Deputy Commissioner of Taxation v PM Developments Pty Ltd  FCA 1886
Liquidators will welcome this recent Federal Court decision. Most have been operating on the assumption that Division 147 of the GST Act imposes personal liability on trustees in bankruptcy, liquidators, receivers and voluntary administrators for the GST obligations of a company or individual after the date of appointment. However, on 12 December 2008 Logan J held that a liquidator (and, by extension, a receiver and voluntary administrator) has no personal liability for GST in circumstances where the assets of the company have not vested in the liquidator. In his decision, Logan J criticised provisions of the GST Act and its explanatory memorandum.
PM Developments Pty Ltd (PMD) was the developer of 8 new residential premises on the Gold Coast. Prior to 5 July 2007 it had entered and settled contracts for the sale of 7 of the 8 lots. It had entered a contract for Lot 8 but had not yet settled that contract.
On 5 July 2007 the Federal Court ordered that PMD be wound up and Mr Greig was appointed liquidator. After his appointment, the liquidator terminated the contract over Lot 8. On 27 August 2007 PMD entered a fresh contract for the sale of Lot 8 for $1,755,000, including GST. The contract settled on 31 August 2007.
The Commissioner sought to recover the GST from the liquidator, arguing that he was personally liable for the GST under Division 147 of the GST Act. The liquidator sought declaratory relief from the Court that he was not personally liable for the GST and that the GST was another debt of PMD to be paid pro rata in line with other unsecured debts of the company.
The explanatory memorandum to the GST Act states, in relation to Division 147:
- where an entity is registered for GST and becomes insolvent, and a representative is appointed, such as a trustee in bankruptcy or liquidator, during the period of the representative's appointment, the effect of Division 147 is that the representative is taken to be carrying on the enterprise; and
- the representative is personally liable for GST in respect of supplies made from the date the representative is appointed.
Logan J held that Division 147 does not achieve the result stated in the explanatory memorandum because it does not deem the liquidator to be making supplies. Logan J held that ordinarily, when a company is placed in liquidation, it is the company and not the liquidator which carries on an enterprise for GST purposes and therefore only the company is capable of making taxable supplies. This is because the making of a winding up order vests the liquidator with the control of the company but does not vest the assets of the company in the liquidator. In this respect, receivers and voluntary administrators are in the same position as liquidators: the assets of the company over which they are appointed do not vest in the receiver or voluntary administrator. A liquidator can apply to the Court to have assets of the company vested in him or her but such applications are uncommon. The position of liquidators, receivers and voluntary administrators is distinguished from what occurs when an individual is placed in bankruptcy as in that case, the assets of the individual are automatically vested in the trustee in bankruptcy.
Accordingly, as the liquidator is not making any supplies, Division 147 can not impose any personal liability on the liquidator for GST.
In reaching his decision, Logan J contrasted the clear provisions of the New Zealand GST Act which impose personal liability on liquidators. Logan J noted that the New Zealand GST Act, when enacted in 1985, also lacked a provision deeming liquidators to be carrying on the enterprise of the company to which they were appointed. However, the New Zealand GST Act was amended in 1992 to overcome this deficiency and to clearly deem liquidators to be making supplies. This lack of a deeming provision in Division 147 of the Australian GST Act is the important missing link which means that liquidators can not be taken to be making any taxable supplies, and therefore they can not be personally liable for the GST of the company to which they are appointed.
Logan J held that the GST payable by PMD in relation to the sale of Lot 8, as it was not a personal liability of the liquidator, was a debt of PMD. The GST debt for the sale of Lot 8 was, however, a post liquidation debt of PMD and therefore enjoyed the payment priority for which s 556(1)(a) of the Corporations Act provides for such debts.
The case did not consider the difficult issue of what the GST position would have been had the original contract for Lot 8 proceeded to settlement. That contract was entered into prior to the appointment of the liquidator and, had it proceeded, would have settled after the appointment. Would the GST payable under such a contract constitute a debt in existence at the date of appointment? Or is it a debt that arises after the appointment? Is the answer different if the deposit is released to the vendor prior to the liquidator's appointment? This requires consideration of when the supply of the property is made for GST purposes and whether any special attribution rules apply.
Why is this case important?
This case provides clear law for liquidators, receivers and voluntary administrators regarding the correct GST treatment of transactions entered into by companies in liquidation, receivership or voluntary administration. Liquidators, receivers and voluntary administrators will welcome the decision as it clearly states that liquidators (and, by extension, receivers and voluntary administrators) have no personal liability for the GST debts of companies in liquidation (or receivership or voluntary administration), except in the uncommon circumstances where assets of the company have vested in the liquidator. Trustees in bankruptcy, however, are personally liable under Division 147 for post-appointment GST.
The case may give rise to amendments to the GST Act to deem liquidators, receivers and voluntary administrators to be the entity making taxable supplies. The question then arises, whether such amendments will have retrospective effect. If not, many liquidators, receivers and voluntary administrators who have previously assumed they were personally liable for GST and submitted GST returns accordingly and the companies over which they have been appointed, may each need to adjust their returns. Liquidators, receivers and voluntary administrators should consider whether amounts previously remitted to the Australian Taxation Office under Division 147 of the GST Act should be reclaimed and distributed rateably amongst priority unsecured creditors (including the ATO) under section 556(1)(a) of the Corporations Act.
Where contracts are on foot prior to the appointment of liquidators, receivers or voluntary administrators but settle after the appointment, the correct GST treatment is more complex and should be given careful consideration.
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.