Can the ATO access a taxpayer’s superannuation when bankruptcy looms? David Oon and Bryce Figot explore this matter further.
The generally accepted notion is that superannuation is protected on bankruptcy due to s 116(2)(d)(iii) of the Bankruptcy Act 1966 (Cth).
However, the Commissioner has recently shown a willingness to seize superannuation monies to satisfy personal tax liabilities, even where bankruptcy was looming.
These were the facts in the recent case of Denlay v Commissioner of Taxation [2013] FCA 307 (‘Denlay').
The seizure of money occurred at first because the Commissioner exercised a power under s 260-5 of sch 1 to the Taxation Administration Act 1953 (Cth) allowing for the collection of their SMSF money to satisfy the Denlays' personal tax debts. These notices are often referred to as garnishee notices.
Although the Federal Court quashed the Commissioner of Taxation's decision to ‘garnishee' amounts held within the superannuation environment, this was largely the result of a fact-specific administrative law challenge mounted by the taxpayers.
The case therefore only hints at what the true position is regarding the status of superannuation when a taxpayer who is personally indebted is very likely to become bankrupt.
The decision
The taxpayers in Denlay had come to the attention of the ATO as having significant money in Liechtenstein.
The ATO believed the assets to be the result of the sale of property in Australia and income from business activity in Australia, particularly deep-sea diving, which included exploration, pipeline laying and maintenance and treasure-hunting.
In 2007 and 2008, the ATO audited the taxpayers' affairs after receiving information from a former employee of the Liechtenstein Global Trust. The result was that the Commissioner amended income tax assessments for the 2002 to 2007 income years, including significant administrative penalties.
The taxpayers challenged their amended assessments in the Federal Court. While this challenge was still on foot, the Commissioner commenced a case in the Supreme Court of Queensland. Judgment against the taxpayers for their personal tax debts was obtained, but then stayed in light of the still pending Federal Court appeals.
The reasons for the Court granting the stay included evidence that the taxpayers had limited funds to pursue the Federal Court appeals.
The Court also considered that bankruptcy was highly likely, and had ‘the potential to defeat a meritorious appeal'. Following this, the Commissioner was unsuccessful in challenging the stay.
The ATO then became aware of funds within the taxpayers' SMSF, held by BT Funds Management Ltd. On becoming aware of the diminution of these funds, the Commissioner issued a ‘garnishee' notice.
BT Funds Management Ltd paid the SMSF funds to the Commissioner. At the time, the appeals in the Federal Court were only part-heard. The Commissioner's stated reasons for issuing the notice included:
- The taxpayers' net assets in Australia had been recently and significantly diminished;
- The reduction of funds presented a ‘substantial' risk to the revenue; and
- The view formed by the Commissioner that the taxpayers probably still had access to monies outside Australia.
While the Commissioner stated in the reasons that the issue of notice was not in breach of the stay of enforcement of the judgment, this was not elaborated on in the reasons.
The taxpayers applied for judicial review of the decision to issue the garnishee notice. In the Federal Court, Logan J quashed the Commissioner's decision to issue the notice, stating that:
The decision to issue the notice was so unreasonable that no decision-maker, acting reasonably, could have so decided.
After stating that the law was that the Commissioner was bound to take into account certain relevant considerations, Logan J stated that the Commissioner made the decision while failing to take into account:
- The reasons that the stay of enforcement had been granted (his Honour stated that these reasons reflected a ‘considered judicial value judgment');
- The merits of the tax appeals on foot; and
- The effect of the notice on the taxpayers' ability to further prosecute the appeals.
Is superannuation protected if a personal tax bill is unpaid?
The facts of Denlay are significant when considering the prospect of ATO garnishment of superannuation monies to satisfy personal tax debts. On the face of it, the Commissioner's policy in PS LA 2011/18 remains that:
A garnishee notice in respect of any tax-related liabilities may be served on a superannuation fund, but it will not be effective until the tax debtor's (member's) benefits are payable under the rules of the fund (for example, the tax debtor retires or dies).
However, Logan J's judgment made specific reference to an old conundrum, stating:
"I note, in passing only, because it was not submitted to be a relevant consideration or a feature of why the decision was said to be unreasonable, that the decision-maker has not at all considered whether any of the funds garnered by the s 260-5 notices from BT Funds Management Ltd would, having regard to s 116(2)(d)(iii) of the Bankruptcy Act 1966 (Cth), have formed part of the property of the bankrupt estates of Mr and Mrs Denlay in the event that the Commissioner were successful in any future sequestration application."
In drawing attention to this point, his Honour appeared to hint at superannuation's protected status in bankruptcy possibly being able to trump a garnishee notice.
It may be that, given the right facts, raising this argument in the future could lead to resolution of the question in favour of taxpayers.
In particular, in the case of taxpayers who are near to being bankrupt, the fact of superannuation's protected status on bankruptcy may mean the Commissioner is bound to take into account the special status of superannuation. This could be raised when challenging a garnishee notice.
ATO policy
The outcome of Denlay was heavily dependent on the taxpayers' facts and the inability of the Commissioner to show that all the relevant considerations were taken into account.
The ATO's decision impact statement for Denlay stated that the ATO will continue to apply the stated policy in PS LA 2011/18 of considering whether a garnishee notice will ‘significantly prejudice' any rights in pursuing tax appeals.
The ATO did state, however, that it will take into account the daily living expenses of taxpayers.
Conclusion
The facts of Denlay show an increasing willingness of the Commissioner to utilise statutory powers to recover tax debs.
Then, in the case of garnishee notices, the onus will be on the taxpayer to launch a legal challenge.
Despite the above, it may be that for taxpayers close to bankruptcy, superannuation's protected status on bankruptcy provides a possible defence argument against garnishee notices.
David Oon is a lawyer and Bryce Figot is a director at DBA Lawyers.
Originally published on SMSF Essentials.
