Australia: The obligation of a liquidator or receiver to retain funds from the proceeds of sale of an asset sufficient to meet prospective tax liabilities

On 17 April 2015 the High Court granted the Commissioner of Taxation (Commissioner) special leave to appeal the decision of the Full Federal Court in the decision Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133. In that case, the Full Federal Court held that the obligation imposed on a liquidator by s 254 of the Income Tax Assessment Act 1936 (ITAA36) to retain funds from the proceeds of assets realized during their appointment sufficient to meet any tax liabilities does not arise prior to the issuing of a notice of assessment.

If the Commissioner's appeal is successful, the way in which a liquidator or receiver accounts for the proceeds of assets realised during the course of their administration will be significantly impacted.

The Legislation

Section 254 of the ITAA36, imposes a number of obligations on 'trustees' and 'agents' in relation to the collection and assessment of tax. The definition of 'trustee' in s 6 of the ITAA36 includes both a liquidator and a receiver. Section 254 of the ITAA36 provides as follows:

" (1) With respect to every agent and with respect also to every trustee, the following provisions shall apply:

(a) He or she shall be answerable as taxpayer for the doing of all such things as are required to be done by virtue of this Act in respect of the income, or any profits or gains of a capital nature, derived by him or her in his or her representative capacity, or derived by the principal by virtue of his or her agency, and for the payment of tax thereon.
(d) He or she is hereby authorized and required to retain from time to time out of any money which comes to him or her in his or her representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains."

The Facts

On 6 April 2011 Australian Building Systems Pty Ltd (ABS), which had been placed into voluntary administration under part 5.3A of the Corporations Act 2001 (Corporations Act) was wound up by resolution of its creditors.

During the course of the winding up the liquidators of ABS caused the company to dispose of a parcel of land located in Crestmead, just south of Brisbane (Creastmead Property). The disposal of the Creastmead Property resulted in ABS making a capital gain of approximately $1.12 million constituting a 'CGT Event A1' for the purposes of the Income Tax Assessment Act 1997 (ITAA97). It is relevant to note that a 'CGT Event A1' is deemed to have occurred at the time that the contract disposing of the asset is entered into1.

In January 2012, when the liquidator's of ABS received the proceeds of the sale of the Creastmead Property, a notice of assessment had not yet been issued to ABS for the financial year in which the CGT event occurred. On this basis, the liquidator's sought a private ruling from the Commissioner of Taxation to determine whether their obligations to retain funds under s 254 of the ITAA36 arose prior to the company being issued with a notice of assessment. The private ruling issued by the Commissioner answered this question in the following terms:

  1. Is the liquidators required under s 254 of the ITAA36 to account to the Commissioner out of the proceeds of sale, any capital gains tax liability that crystalises on the sale of an asset that belonged to the company before liquidation?
    Answer to Q1 – Yes
  2. If the answer to Q1 is yes, are the monies to be retained once an assessment issues?
    Answer to Q2 – No.
  3. If the answer to Q2 is no, are the monies to be retained at crystallization of any capital gains?
    Answer to Q3 – Yes.

On 10 July 2012 ABS filed an objection to the private ruling challenging the Commissioner's findings, which was subsequently disallowed by the Commissioner.

Draft Taxation Determinations

On 19 September 2012 the Commissioner issued two draft Taxation Determinations relating to the effect and operation of s 254 of the ITAA36.

In the first of those Draft Taxation Determinations, TD2012/D6, the Commissioner noted that the obligation imposed on trustees and agents under s 254 of the ITAA36 is an obligation to retain an amount from any funds that come into their hands in the course of their appointment sufficient to pay tax 'which is or will become due'. The Commissioner opined that the language in s 254 ITAA36, and particularly the phrase 'is or will become due', makes clear that the obligation arises irrespective of whether a notice of assessment has been issued.

In Draft Taxation Determination TD2012/D7, the Commissioner expressed the view that a receiver's obligations under s 254 ITAA36 required him or her to retain from the gross sale proceeds of a Capital Gains Tax asset, sufficient funds to pay tax which is or will become due as a result of the disposal of the asset. The Commissioner also stated that this statutory obligation took precedence over any other claims to those funds, including that of a secured creditor.

Australian Building Systems Pty Ltd v Commissioner of Taxation [2014] FCA 116

On 11 October 2012 the liquidators of ABS commenced proceedings in the Federal Court of Australia appealing from the Commissioner's decision to disallow the objection it had filed, and also seeking:

  1. an order that the private ruling issued by the Commissioner be set aside; and
  2. a declaration that they were not required under s 254 of the ITAA36 to retain from the proceeds of sale of the Creastmead Property sufficient money to pay such tax, if any, which is or will become due as a result of the disposal of the Creastmead Property.

Justice Logan held that the liquidators were not, in the absence of any notice of assessment, subject to any retention or payment obligation derived from s 254 of the ITAA362. Justice Logan was of the view that although the obligation to retain funds to pay tax under s 254 ITAA36 refers to tax 'which is or will become due' this does not mean that the obligation arose before the issuing of a notice of assessment. In arriving at this position, Justice Logan relied heavily on the decision of the High Court in Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598, which involved the interpretation of similar language contained in s 255 of the ITAA36.

It is also relevant to note that the liquidators of ABS also requested that the court determine whether the operation of ss 501, 555 and 556 of the Corporations Act is affected by s 254 of the ITAA36, such that the Commissioner enjoys a form of priority because of s 254, notwithstanding what would otherwise be the effect of these provisions of the Corporations Act in a winding up. Justice Logan did not decide this question on the basis that he was not required to do so based on his finding that there was no obligation under s 254 of the ITAA36.

On 8 October 2014 the Commissioner's appeal of the decision of Justice Logan was unanimously dismissed by the Full Federal Court.

Implications for insolvency practitioners

  1. Although Justice Logan found that a liquidator is not, in the absence of any notice of assessment, subject to any retention or payment obligation derived from s 254 of the ITAA36, he did note that a 'prudent liquidator' would be entitled to retain the proceeds from the sale of an asset for a time against other expenses that may arise in the course of administration. Justice Logan also noted that at the very least a liquidator would be entitled to retain the gain until the income tax position in respect of the year in which the CGT event occurred had become certain by the issuing of a notice of assessment.
  2. It is unclear whether the Commissioner will determine the liability of a liquidator or receiver under s 254 of the ITAA36 in accordance with Draft Tax Determinations TD2012/D6 and TD/2012/D7 until the determination of the appeal by the High Court.
  3. In light of the above, both liquidators and receivers should be mindful of their obligations under s 254 of the ITAA36 when distributing the proceeds of sale of assets from which a tax liability may arise. Receivers should be particularly mindful of this obligation before distributing funds to a secured creditor considering the findings of the Commissioner in Draft Tax Determination TD/2012/D7.
  4. In the circumstances, until the determination of the appeal by the High Court, it would be prudent for both liquidators and receivers to retain funds sufficient to meet potential tax liabilities from the proceeds of sale of assets until such time as a notice of assessment is issued to avoid potential personal liability under s 254 of the ITAA36.


1Section 104-10 (3) ITAA91
2See judgment of Logan J at [25]

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.

Kemp Strang has received acknowledgements for the quality of our work in the most recent editions of Chambers & Partners, Best Lawyers and IFLR1000.

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