Yesterday the High Court handed down its decision in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq)  HCA 48. The High Court held (by a majority of 3:2) that, in the absence of an assessment, a liquidator is not required to retain funds from asset sale proceeds in order to meet a tax liability which could become payable as a result of a capital gain made on the sale. In doing so, the majority of the High Court affirmed the decision of the Full Federal Court and provided long awaited guidance to liquidators, receivers and administrators.
The liquidators of Australian Building Systems Ltd (ABS) sold a property of the company for a capital gain. The Commissioner of Taxation (Commissioner) contended that the liquidators were required to retain funds from the sale proceeds in order to pay any tax arising from the gain, despite the fact that no assessment had been issued. This Commissioner claimed that this obligation was imposed by section 254 of the Income Tax Assessment Act 1936 (Tax Act).
This section applies to agents and 'trustees', which is defined to include a liquidator, receiver and an administrator. It creates a 'retention obligation', namely that an agent or 'trustee':
'is authorised 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'; and
'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'
At first instance, Logan J of the Federal Court held that in the absence of an assessment, a liquidator has no such obligation to account to the Commissioner or to retain sufficient amounts out of the proceeds of sale for any tax which may be payable as a result of a capital gain that arises on the sale of a company asset.
The Full Federal Court rejected the Commissioner's appeal, holding that the payment and retention obligations in section 254 arise only once an assessment has been issued in relation to the relevant income, profits or gains.
High Court Judgement
French CJ, Keifel J and Gageler J (Keane J and Gordon J dissenting) considered that the construction of the retention obligation imposed by section 254, like the retention obligation imposed in section 255(1)(b) as considered by the Court in Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598 (Bluebottle), is limited to retaining money after an assessment has been made. While the majority accepted that there were differences between section 254 and section 255, it found that the considerations which moved the Court to its construction of section 255(1)(b) in Bluebottle were equally applicable to the retention obligation in section 254(1)(d).
French CJ and Kiefel J highlighted the practical difficulties with the Commissioner’s view:
'…the agent or trustee would be burdened with a continuing obligation to retain sufficient money to pay at any time the amount of tax that would be payable upon a notional assessment made at that time. Losses and deductions would have to be factored in to avoid the agent or trustee exceeding the retention authority conferred by Section 254(1)(d). Linked to the continuing obligation would be a continuing and variable personal liability defined by reference to the difference between what the agent or trustee has retained and what would have been sufficient to pay the relevant tax at that time.'
While Gordon J (in dissent) considered that a tax expense may fall into a category of 'priority payment' (as against payments owed to other unsecured creditors) under section 556 of the Corporations Act 2001 (Cth), the majority did not opine on this issue.
For receivers, liquidators and administrators, this case provides certainty that, in the absence of an assessment, they have no obligation under section 254 to retain amounts out of the proceeds of the sale of a company asset on account of any tax which may become payable as a result of a capital gain.
Draft ATO Tax Determinations on this and related issues (refer TD 2012/D6 and TD 2012/D7) will now need to be revisited by the Commissioner.
The case leaves unresolved the issue of whether tax in relation to a capital gain is a first priority expense under section 556 of the Corporations Act 2001 (Cth). We await further guidance in this area.