Why the ATO had to pay a judgment exceeding $15m (plus $20m in interest), a strict application of the equitable rule in Barnes v Addy concerning knowing receipt of trust property.
An article by Jake Cole and Kseniia Gasiuk.
The New South Wales Court of Appeal’s decision in Commonwealth of Australia v Kupang Resources Pty Ltd [2026] NSWCA 161 illustrates that the Commissioner’s statutory duties to assess and collect tax do not absolve the Commonwealth from personal liability as a knowing recipient of property obtained in breach of fiduciary duty.
In this case, the Court dismissed an appeal by the Commonwealth of Australia (Commonwealth) from Kupang Resources Pty Ltd v Commonwealth of Australia (No 4) [2025] NSWSC 1477 (McGrath J), leaving in place a judgment against the Commonwealth for $15,139,745.67, plus pre-judgment interest to 18 December 2025 agreed between the parties in the amount of $20 million. The Court comprised Bell CJ, with Ward P and Griffiths AJA agreeing.
The decision raises two quite different sets of issues:
how orthodox equitable rules concerning breaches of fiduciary duty require third parties with the requisite knowledge of those breaches to hold property obtained in breach of fiduciary duty on trust; and
a tax administration question about the limits of the Commissioner's statutory functions.
Background
The findings relevant to the issues before the Court related to historical proceedings concerning Phillip Grimaldi (Grimaldi): Chameleon Mining NL v Murchison Metals Limited [2010] FCA 1129 (Chameleon Judgment). In those proceedings, Grimaldi was found to have acted as a de facto director of Chameleon Mining NL, now known as Kupang Resources Pty Ltd (Chameleon). It was not in contention that he owed fiduciary obligations to Chameleon as a de facto director. In February 2004, Winterfall Pty Ltd (Winterfall), controlled by Mr Nicholas Zuks, agreed to purchase the “Iron Jack” mining tenements but could not fund the whole purchase price. Murchison Metals Limited then used Chameleon’s funds to acquire its interest in Winterfall and, through it, the Iron Jack project. Grimaldi and Mr Gregory Barnes, a director of Chameleon, through a separate entity, obtained an undisclosed "spotter's fee" of 10 million shares in Winterfall for introducing Murchison into the transaction. Grimaldi later sold those shares, producing significant Sale Proceeds.
Following a lengthy trial, on 20 October 2010 Jacobson J found that Grimaldi had breached his fiduciary duties to Chameleon, in particular because he had caused Chameleon’s funds to be used to obtain the Iron Jack mining tenements and the undisclosed spotter’s fee. (An appeal from Jacobson J’s orders was dismissed in Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6.) Justice Jacobson made Final Orders requiring Grimaldi to account personally to Chameleon for the Sale Proceeds and any further profits derived from them, including an inquiry by a referee as to those further profits. The parties never completed the ordered inquiry.
By that time, the Commissioner was investigating Grimaldi’s tax liabilities. The parties agreed that various companies controlled by Grimaldi, including International Finance Trust Company Limited, initially received the Sale Proceeds into offshore New Zealand bank accounts, and that the Commonwealth knew this. The Commissioner subsequently issued amended tax assessments for the 2006 to 2008 income years to Grimaldi, resulting in additional tax and penalties payable by Grimaldi in the amount of $35,761,637. The Commissioner and Grimaldi ultimately compromised those liabilities pursuant to two deeds of settlement dated 8 October 2010. Under those deeds, Grimaldi paid the Commissioner $12,519,410.61 at the outset, with the balance paid by instalments through to 28 February 2013 (Admitted Receipts).
At trial before McGrath J in this matter, the Commonwealth conceded that Chameleon could trace the Sale Proceeds into the payments that the ATO ultimately received under the Deeds of Settlement. The Admitted Receipts therefore represented the proceeds Grimaldi had obtained in breach of his obligations to Chameleon.
With Grimaldi unable to satisfy the Final Orders, Chameleon sought to recover the Sale Proceeds from the Commonwealth on the basis that the Commonwealth was personally liable under the first limb of Barnes v Addy (1874) LR 9 Ch App 244 as a knowing recipient of the Admitted Receipts (i.e. trust property). Chameleon alleged that the Commonwealth knew that the Admitted Receipts had been obtained in breach of fiduciary duty by Grimaldi and thus held those funds on trust for Chameleon. McGrath J having found for Chameleon at trial, the Commonwealth appealed to the New South Wales Court of Appeal.
Part A: Equity and Remedy Aspects
The courts have been clear that a person ‘who receives trust property become[s] chargeable if it is established that they received it with notice of the trust’. The Court identified the four Baden categories, as stated in Simmons v New South Wales Trustee and Guardian [2014] NSWCA 405 at [90] and discussed at [31]-[33], as the relevant knowledge test:
actual knowledge that the property was transferred in breach of fiduciary duty or trust;
wilfully shut their eyes to those matters;
wilfully and recklessly failed to make such inquiries as an honest and reasonable person would make, or abstained in a calculated way from making them; and
knowledge of facts which to an honest and reasonable person would indicate the existence of the trust and the fact of misapplication.
The Commonwealth accepted at trial before McGrath J that the ATO ‘knew all of the findings’ in the Chameleon Judgment when it was delivered on 20 October 2010 (at [643] of the primary judgment). The Court of Appeal noted that finding at [36]. Further, McGrath J found at [678] of the primary judgment that, putting aside that admission, the ATO had sufficient knowledge to satisfy the tests in (b), (c) and (d) above; the Court of Appeal recorded those findings at [38]-[39]. The Commonwealth did not challenge those findings on appeal. Accordingly, the Commonwealth was plainly on notice of Grimaldi’s breaches of fiduciary duty and of the interest that Chameleon had in the Sale Proceeds and thus the Admitted Receipts.
At [56], the Court quoted Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342 at 350, which states the doctrine of Keech v Sandford (1726) 25 ER 223:
a trustee must not use his position as trustee to make a gain for himself: any property acquired, or profit made, by him [or her] in breach of this rule is held by him [or her] in trust for his cestui que trust [i.e. beneficiary]. The rule is not confined to cases of express trusts. It applies to all cases in which one person stands in a fiduciary relation to another.
To put it another way: a trust will immediately arise in respect of any gain or property acquired by the delinquent fiduciary in breach of their obligations, and such a trust does not depend on any order of the Court. The Court observed at [59] that if the rule was not so, and instead depended on an order of the Court, then the delinquent fiduciary or trustee would ‘be at liberty to treat with the trust property and to dissipate it in a manner that would undermine the rationale of the initial fiduciary obligation …’
In so holding, the Court rejected an argument by the Commonwealth that the Admitted Receipts were no longer trust property, such that the Commonwealth did not hold them on trust for Chameleon, following the Final Orders made on 20 December 2010. The Commonwealth argued that the orders of Jacobson J somehow changed the nature of the property that was the subject of the Admitted Receipts. Jacobson J had not decided that Chameleon did not hold a proprietary interest in the Sale Proceeds but only that Grimaldi was liable to account for them. The Court observed that Jacobson J’s order for an account in the Final Orders, as opposed to a proprietary remedy (for example, an order that Chameleon had an equitable interest in the Admitted Receipts), did not alter the nature of the Admitted Receipts as trust property of which the Commonwealth was a knowing recipient. A trust arose in respect of the Sale Proceeds as soon as Grimaldi breached his fiduciary obligations to Chameleon. The Commonwealth admitted that it had knowledge of such matters. Accordingly, the Commonwealth was liable as a knowing recipient of the Admitted Receipts.
Part B: Tax Aspects
The Commonwealth also sought to absolve itself from any liability under the principles in Barnes v Addy on the basis of the Commissioner’s unique statutory functions. By Ground 4 of its Amended Notice of Appeal (Ground 4), the Commonwealth argued that the primary judge's finding that the Commissioner had acted with a want of probity failed to give proper weight to the Commissioner's statutory duties, namely:
the duty under section 166 of the Income Tax Assessment Act 1936 (ITAA 1936) to assess a taxpayer's liability and pursue its recovery;
the "conclusive evidence" status given to a notice of assessment by item 2 of the table in subsection 350-10(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) (and its predecessor, former section 177 of the ITAA 1936); and
the Commissioner's obligations under Part IIB of the TAA, including section 8AAZL, concerning how payments and credits received in respect of a tax debt must be applied.
The Commonwealth contended that its statutory obligations under Part IIB of the TAA, including the mandatory and unqualified obligations concerning payments and credits received in respect of tax debts under section 8AAZL, required the Commissioner to accept and apply the Admitted Receipts as it did, and that the Commonwealth should not be found to have acted improperly in doing so.
Why the argument failed
The Court refused to entertain Ground 4 ultimately because it had not properly been pleaded and argued at trial, and to allow the Commonwealth to run the argument on appeal had the potential to cause Chameleon significant prejudice.
Had Ground 4 been pleaded, Chameleon could have tested through discovery and cross-examination whether the relevant officers on behalf of the Commissioner had considered those obligations, what discretion the Commissioner had as to timing and how the Commissioner’s investigations of Grimaldi’s taxation affairs influenced the pursuit of the Admitted Receipts.
For completeness, the Court observed that Ground 4 rested on the premise that a want of probity was a separate (and necessary) element of the knowledge requirements essential for a claim that a third party holds property on trust as a knowing recipient. The Court noted that that premise is not consistent with Australian law: the relevant knowledge test is that discussed above.
The Court therefore did not accept that the Commissioner's statutory duty to assess and collect tax altered the findings as to the ATO’s knowledge of Grimaldi’s breach of fiduciary duties. The trial judge was therefore correct in concluding (at [685] of the primary judgment) that: ‘The ATO does not have some special status which makes it immune from possessing the requisite knowledge to make it liable as a knowing recipient or immune from conducting the sorts of inquiries which should be conducted by an honest and reasonable person.’ (The Commonwealth did not challenge those findings on appeal.)
The Court also queried whether the conclusive evidence provisions relied on by the Commonwealth, including section 350-10 of Schedule 1 to the TAA and its predecessor, former section 177 of the ITAA 1936, could assist the Commonwealth in this case. It was, the Court said, strongly arguable that the provisions applied only for recovery proceedings or ‘for the purposes of taxation laws’. The Court referred to the majority’s statement in Federal Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32 (Futuris) that the evident policy of former section 177 of the ITAA 1936 was the ‘facilitation of proceedings for the recovery of tax’, and to Anglo American Investments Pty Ltd v Deputy Commissioner of Taxation [2017] NSWCA 17. Ultimately, the Court did not need to decide whether the provisions could have assisted the Commonwealth. However, the detailed findings made by McGrath J at trial, which the appeal did not disturb, demonstrate how strictly the rules in Barnes v Addy are applied, including to entities with statutory functions.
The Court dismissed the appeal with costs, leaving the Commonwealth liable to pay Chameleon the judgment sum of $15,139,745.67 in respect of the Admitted Receipts. The Admitted Receipts comprised an initial payment of $12,519,410.61 on 19 October 2010 and instalments through to 28 February 2013. The primary judgment also included agreed pre-judgment interest of $20,000,000 to 18 December 2025. Interest from 18 December 2025 remained to be agreed or, failing agreement, to be addressed by further submissions.
Key takeaways
The following principles fall from this case:
the Courts treat delinquent fiduciaries and trustees strictly; they hold any gains or property they acquire in breach of their duties on trust for their beneficiaries;
any such trust arises immediately upon a breach by the trustee or fiduciary; such a trust does not depend on any order being made by a court;
a person with the requisite knowledge of the trustee or fiduciary’s breaches of duty will be liable to account to the trustee or fiduciary’s beneficiary as a knowing recipient in accordance with the principles in Barnes v Addy;
a statutory duty to assess and collect tax is not, on its own, a defence to any such claims. The Commonwealth remains subject to the same standards as any other recipient of trust property;
whether the conclusive evidence provisions, including section 350-10 of Schedule 1 to the TAA, can assist the Commonwealth to defend against a third-party claim remains a real but undecided issue. In this case, however, the Court observed that it is strongly arguable that the provisions apply only to recovery proceedings or ‘for the purposes of taxation laws’;
where the ATO is aware that a taxpayer is defending civil proceedings alleging that the taxpayer’s funds are the product of a breach of fiduciary duty or similar wrongdoing, collecting the tax debt without further inquiry may expose the Commonwealth to liability, as occurred in this case; and
a party should plead and prove every available basis of defence at first instance, including reliance on statutory functions. The Commonwealth could not raise Ground 4 for the first time on appeal because it had not pleaded or argued that case below and Chameleon established prejudice.
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