Australia: ATO issues draft tax determinations to assert its priority over secured creditors in receiverships

Last Updated: 10 October 2012
Article by Philip Diviny and Andrew Chambers

The Australian Taxation Office (ATO) has recently released two Draft Taxation Determinations (TDs), TD 2012/D6 and TD 2012/D7 to resolve the uncertainty surrounding the obligation of receivers when Capital Gains Tax (CGT) assets are sold in the course of receivership. The TDs discuss the ATO's interpretation on how section 254 of the Income Tax Assessment Act 1936 (Section) applies.

In essence, the TDs stipulate that receivers are obliged to retain from the sale proceeds that come to them in the capacity of receiver, sufficient funds to pay tax which is or will become due as a result of disposing of a CGT asset. This applies even if no formal tax assessment has been made by the Commissioner.

Importantly, the ATO deems the retention of funds required by the Section as a statutory requirement that takes precedence over other contractual rights including the contractual rights of secured creditors.


The Section provides that agents and trustees which include administrators, receivers and liquidators are required to retain funds to pay tax 'which is or will become due' in respect of the income, profits or gains realised by the principal (ie debtor). The Section also makes agents personally liable for the tax payable in relation to the amounts required to be retained.

TD 2012/D7

This draft determination qualifies the current position that agents or trustees in their representative capacity have obligations under the Section and that the Section does not itself create a liability for tax. It is meant to work in conjunction with the other relevant substantive liability provisions (including the CGT regime) to allow for the agents to be liable for any tax liabilities that arise in the course of their agency.

The TD specifically rules that obligations under the Section extend to the total capital gain arising from the CGT asset and not just any capital gains accruing from the time the receiver is appointed. The TD provides the following example:

"If an asset was purchased ten years earlier for A$100,000, and it was worth A$200,000 when the receiver was appointed as agent for the debtor, and subsequently it was disposed of for A$210,000 during the period in which the receiver was the agent of the debtor, then the debtor's tax liability (if any) will relate to the whole of the A$110,000 capital gain."

The Section then applies to the capital gain and the receiver will be required to retain an amount sufficient to pay the tax liability regardless of whether the money was used to meet secured debts. The TD further stipulates that this "obligation subsists despite other existing or potential claims over the retained amount."

The obligation to withhold and remit tax will not apply to a mortgagee in possession as a mortgagee in possession is not an agent or trustee of the debtor for the purposes of the Section.

TD 2006/D6

This draft determination examines whether an assessment is required to be made before the obligation to retain funds arises. The ATO takes the view that an assessment is not required before the obligation to retain sufficient funds to pay the tax which arises.

This is contrary to a High Court case decided in 2007 which considered the phrase in the context of another provision that imposes an obligation to retain funds (section 255). The ATO relied on the differences in the legislative history and policy arguments in relation to the two sections in forming its view. In addition, the ATO considers that an agent or trustee will ordinarily have the ability to accurately calculate any tax liabilities on disposal as they are generally in possession of relevant information.

Important considerations

It is essential for receivers to understand these rules and ensure that they take appropriate steps to retain sufficient tax as they can be held personally liable for any shortfall, ie in situations where the proceeds from sale are insufficient to meet both the secured debt and the tax amount.

As the Section (and the draft determinations) implicitly recognises that receivers will ordinarily have the ability to calculate any tax due, they will have to ensure that all information necessary to calculate the tax liability is obtained and retained. Where this proves to be practically difficult, receivers will need to obtain specialist tax advice or approach the ATO to obtain a ruling as to the appropriate amount to withhold.

Application/transition period

The ATO has indicated that it will only apply TD 2012/D7 prospectively from the time that the final determination is issued.

TD 2012/D6 will be applied both prospectively and retrospectively.


The deadline for submissions on these draft determinations is 19 October 2012. Middletons would be happy to assist you if you would like to lodge a submission.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Middletons has been awarded a 2012 EOWA Employer of Choice for Women citation acknowledging our commitment to workplace diversity.

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