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ATO jumps queue

The Full Federal Court of Australia recently handed down a decision that condoned the ATO’s actions of jumping the queue in a property settlement to recover a tax debt of $75,508.64. Without having any specific rights to the property, the ATO was able to take priority over a second registered mortgagee.

 

The case concerned a taxpayer who entered into a $1.675 million contract for the sale of a property which had two registered mortgages over it: the first in favour of NAB and the second in favour of Instyle. While the sale price was insufficient to satisfy the taxpayer’s debts to the two mortgagees, the parties agreed that the transaction-specific costs and the NAB’s first mortgage would be paid, with the balance to be paid to Instyle even though this was insufficient to discharge the debt.
 
Before settlement occurred, the ATO issued a notice under s260-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) – a notice compelling a third party to pay an amount owing to a taxpayer directly to the ATO - to the purchaser demanding payment of $75,508.64 to the ATO immediately upon the purchase amount becoming payable to the taxpayer.
 
The notice initially frustrated settlement because it meant that Instyle would not receive the full balance of the proceeds as originally agreed. After extensive discussions, the Commissioner agreed to allow the full balance of the sale proceeds to be paid to Instyle on the condition that the $75,508.64 in dispute be paid into a trust account pending resolution of the matter. As a result Instyle provided a release of the second mortgage over the property at the time of settlement.
 
In a 2:1 decision, the Court held that the sale proceeds were payable to the taxpayer, and therefore payable to the Commissioner as soon as the taxpayer offered unencumbered title to the purchaser, and that Instyle had therefore compromised its position when it released its mortgage over the property. On this basis, the Court ordered that the $75,508.64 be paid to the ATO.
 
While it appears that Instyle took all reasonable precautions to secure receipt of the proceeds of sale, they proved insufficient. This case emphasises the need for mortgagees to carefully consider their rights prior to providing any release of a mortgage where an applicable s260-5 notice has been issued. It will also be interesting to observe how this judgement impacts other security holders in light of the recently introduced PPSR.
 
You can read the full decision here.
 

Posted in: Tax & ATO News Australia at 21 November 12

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Tax & ATO News Australia

Author: David Hughes

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