In Commissioner of Taxation v Park  FCAFC 122, in the context of considering the enforceability of notice issued under section 260-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (Taxation Administration Act), the Full Court of the Federal Court held that mortgagees of land are not entitled to the proceeds of the sale of the land if they are not mortgagees in possession.
The decision concerned a tax payer and bankrupt, Mrs Bassili, who owed $75,508.64 to the Commissioner of Taxation (Commissioner). Mrs Bassili had entered into a contract for the sale of her land (Sale Contract). The land was subject to two registered mortgages. Neither of the mortgagees had taken possession of the land, however, it was inferred that the sale proceeds were to be paid to the mortgagees.
Before settlement of the Sale Contract, the Commissioner served a section 260-5 notice under the Taxation Administration Act on the purchasers to the Sale Contract requiring them to pay part of the purchase price to the Commissioner of Taxation in discharge of Mrs Bassili’s tax debt (Notice).
The Notice caused settlement of the Sale Contract to be delayed. When settlement did eventuate, the purchasers provided cheques to the mortgagees to be held on trust by the second mortgagee’s solicitors, the first mortgage was discharged and the second mortgage was released in exchange for the residual purchase price.
The Commissioner sought to be paid the tax debt from the funds held on trust.
The Taxation Administration Act
Section 260-5 of Schedule 1 of the Taxation Administration Act empowers the Commissioner to require a third party to pay to the Commissioner a debt that the third party owes to a tax debtor. The Act provides that:
- The Commissioner may give a written notice to a third party if the third party owes or may later owe money to the tax debtor: section 260-5(2); and
- The third party is taken to owe money to the tax debtor if the third party is an entity by whom the money is due or accruing to the tax debtor or holds the money for or on account of the tax debtor: section 260-5(3).
At issue before the Full Court was whether the purchasers were “third parties” owing money to Mrs Bassili. At first instance, the Federal Magistrates Court held that the Notice was unenforceable on the basis that the sale proceeds were payable to the mortgagees and not Mrs Bassili.
On appeal, the Commissioner argued that the purchasers were debtors of Mrs Bassili under the Sale Contract and, upon settlement of that contract, they were obliged to comply with the Notice.
The Full Court agreed, rejecting the contention that mortgagees under the Torrens system had any right to (or beneficial interest) in the proceeds of the sale of the secured property in circumstances where they had not taken possession of that property and exercised their power of sale.
Upon this finding, the Court ordered part of the sale proceeds held on trust to be paid to the Commissioner. As noted by the Court, this was an unsatisfactory result for the mortgagees who had released their security upon settlement, leaving them without any security to recover the amount paid to the Commissioner from Mrs Bassili.
This decision illustrates that mortgagees should be cautious in releasing their security in the absence of having a right to be paid the proceeds from the sale of the encumbered asset.
The Full Court stressed that a Torrens system mortgage is only in respect of land and does not relate to moneys owed by third parties to the mortgagor. As a consequence, where a section 260-5 notice is issued, a mortgagee would be well advised not to allow any sale of the secured property to proceed unless the property is being sold by the mortgagee as mortgagee in possession.