The High Court heard (on 17.4.15), the Commissioner’s applications for special leave to appeal against the decision of the Full Federal Court decision in FCT v Australian Building Systems Pty Ltd (in liq) & Anor [2014] FCAFC 133. The Full Federal Court had confirmed that s 254(1)(d) of the ITAA 1936 does not require a liquidator to retain monies from the sale proceeds of a property for the payment of any resulting CGT liability to the Tax Office, until a relevant assessment has been issued to the taxpayer. The Commissioner argued that such an obligation existed to retain moneys to meet the expected tax liability.
[LTN 69, 14/4/15]
The High Court this morning allowed the Commissioner’s special leave application in the matters of Commissioner of Taxation v Australian Building Systems Pty Ltd ACN 094 238 678 (In liquidation) and Commissioner of Taxation v Ginette Dawn Muller and Joanne Emily Dunn as liquidators of Australian Building Systems Pty Ltd ACN 094 238 678 (In liquidation). The application was heard before Keane and Kiefel JJ.
The issue in this case is whether the issuing of a notice of assessment is a necessary requirement before a liquidator can [must] retain an amount from the proceeds of a sale of land to meet the tax on the capital gain.
[ATO LPR]
The High Court, on Friday 17.4.2015, granted the Commissioner’s applications for special leave to appeal against the decision of the Full Federal Court in FCT v Australian Building Systems Pty Ltd (in liq) & Anor [2014] FCAFC 133. The Full Federal Court had confirmed that s 254(1)(d) of the ITAA 1936 does not require a liquidator to retain monies from the sale proceeds of a property for the payment of any resulting CGT liability to the Tax Office, until a relevant assessment has been issued to the taxpayer.
[LTN 72, 17/4/15]
Section 254(1)(d) of the Income Tax Assessment Act 1936 (ITAA36)
254(1) Agents and trustees
(1) With respect to every agent and with respect also to every trustee [which includes ‘liquidators’], 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.
(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) Where as one of 2 or more joint agents or trustees he or she pays any amount for which they are jointly liable, each other one is liable to pay him or her an equal share of the amount so paid.
(h) For the purpose of insuring the payment of tax the Commissioner shall have the same remedies against attachable property of any kind vested in or under the control or management or in the possession of any agent or trustee, as the Commissioner would have against the property of any other taxpayer in respect of tax.
FJM Note
This issue might matter if the liquidator proposed paying all the creditors prior to year end and thus prior to any assessment issuing (leaving no funds for paying the tax when the assessment does finally issue). But the Commissioner has the power to issue a special assessment straight after the sale (even though this was prior to the end of the income year) – see s168 of the ITAA36. Then the Commissioner could ‘prove’ for the tax debt, along with other creditors, and be paid the same dividend.
This issue gets even more interesting if a receiver (who is also a deemed ‘trustee’ for the purposes of s254(1)(d)) sells a property under a mortgage in favour of a secured lender. Would s254(1)(d) apply (or could it be said that the disposal proceeds do not “come[ ] to him or her in his or her representative capacity”)? And if s254(1)(d) did apply to such a receiver, does it elevate the Commissioner’s claim for tax above the normal position of being unsecured (where he has to stand in line with all other unsecured creditors to be paid some dividend). If it does elevate his claim, it would do so above secured creditors. If that were so, the secured lender would do better to get the taxpayer (borrower) to sell the property itself, so that all the proceeds could go to the secured lender, rather than through the hands of an intermediary that is deemed to be a ‘trustee’ to which s254(1) could apply. Further, s254(1)(d) may be powerless to overcome a sale by a mortgagee in possession (who would not be a ‘trustee’ for the purposes of s254(1)). Surely, there could not be these differences in priority, depending only on how the sale was effected.