In Australian Building Systems Pty Ltd v Commissioner of Taxation  FCA 116, the Federal Court held that liquidators do not have an obligation to retain an amount for the payment of tax of a portion of the proceeds from the sale of property owned by the company before liquidation when no tax assessment has been issued. However, Justice Logan made clear that a prudent liquidator would be entitiled to retain the gain until an advice or assessment from the Commissioner, was issued.
In April 2011 the creditors of Australian Building Systems Pty Ltd (ABS) resolved that it be wound up, following ABS having been put into voluntary administration. The liquidators sold one of the company’s assets, a portion of real property, located in Brisbane. The sale of the property constituted a Capital Gains Tax (CGT) event for the purposes of the Income Tax Assessment Act 1997 (Cth). However the Australian Taxation Office (ATO) had not issued a tax assessment.
The liquidators of ABS sought a private ruling on whether they were required, under s 254 of the Tax Assessment Act 1936 (Cth), to account to the Commissioner out of the proceeds of the sale, any capital gains, prior to a tax assessment having been issued. In effect, whether the liquidators were obliged to retain monies so as to meet what may be a taxation liability in respect of the income year when the CGT event occurred, and to pay to the Commissioner the whole of any tax due, in priority to any other creditors.
The Commissioner issued a ruling that liquidators were required to account for any tax liability on the sale of property at the time a capital tax gain ‘crystallises’, and not once a tax assessment has issued. The liquidators lodged an objection that was disallowed by the Commissioner. The liquidators then appealed the objection to the Federal Court.
Federal Court decision
Section 254 of the Income Tax Assessment Act 1936 (Cth) requires trustees and agents to retain out of money which comes to them so much as is necessary to pay “tax which is or will become due” in respect of “income, profits or gains”. The key issue for the Federal Court was whether the liquidators of ABS were required to retain from the sale of the Brisbane property, an amount to pay the tax that would become due, when a tax assessment had not yet been issued.
The Court held that “tax which is or will become due” only arises once a tax assessment has been issued. As an assessment had not issued, the liquidators were not required to retain an amount from the sale of the property for any tax liability. In reaching this conclusion, the Court followed the High Court decision of Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598. In Bluebottle, it was held that the payment and retention obligations in section 255 arose only on the issue of an assessment. Justice Logan, in following this construction, held that section 254 does not require liquidators to retain a sum when no assessment has been issued.
However, Justice Logan did state that this does not mean that a liquidator is obliged immediately to distribute the gain as a dividend to creditors. Rather, a prudent liquidator would be entitled to:
“retain the gain for a time against the expenses which might arise in the course of the administration”, and at least “until the income tax position in respect of the tax year in which the CGT event had occurred has become certain by the issue of an assessment or other advice from the Commissioner that for example, no tax was payable in respect of that income year”.
This decision is inconsistent with the Commissioner’s draft tax determinations TD 2012/D6 and TD2012/D7, which were released by the ATO after the Commissioner’s private ruling. The decision has been appealed by the ATO and the appeal to the Full Federal Court is expected in August 2014.