Kupang: Court of Appeal disallows Commissioner of Taxation’s appeal

Key findings

No special immunity

The Commonwealth conceded, and the Court of Appeal endorsed the conclusion of McGrath J at first instance, that the Commissioner: "does not have some special status which makes [him] immune from possessing the requisite knowledge to make [him] liable as a knowing recipient or immune from conducting the sorts of inquiries which should be conducted by an honest and reasonable person".

Profits as trust property

The Court upheld McGrath J's conclusion that the Sale Proceeds were "trust property", drawing upon a long line of authority in English and Australian law.

The Court rejected the Commonwealth's contention that whilst the errant fiduciary may be liable to account as a constructive trustee for the profits gained in breach of fiduciary duty, those profits themselves were not trust property. Consistently with Furs Ltd v Tomkies (1936) 54 CLR 583 and Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342, the Court considered that all undisclosed profits derived by a fiduciary from the execution of their fiduciary duties belong in equity to the principal, and are trust property held by the errant fiduciary on constructive trust.

Constructive trust as remedy

The Court further confirmed that the constructive trust is an institution that may arise by operation of law as well as be imposed as a remedy. Noting the observations of Crennan J in Jones (as Trustee of the property of Heather MacNeil-Brown, A Bankrupt) v Southall & Bourke Pty Ltd [2004] FCA 539, the Court rejected the Commonwealth's contention that in Australian law, as distinct from English law, the constructive trust is solely a remedial institution.

Effect of orders in Chameleon Judgment

The Court also rejected the Commonwealth's contention that, even if the Spotter's Fee Securities were held on trust by Mr Grimaldi for Kupang at the time when those securities were sold to derive the Sale Proceeds, the character of the Sale Proceeds as trust property was altered by and 'merged' into the Final Orders (which relevantly granted Kupang only a personal remedy over Mr Grimaldi to account for the Sale Proceeds).

Want of probity and Commissioner's statutory duties and functions

Separately, the Commonwealth sought to argue that, in light of the Commissioner's statutory duties to issue notices of assessment on taxpayers and collect taxation-related liabilities, the Commissioner's conscience was not relevantly bound by the receipt and retention of the Admitted Receipts. This was a challenge to findings of McGrath J that the Commissioner had acted with a "want of probity" in the circumstances.

The Court first confirmed that the concept of "want of probity" was not some additional criterion to the requirement for knowledge in establishing the first limb of Barnes v Addy. Further, the Court expressed some scepticism in relation to these arguments given its conclusion that the Commissioner does not stand in any special position as concerns liability under Barnes v Addy.

In any event, the Court refused leave for the Commonwealth to raise this contention, as it had not been pleaded in the Commonwealth's defence and it would have caused prejudice to Kupang if this contention were allowed to be raised in the proceedings. The Court observed that, had the Commonwealth been permitted to raise this new ground, legitimate questions may have arisen as to, among other matters:

1. the Commissioner's discretions as to his statutory obligations, including as to the timing and issuing of assessments; and

2. the possibility of ex gratia payments,

in addition to other matters specific to the circumstances of the case (such as any special incentives to pursue Mr Grimaldi).

Whether the existence of any special statutory duties and/or the administration of Commonwealth laws informs liability under Barnes v Addy will need to wait for another day.