Key Points
- Under the Income Tax Assessment Act 1936 (the "Act"), Australian liquidators are authorized and required to retain money which comes to them in their representative capacity that is sufficient to pay tax which is or will become due in respect of the income, profits or gains of the company.
- In Commissioner of Taxation v Australian Building Systems Pty Ltd (In Liquidation); Commissioner of Taxation v Muller and Dunn as Liquidators of Australian Building Systems Pty Ltd (In Liquidation) [2015] HCA 48, the High Court of Australia determined that the retention authorization and obligation does not arise upon the crystallization of a tax event but only upon the making of an assessment or deemed assessment in respect of the income, profits or gains.
- The High Court of Australia did not address the question of whether liquidators and other insolvency practitioners are otherwise authorized to retain money for the purposes of satisfying potential tax liabilities prior to the issuance of an assessment. The High Court's decision also leaves open the question of what consequences may flow to insolvency practitioners who have retained money for pre-assessed potential tax liabilities in the absence of authority.
Background
The liquidators of Australian Building Systems Pty Ltd
("ABS") caused ABS to enter into a contract for the sale
of real property, which gave rise to a capital gain tax event. The
liquidators sought a private ruling from the Commissioner of Tax on
the question of whether they had an obligation under the Act to
retain, out of the proceeds of sale, money sufficient to cover any
capital gains tax liability from the time that the capital gain
crystallized or only when a tax assessment had issued.
Section 254 of the Act provides "with respect to every agent
and with respect ... to every trustee" that he or she is:
- answerable, as tax payer, for the payment of tax on any income, profits or gains of a capital nature derived in his or her representative capacity;
- 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"; and
- personally liable for the tax payable in respect of the income, profits or gains to the extent of any amount he or she has retained or should have retained.
The term "trustee" is defined under the Act to include
administrators, receivers and liquidators.
The Commissioner ruled that section 254 of the Act required the
liquidators to retain money for tax purposes from the time of the
crystallization of the capital gain and that the liquidators were
required to account to the Commissioner for that liability out of
the proceeds of sale.
The liquidators objected to the ruling and pursued the matter
through the Federal Courts of Australia. Both the trial judge at
first instance and the Full Court on appeal determined that section
254 did not impose any obligation on liquidators to retain money
from the proceeds of sale of ABS's land unless and until a tax
assessment had issued. However, the trial judge noted that a
prudent liquidator would be entitled to retain the income, profit
or gain until the tax position in respect of the relevant tax year
becomes certain. No authority was cited for this proposition, and
the Full Court did not comment or express any position on it.
The Competing Arguments
The Commissioner argued that the language "tax which is or
will become due" in section 254 is broad enough to include a
tax which will be assessed in the future. For the Commissioner,
construing the retention authorization and obligation as arising
only upon assessment would leave trust or agency receipts liable to
being depleted prior to assessment and diminish the extent of the
potential personal liability of the agent or trustee to satisfy the
tax.
In response, ABS argued that a tax which "will become
due" is one that has been assessed and which is not yet due
for payment. In support of this, ABS asserted that section 254 of
the Act imposes a personal liability on the agent or trustee which
is limited by the clause "to pay tax which is or will become
due", and that this imposition is conditioned upon certainty
as to the amount of tax due. Such certainty, ABS argued, could
arise only upon assessment.
The Decision
Three members of the High Court bench (French CJ, Kiefel J and
Gageler J) determined that section 254 does not authorize or
require a liquidator to retain any money for tax purposes unless an
assessment has issued. Justice Gageler noted that this
interpretation minimizes the potential for disharmony between the
obligations and liabilities of liquidators under section 254 of the
Act and the obligations of liquidators and rights of creditors
under Ch 5 of the Corporations Act 2001 (Cth).
In dissent, Gordon and Keane JJ disagreed and determined that a tax
which will become due includes a tax which has not yet been, but
will be, assessed.
Ramifications
A possible consequence of the High Court's decision is that
liquidators who retain money for the purpose of satisfying a
potential tax liability prior to the issuance of an assessment have
exceeded the authority provided under section 254. A question
arises: Are liquidators otherwise authorized to retain money from
income, profits or gains for the purposes of satisfying a potential
tax liability prior to the issuance of an assessment and, if not,
what are the consequences of liquidators doing so?
Under general law, a trustee is entitled to retain trust property
against a beneficiary pending determination of contingent
liabilities of the trust for which the trustee is
liable.1 However, a liquidator cannot be described as a
"trustee" under general law.
In her dissenting judgment, Gordon J reasoned that a tax expense
incurred by a liquidator may fall within section 556(1)(a) of the
Corporations Act 2001 (Cth), being a winding-up expense
incurred in preserving, realizing or marshalling property of the
company, or in carrying on the company's business. Such an
expense must be paid in priority to all other unsecured debts and
claims. However, this does not address whether a pre-assessed tax
is a tax expense "incurred" and does not provide an
answer for situations where secured property is sold by a
liquidator.
In the face of uncertainty, liquidators and other insolvency
practitioners may need to seek the direction of the Court on these
questions in appropriate cases.
Footnote
1 Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 at 335-336; [1945] HCA 37; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367; [1979] HCA 61; Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 245-247 [47]-[51]; [1998] HCA 4.
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