In the cases of Commissioner of Taxation v. Australian Building Systems Pty Ltd (In Liquidation) and Commissioner of Taxation v. Ginette Dawn Muller and Joanne Emily Dunn as Liquidators of Australian Building Systems Pty Ltd [2015] HCA 48, the High Court held (3-2 on 10 Dec 2015) that s254(1)(d), of the ITAA 36, did not apply and therefore did not oblige a liquidator to retain sufficient money from the proceeds of sale of a property to pay the tax would (otherwise) have been imposed on the liquidator – or at least s254(1) did not apply in that way until the Commissioner had issued an assessment to the Liquidator in his/her representative capacity. This was the decision of French CJ, Keifel & Gageler JJ; with Keane and Gordon JJ dissenting.
Brief Summary of Facts
In the course of winding up Australian Building Systems Pty Ltd, the liquidators arranged for the sale of property, which gave rise to a capital gain.
The liquidators applied for a private ruling as follows:
- whether section 254 of ITAA 1936 obliges the liquidators ‘to account’ to the Commissioner for any capital gains tax liability out of the proceeds from the sale of the asset.
- if so, whether the liquidators are obliged to retain a sufficient amount to pay the tax liability, when the capital gain crystallises, or only when an assessment is made.
The Commissioner ruled that the liquidator’s obligation ‘to account’ out of the sale proceeds of the asset arose when the capital gain was crystallised and not later, when an assessment was issued.
The liquidators also made an application to the Federal Court for declarations that the liquidators are not required ‘to account to the Commissioner’ under section 254 of the ITAA 1936 but rather distribute such amounts that the Commissioner would receive in the ordinary course of the liquidation in accordance with section 556 and section 501 of the Corporations Act 2001.
Issues decided by the Court
- Whether a trustee, within the meaning of section 6 of the ITAA 1936 (including a liquidator) is subject to the requirements of section 254 of the ITAA 1936 only in relation to IPG for which the trustee is assessable to tax under Part III, Division 6 of the ITAA 1936?
- Whether a ‘trustee’ or ‘agent’ within the meaning of section 6 of the ITAA 1936 is subject to the obligations in section 254 of the ITAA 1936 only in relation to income, profits or gains for which they are assessable under some other provision of the revenue law or whether section 254 of the ITAA 1936 creates by its own force an ancillary or secondary liability in relation to the IPG derived by the trustee or agent?
- Whether, following the derivation of income, profits or gains, but prior to an assessment for tax being made in respect of any of those income, profits or gains, paragraph 254(1)(d) of the ITAA 1936 requires and authorises the agent or trustee to retain money in their hands sufficient to pay any tax on the IPG?
The first two issues were not contested by the taxpayer. The High Court held unanimously that the decision of Edmonds and Collier JJ in the Full Federal Court in relation to these issues was incorrect:
In respect to issue (1), the essential premise of the majority of the Full Court was misconceived and not consonant with the High Court’s earlier decision in Federal Commissioner of Taxation v. Bamford (2010) 240 CLR 481. A ‘trustee’, for the purposes of the subsection, is not restricted to situations where there is a trust estate.
In respect of issue (2), on its plain reading, section 254 of the ITAA 1936 is a provision that both imposes a liability and also assists in the process of collection.
In relation to issue (3), the High Court (in a 3-2 split) found against the Commissioner:
- French CJ and Kiefel J (in a joint judgment) and Gageler J (in a separate judgment) found that the retention obligation in paragraph 254(1)(d) of the ITAA 1936 only applies if an assessment has first issued [to the ‘trustee’ in its representative capacity, under s254(1)(b)] in respect of the relevant income, profits or gains.
- Keane J and Gordon J (in separately delivered judgments) held that the retention obligation in paragraph 254(1)(d) of the ITAA 1936 applied earlier and from the moment that a trustee or agent derived relevant income, profits or gains.
ATO View of Decision
The Commissioner accepts that a trustee or agent has no obligation to retain under paragraph 254(1)(d) of the ITAA 1936 until an assessment has first issued in respect of relevant income, profits or gains.
The Commissioner will consider whe[ther] it is now necessary to finalise draft taxation determinations: TD 2012/D6 and TD 2012/D7. He will also consider the content of any revised Determinations.
The decision reflects the Commissioner’s view that section 254 of the ITAA 1936 does not require the trustee to be assessable to tax under Part III, Division 6 of the ITAA 1936 in order for the retention obligation to be imposed.
The decision also reflects the Commissioner’s view that section 254 of the ITAA 1936 is both an assessing and a collection provision.
The Commissioner agrees with the obiter comments made by Gordon J at [207] concerning the operation of section 256 of the Corporations Law, and will act accordingly.
Implications for impacted ATO precedential documents (Public Rulings, Determinations, ATO IDs) – The High Court’s decision in favour of the liquidator is inconsistent with the views set out in Draft TD 2012/D6 and Draft TD 2012/D7. Consequently, the Commissioner will finalise these draft taxation determinations to reflect the High Court’s decision.
[ATO Decision Impact Statement] [LTN 2, 6/7/16]
Extract from the Income Tax Assessment Act 1936
SECTION 254 AGENTS AND TRUSTEES
254(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.
(b) He or she shall in respect of that income, or those profits or gains, make the returns and be assessed thereon, but in his or her representative capacity only, and each return and assessment shall, except as otherwise provided by this Act, be separate and distinct from any other.
(c) If he or she is a trustee of the estate of a deceased person, the returns shall be the same as far as practicable as the deceased person, if living, would have been liable to make.
(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 [referred to in paras (a) & (b) above – which is to say, profits or gains received in his/her representative capacity].
(e) He or she is hereby made personally liable for the tax payable in respect of the income, profits or gains to the extent of any amount that he or she has retained, or should have retained, under paragraph (d); but he or she shall not be otherwise personally liable for the tax.
(f) He or she is hereby indemnified for all payments which he or she makes in pursuance of this Act or of any requirement of the Commissioner.
(g) …
FJM Note
One might wonder why there ought be a High Court challenge on an issue like this, which might appear to be just an administrative matter. But the real issue was the question of whether the Commissioner effectively got priority over the other unsecured creditors or had to stand in line to with those other creditors to get paid as much as was available. This is would be the effect of s254(1)(d) applying, as it would move the tax liability from the company, to the liquidator, and require him/her to retain sufficient of the sale proceeds to pay that tax.