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20 Sep 12
ATO obtains priority over secured creditor

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In Commissioner of Taxation v Park [2012] FCAFC 122, the ATO was given priority over the second mortgagee for the payment of part of the sale proceeds which were payable by the buyer to the seller (taxpayer) under a contract for sale of real property.

The ATO had issued a notice under section 260-5 Schedule 1 Taxation Administration Act 1953 (Cth) (section 260-5 notice) to the buyer demanding that the buyer pay the ATO part of the purchase price to repay the seller’s existing ATO taxation debt.

If the tax liability was for a GST liability that arose from the sale of the property itself, you might expect the ATO would want to claim priority over the GST amount from the sale proceeds given the GST liability arises from the sale itself.  However, in this case, the seller’s taxation debt was for general tax liabilities and not GST.

In a 2:1 decision, the Full Federal Court held that the Commissioner of Taxation was entitled to payment from the buyer in priority to the second mortgagee.

McCullough Robertson believes, the decision is a significant departure from the law as it was understood to apply previously. The decision represents a significant risk to the priority position of secured creditors and creates a practical dilemma for secured creditors and their customers.

Given the strong dissenting judgment, the decision may be appealed.

Action needed by secured creditors

If relevant, secured creditors should consider directly exercising power of sale under their securities instead of cooperating with a sale of the secured property by the debtor.

It is clear from the decision that if a secured creditor exercises power of sale, the sale proceeds are payable to the secured creditor and there will be no money payable to the seller to which a section 260-5 notice could attach.

If secured creditors are asked to provide a release at settlement, secured creditors should:

  • take steps to determine whether a section 260-5 notice has been issued at any time prior to settlement
  • advise sellers that any release given is conditional upon there being no section 260-5 notice issued prior to settlement
  • require sellers to notify them immediately if a section 260-5 notice is issued, and
  • refuse to release their security if a section 260-5 notice has been issued to protect their priority.

It is worth noting that if a secured creditor provides a release and a section 260-5 notice has been issued, the secured creditor may be required to pay to the ATO money it has received in exchange for the release, even though settlement of the sale of the customer’s property has occurred.


Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.

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