On December 10, The High Court dismissed the Commissioner's
appeal from the decision of the Full Federal Court in
Australian Building Systems.
The case concerned the application of section 254(1)(d) of the
Income Tax Assessment Act 1936 which requires every agent and
trustee "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...". The appeal concerned the interpretation of the
words "tax which is or will be come due" and
specifically whether the obligation to retain arose before an
assessment for tax was issued.
By a 3:2 majority, the High Court held that section 254 does not
impose an obligation on agents and trustees (which include
liquidators, administrators and receivers) to retain moneys to pay
tax unless and until an assessment has been issued.
The decision significantly limits the ability of the
Commissioner to use section 254 to achieve priority over secured
creditors. Secured creditors may no longer be forced to realise
secured assets pregnant with tax liabilities by way of mortgagee in
possession sale rather than receiver sale to circumvent the
operation of section 254. However, it is too early to predict how
the Commissioner will react to the decision and it is possible in
the case of significant secured assets that the Commissioner may
issue special assessments immediately after a receiver sale to
invoke the operation of section 254.
We expect that the Commissioner will withdraw the draft Taxation
Determinations (TD 2012/D6 and TD 2012/D7) in which he had asserted
the view that a retention obligation arises even before an
assessment has been issued.
It remains to be seen whether the Commissioner will seek
legislative changes to remedy his position.
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ATO has released 2 draft fact sheets relating to the 2010 amendments to corporate law and tax in relation to dividends.
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