By Johan van der Walt (DLA Cliffe Dekker Hofmeyr Tax Alert)
Executive summary (SAIT Technical)
Johan van der Walt reflects on the Australian case of Commissioner of Taxation v Park that analysed the provision of the Australian TAA dealing with third party appointments.There is significant overlap and similarity in design and intent between the Australian third party notice provisions and those found in s179 of the local TAA. At the core of both sets of provisions is the Commissioner's ability to give a third party notice to pay to the fiscus money in satisfaction of a taxpayer's debt.In theParkcase the court had to decide whether the Commissioner's claim to payment of a tax debt front-ranked a registered mortgagee's entitlement to payment of monies lent to the taxpayer.
On appeal to the FCAFC,the majority judgment was that, once the mortgage was released to allow settlement, the Commissioner's notice applied in relation to the purchase consideration receivable by the seller/taxpayer.
A recent Tax Alert (16 November 2012) considered SARS's ability to make third party appointments under s179 of the Tax Administration Act, No 28 of 2011 (TAA).
This follow-up article looks at the Australian case ofCommissioner of Taxation v Park  FCAFC 122 (decided on 31 August 2012)that analysed the corresponding provision in the Australian Tax Administration Act, 1953 (Australian TAA). The judgment caused quite a stir down under and could have significance for South African mortgagees.
Division 260 of the Australian TAA deals with 'Special rules about collection and recovery'. Section 260-5 specifically provide that the 'Commissioner may collect amounts from third party'. There is significant overlap and similarity in design and intent between the Australian third party notice provisions and those found in s179 of the local TAA. At the core of both sets of provisions is the Commissioner's ability to give a third party notice to pay to t he fiscus money in satisfaction of a taxpayer's debt.
In theParkcase the Federal Court of Australia had to decide whether the Commissioner's claim to payment of a tax debt front-ranked a registered mortgagee's entitlement to payment of monies lent to the taxpayer. The facts: There were two mortgages registered over the taxpayer's property. The sale price of the land was however insufficient to discharge the debt owed to both mortgagees. Before settlement the Commissioner served upon the purchasers of the land a garnishee notice issued under Australia TAA. It required the purchasers to pay part of the purchase consideration to the Commissioner in discharge of the seller's/taxpayer's tax debt. According to the Commissioner the fiscus was entitled to discharge of the tax debt in priority to the mortgagee's right to have its loan repaid.
In the courta quothe Federal Magistrate found against the Commissioner. It was held that the monies due to be tendered by the purchasers to the taxpayer at settlement, insofar as they were attributable to the secured debt, were not monies 'due' to the taxpayer pursuant to the notice under the Australian TAA [paragraph 29 of FCAFC judgment].
The Commissioner took the matter on appeal to the FCAFC.
The FCAFC majority judgment held as follows regarding the operation of the notice: "A notice under s260-5 (which this one was) imposes an obligation on the addressee immediately money becomes owing to the taxpayer. The money must be paid to the Commissioner instead of being paid to the taxpayer. There would, therefore, never be proceeds in the hands of the errant vendor which might be the subject of a charge in favour of the mortgagee" [par 103 of FCAFC judgment].
It was submitted to the FCAFC that, as a matter of construction, s260-5 should not be understood as entitling the Commissioner to step in and take the money promised to be paid to the vendor of a mortgaged property by his or her purchaser, at the expense of the mortgagee. The argument was that that would, in effect, turn the mortgagee into an unsecured creditor. The FCAFC rejected this proposition [par 104].
Consequently, the majority judgment was that, once the mortgage was released to allow settlement, the Commissioner's notice applied in relation to the purchase consideration receivable by the seller/taxpayer – the Commissioner was therefore entitled to payment in priority to the mortgagee. The Court pointed out that the second mortgagee's position became compromised "...when it released its mortgage over the property" [par 114]. The second mortgagee's release of the mortgage (and allowing the proceeds to be held in a trust account pending resolution of a dispute between the parties), was its undoing.
The facts in the Park case were complex and somewhat unique. The wording of s260-5 ("The Commissioner may give a written notice ... if the third party owes or may later owe money to thedebtor") is also not identical that of s179 of the TAA ("A senior SARS official may by notice to a person who holds or owes or will hold or owe any money ... for or to a taxpayer, require the person to pay the money to SARS ..."). One should thus be careful to extrapolate the Australian approach locally. The Park case does illustrate, however, the potential prejudice a third party notice could bring to the unwary mortgagee.
Taking into account SARS's increased reliance on s179 third party notices as a tax debt collection mechanism, recipients of such notices should be vigilant.