Exposure draft legislation has been released which proposes amendments to the GST legislation to make it clear that liquidators and other representatives of incapacitated entities are liable for GST on transactions within the scope of their appointment.
Date of effect
It is proposed that the main operative provisions of the legislation have effect retrospectively from the commencement of the GST Act on 1 July 2000.
The release of the draft legislation is a direct response to the December 2008 Federal Court decision in Deputy Commissioner of Taxation v PM Developments Ltd  FCA 1886 (click here to see our legal update concerning this case). In that case Logan J found that a liquidator has no personal liability for GST in circumstances where the assets of the company have not been vested in the liquidator.
The decision was directly contrary to the stated intention of Division 147 of the GST Act relating to representatives of incapacitated entities (as expressed in the Explanatory Memorandum to the GST Bill) that:
The representative is personally liable for the GST payable and for the other requirements [of the GST legislation]. The representative is liable from the date on which he or she becomes entitled to act for you (the principal) until he or she ceases to be entitled. The representative is liable for GST, entitled to input tax credits and has any adjustments attributable to that period.
However, Division 147 does not contain express language relating to its intended purpose. It merely sets forth, for example, when a representative of an incapacitated entity is required to be registered in its capacity as a representative and when the Commissioner of Taxation is required to cancel a representative’s GST registration.
An “incapacitated entity” for these purposes means a bankrupt individual, an entity in liquidation or in receivership or an entity that has a representative appointed (such as an administrator).
Proposed New Division 58
The draft legislation proposes to insert a new Division 58 in the GST Act, which will replace Division 147, and will seek to give effect to the stated intention of Division 147 of the GST Act. This is why it was considered appropriate that the main operative provisions in the new Division 58 take effect retrospectively from the date of introduction of GST on 1 July 2000.
New section 58-10 of Division 58 sets forth the general rule as to the circumstances in which representatives of incapacitated entities have GST related liabilities and entitlements. A representative is liable to pay any GST, is entitled to an input tax credit and has any adjustment that would be an amount that the incapacitated entity is liable for or entitled to. However, this will only be the case if the making of a supply, acquisition or importation to which the amount of GST, input tax credit or adjustment relates is within the scope of the representative’s responsibility or authority for managing the incapacitated entity’s affairs.
There are, however, certain specified exemptions to this general rule. For example, the representative is not liable for GST or entitled to an input tax credit and an adjustment is not applicable if:
- the incapacitated entity received the consideration for the supply before the representative became a representative of the incapacitated entity; or
- it is attributable to a tax period that ends after the representative ceases to be a representative of the incapacitated entity.
The provisions of the existing Division 147 are largely replicated in new Division 58, for example:
- a representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entity is registered or required to be registered
- when the appointment of a representative ends, the representative must notify the Commissioner within 21 days of the end of the appointment, and
- the Commissioner must cancel a representative’s registration if the Commissioner is satisfied that the representative is not required to be registered in that capacity.
A representative of an incapacitated entity must give the Commissioner a GST return for a tax period applying to the incapacitated entity if:
- the incapacitated entity has failed to file such a return, and
- the Commissioner directs the representative in writing to file the return.
There are certain matters specified that the Commissioner may take into account in determining whether to give a direction to a representative, namely, the likelihood of a dividend to unsecured creditors being declared and the likely amount of such dividend; the likelihood that the GST return would reveal an increase in the amount of GST payable to the Commissioner and the likelihood that the cost to the representative of preparing the return would be covered by the incapacitated entity’s assets without resulting in an unreasonable impact on other creditors.
A representative that is appointed to 2 or more incapacitated entities that are members of a GST group may file one return for a tax period in respect of the entities.
GST Groups with Incapacitated Members
The exposure draft proposes to amend the GST group provisions so as to deal with the situation where a member of a group becomes incapacitated. In such circumstances the incapacitated member is required to exit the GST group. The concluding tax period of the incapacitated member would differ from that applying to other members such that it can no longer remain a member of the group. The incapacitated entity would be required to exit the group from the start of the tax period applying to the group members ie the incapacitated member exits retrospectively. This can create difficulties for the group because, during that tax period, they would have accounted for GST as though they were a group.
It is proposed that an election may be made by the representative member of the group so that, where a member of a group becomes incapacitated, the tax periods that apply to group members cease at the same time as the incapacitated entity’s tax period ceases. The intent is to provide an opportunity for the incapacitated entity to remain part of the group which may reduce compliance costs.
Interested parties are invited to make submissions on the exposure draft legislation. The closing date for submissions is 7 August 2009.
ATO Administrative Treatment
On 28 July 2009 the ATO released details of its administrative treatment concerning the GST obligations of representatives of incapacitated entities having regard to the release of the exposure draft legislation. It stated that, if the proposed law is passed, a representative of an incapacitated entity will be liable for any GST payable on taxable supplies during the period of their representation.
In respect of GST payable in the period pending passage and assent to the proposed amendments, the ATO:
- accepts that the liability for GST on transactions entered into by a representative of an incapacitated entity as agent for the incapacitated entity is satisfied if the liability is paid by or on behalf of the incapacitated entity, and
- accepts that the representative is not liable for the GST under the current law.