In February 2014, we issued an alert concerning our clients' successful outcome in Australian Building Systems v Commissioner of Taxation  FCA 116. That matter concerned important considerations around a liquidator's liability for a capital gain made during the liquidation. Today, the Full Federal Court unanimously dismissed an appeal brought by theCommissioner of Taxation (Commissioner of Taxation v Australian Building Systems Pty Ltd (in Iiq)  FCAFC 133).
At first instance, Justice Logan was asked to clarify the income tax obligations of a liquidator imposed by section 254 of the Income Tax Assessment Act 1936 (ITAA36) in circumstances where the company in liquidation sold real property and, in consequence, made a capital gain. Relevantly, section 254(1)(d) of the ITAA36 requires a 'trustee' (which by definition includes a liquidator) to retain from money coming to him or her an amount sufficient to pay the income tax which is or will become due in respect of any income, profits or gains. The Commissioner of Taxation (Commissioner) had argued that the effect of section 254(1)(d) of the ITAA36 was that the liquidators became liable to retain from proceeds of the sale an amount sufficient to pay the tax that would become due in respect of the net capital gain – and it was not necessary for an assessment to first issue. His Honour found in favour of the liquidators and held that the retention obligation in section 254 of the ITAA36 was imposed only once an assessment had been issued.
The Commissioner appealed that decision to the Full Federal Court. As he did at first instance, the Commissioner argued the liquidators should be liable to retain from the proceeds of sale an amount sufficient to pay the tax liability – arising on entry into the contract of sale – whether or not an assessment had issued. Specifically, the Commissioner argued the word 'due' in 'is or will become due' must mean 'owing' in the sense that the tax is owing even in the absence of an assessment. Justice Edmonds, with whom Collier and Davies J agreed (the latter with one exception; her Honour disagreed with Justice Edmonds on the entity to whom the assessment would be directed) described the Commissioner's position variously as 'fundamentally flawed' and 'so bizarre as to immediately cast doubt on its propriety'. His Honour said that 'the words "will become due" in the sense of "owing" predicate nothing less than certainty, and that, in my view, cannot be predicted prior to the issue of a relevant assessment'.
This Full Court decision provides much needed certainty not only for liquidators, but also receivers (who, by definition, are also 'trustees' for the purposes of section 254(1) of the ITAA36). Prior to the first instance decision, the Australian Taxation Office (ATO) had issued draft determinations (2012/06 and 2012/07) concerning the Commissioner's general interpretation of section 254 of the ITAA36, and, specifically, its application to receivers. Those drafts had not been finalised, pending the outcome of this litigation. In the absence of further appeal, we would expect those draft determinations to be withdrawn or revised to reflect the outcome of the decision at first instance, and the appeal. Practically, though, section 254(1)(b) of the ITAA36 obliges the 'trustee' to lodge returns in respect of the income, profits or capital gains, and some direction from the ATO on the lodgement process would probably provide some further assistance to the industry.