The High Court has further clarified the law regarding the effect of section 260-5 notices served by the Commissioner on third parties who are required to make payments to a company in liquidation.

The effect of the decision is that the Commissioner cannot issue such a notice after a company has gone into liquidation in order to give himself a priority over other creditors for payment of a tax debt. Such a notice is void.

A section 260-5 notice is a notice served by the Commissioner on a third party who owes or may later owe money to the taxpayer who has a tax related debt to the Commissioner requiring that third party to pay that money to the Commissioner rather than the taxpayer.

The facts in the High Court case were that the Commissioner served a section 260-5 notice on a firm of lawyers requiring that firm to pay money it held on trust for the relevant taxpayer on account of present and future legal costs. The relevant taxpayer was a company in liquidation that was a trustee of a charitable trust.

The Commissioner sought to gain a priority over other creditors of the company by issuing the section 260-5 notice to the firm of lawyers for that firm to pay the Commissioner rather than pay the balance of the funds after satisfaction of its lien for legal costs to the company in accordance with the obligations of the legal firm under the Legal Profession Act.

The Corporations Act provides as relevant to this case that:

  • any attachment... put in force against the property of the company after the passing of a resolution for voluntary winding up is void
  • ...all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately.

It was argued by the Commissioner that there was a conflict between the Administration Act which enabled it to issue the section 260-5 notice and the above provisions of the Corporations Act and therefore the provision of the Administration Act overrode the provisions of the Corporations Act.

The High Court said the critical question was whether these provisions of the Corporations Act could be diminished by the subsequent engagement of a section 260-5 notice. The High Court said these provisions were not so diminished.

Firstly the Administration Act had a regime for dealing with a company in liquidation so there was no conflict between the Corporations Act and the Administration Act which meant that a section 260-5 notice was not available to the Commissioner where a company was placed in liquidation.

Secondly this conclusion was reinforced by the provisions of the Corporations Act which had the effect of binding the Crown in right of the Commonwealth.

The High Court also confirmed earlier authority that a section 260-5 notice was an attachment and therefore void where issued after the passing of a resolution for voluntary winding up.