Australia: Exposure Draft Bill - GST And Insolvency Practitioners

The Government has released its long-awaited Exposure Draft Bill altering the GST liability of insolvency practitioners.

The amendments seek to counter the effects of the Federal Court's decision in Deputy Commissioner of Taxation v P M Developments Ltd [2008] FCA 1886, where it was held that the GST law did not impose a liability on a liquidator appointed to an insolvent company. The court found that the GST liability was a liability of the company in liquidation.

The proposed amendments are intended to apply from 1 July 2000. The retrospective nature of the amendments could give rise to GST liabilities for insolvency practitioners who have since retired from their role as an external administrator and are no longer able to access the company's assets or any indemnity that operated during their appointment. However, practitioners who can establish that they acted in 'good faith' may be protected against recovery proceedings.

Scope of personal liability

The amendments proposed in the Exposure Draft Bill were first announced by the Assistant Treasurer in February this year. The Assistant Treasurer explained that the amendments will restore the policy intention stated in the Explanatory Memorandum to the law introducing the GST.

The Explanatory Memorandum indicated that once a representative is appointed to an incapacitated entity, it is the representative rather than the principal that carries on the enterprise. The Exposure Draft Bill does not go this far, rather, the proposed amendments acknowledge that supplies and other acts of the representative are made by the incapacitated entity (which is consistent with the court's finding in the P M Developments case). This clarification should allow greater certainty for transactions that require continuity of conduct, such as margin scheme transactions and supplies of going concerns.

While the draft Bill makes it clear that the incapacitated entity continues to carry on its own enterprise, insolvency practitioners will be personally liable for the GST that the incapacitated entity would otherwise be liable to pay. There are exceptions where the consideration is received before the practitioner is appointed or the GST does not become payable until after the appointment ends.

The practitioner's liability under the Exposure Draft Bill will extend to any supply that is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

This may give rise to uncertainty in relation the insolvency practitioner's liability for pre-appointment contracts completed by the insolvency practitioner. Under the current law, the Commissioner of Taxation expressed the view that insolvency practitioners are not liable when they complete certain pre-appointment contracts (see, ATO ID 2004/290). Insolvency practitioners need clarification that the proposed amendments will not expand their potential liability.

On a positive note, insolvency practitioners will be protected from civil or criminal proceedings in relation to any thing they do (or fail to do) in the performance of their GST obligations. To obtain this protection, practitioners must establish that they have acted in good faith in the performance of their GST obligations. Insolvency practitioners are also entitled (and required) to apply any money they receive on behalf of the insolvent entity towards any GST liability they incur as representatives.

GST groups

The Exposure Draft Bill includes special provisions that will relax the current grouping rules for incapacitated entities and allow flexibility for the continuation of existing GST groups, even where the representative is appointed to a single member of a GST group.

Insolvency practitioners who elect to remain members of a larger GST group should not be personally liable for GST on supplies by other group members to which the practitioner has not been appointed. However, further clarification may be needed on that issue.

Commissioner of Taxation to be given priority over other creditors

By ensuring that the insolvency practitioners are personally liable, the proposed amendments will give the Commissioner of Taxation priority over other creditors. This approach seems to be contrary to the policy advocated by successive governments over the past 30 years.

For example, the Senate Standing Committee on Constitutional and Legal Affairs delivered a report (known as the 'Missen Report') in 1978, which recommended the total abolition of all Crown priorities. That report was partially adopted by the Fraser Government in 1980. A subsequent report of The Law Reform Commission on General Insolvency Inquiry (known as the 'Harmer Report') in 1988 recommended that all remaining priority accorded to the Commissioner of Taxation should be abolished. Measures to implement this recommendation were introduced by the Keating Government in 1993 and commended to the Parliament by the current Treasurer.

By giving the Commissioner of Taxation priority for GST, the government will reverse the reforms made by the Fraser and Keating Governments.

In our opinion, there is no justification in policy for differentiating between supplies made prior to the appointment of a representative versus post appointment supplies.

For more information, please contact:

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.