the mortgagor owes moneys to the ATO.
In this case, a mortgagor entered into a contract for the sale of property which required her to transfer an unencumbered title on settlement to the purchasers.
At the time of sale, the property in question was subject to two registered mortgages and the contract price was less than what was required to discharge the debts owed to the respective mortgagees.
Soon after the contract was entered into but before settlement occurred, a garnishee notice was served by the ATO on the purchasers of the property under the contract. The garnishee notice was issued pursuant to s.260-5 of Sch 1 of the Tax Administration Act 1953 (Cth). This notice required the purchasers of the property to redirect part-payment of the total purchase price under contract to the ATO for the purpose of discharging the mortgagor’s tax debt.
The Commissioner asserted that at settlement he was entitled to a portion of the sale proceeds payable by the purchasers for an amount sufficient to discharge the tax debt owed by the mortgagor, in priority to the second mortgagee’s right to claim payment of all moneys payable under the terms of its mortgage. The ATO informed the purchasers that if they failed to act in accordance with the garnishee notice they may be held liable for a criminal offence (s.260-20 of the Tax Administration Act 1953 (Cth)).
The Commissioner claimed that by serving the s.260-5 notice he was “enforcing his entitlement ahead of earlier secured creditors”, and that the garnishee “has attached to the purchase price and the purchasers’ obligation in relation to the garnishee supersedes the obligation or discretion to pay money to the secured creditor”.
The second mortgagee and the Commissioner eventually agreed to proceed to settlement on the provision that the Commissioner reserved his rights under the s.260-5 garnishee notice, and that the second mortgagee received the transfer of funds from the sale into its solicitor’s trust account only after the first mortgagee’s debts were reimbursed in full.
The issues in contention were:
- whether the money from the proceeds of the sale of the property was money due to the mortgagor pursuant to the contract of sale;
- whether on the release of the legal charge under the mortgage which allowed the settlement to proceed, the mortgagee held an equitable charge over the proceeds of sale; and
- whether the proceeds of the sale was available money of which the garnishee notice could attach.
Full Court of the Federal Court
The Full Court held in favour of the ATO.
Justice Siopsis was of the view that the mortgagor never obtained any beneficial interest in the proceeds of the sale as the second mortgagee had an equitable charge in its favour when it released its charge over the property, and therefore there was no money upon which the demand in the s.260-5 garnishee notice could operate or attach to.
However Jessup and Katzmann JJ held a different view in that the instant the money became owing at settlement by the purchasers to the mortgagor in exchange for the unencumbered title, the purchasers then fell under the statutory obligation by virtue of the s.260-5 notice to pay those moneys owed to the ATO by the mortgagor.
In light of the above reasoning, the Court found, inter alia, that the garnishee notice attached to the debt owing to the ATO and obliged the purchaser to pay the ATO an amount sufficient to discharge the mortgagor’s tax debt.
Can the situation be avoided?
Where a mortgagee is aware that a garnishee notice has been served by the ATO on a purchaser/s of the property under contract with the mortgagor, then the mortgagee is entitled to decide whether or not it will release its security at settlement for less than what it is owed.
When making a decision, the mortgagee should take into account that if the property is put back on the market, it may sell for less than the initial contract of sale.
A prudent mortgagee should also consider inserting a term or condition in the sale contract between the mortgagor and purchaser which requires the purchaser to pay the nett sale proceeds direct to the mortgagee. Also, confidentially clauses should be inserted in both the agreement with the selling agent and in the sale contract.
Mortgagees should always seek advice regarding their rights under the relevant legislation.