In brief: The Full Federal Court has held that a liquidator has no obligation to retain monies on account of tax until a notice of assessment has been issued. While the decision is a win for taxpayers (and creditors of insolvent entities), it remains to be seen how the Commissioner of Taxation will respond. Partner Katrina Parkyn (view CV), Senior Associate Joanne Langford and Associate Jay Prasad report on the decision.
HOW DOES IT AFFECT YOU?
- The Full Federal Court has dismissed the appeal of the Commissioner of Taxation (the Commissioner) in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq)  FCAFC 133. The dispute centred on whether a liquidator of a company is obliged to account to the Commissioner for tax arising from a sale of the company's assets before an assessment of tax is issued.
- The court has held that a liquidator's obligation under section 254(1)(d) of the Income Tax Assessment Act 1936 to retain sufficient money to pay 'tax which is or will become due' does not arise at the time that a taxable event occurs or when the liquidator receives money in relation to that taxable event. Instead, the obligation to retain only arises upon the issue of a notice of assessment by the Commissioner (at which time there is certainty as to the quantum of the tax liability which is or will become due).
- The decision is contrary to the Commissioner's views in Taxation Determination TD 2012/D,6 where the Commissioner took the position that the obligation of an 'agent' or 'trustee' under s254(1)(d) to retain sufficient money to pay 'tax which is or will become due' is not restricted to tax that has been assessed.
- The Commissioner has until early November to apply for special leave to appeal to the High Court. If an application for special leave is made, it is unlikely that the Commissioner will take any steps to withdraw or reissue TD 2012/D6 until at least the outcome of the special leave application is known.
- While the case involved the obligations of a liquidator who is deemed to be a 'trustee' for the purposes of s254, the same analysis would appear to apply to a receiver who is also deemed to be a trustee, acting in the course of their duties.
The facts of the case were relatively straightforward.
- During the income year ended 30 June 2012, the liquidators of Australian Building Systems Ltd (ABS) caused the company to dispose of a property located south of Brisbane in Queensland.
- The sale of the property crystallised a capital gain for ABS of approximately A$1.12 million.
- ABS sought a private binding ruling from the Commissioner to confirm the scope of the liquidator's obligations under s254.
- The Commissioner ruled that the liquidators were required to account to the Commissioner out of the proceeds of sale for the capital gains tax liability that crystallised on sale of the property and that the liquidator's obligation to retain monies sufficient to pay such tax arose at the time the gain crystallised, even though no assessment of tax had yet issued.
- After its objection was disallowed, ABS appealed to the Federal Court.
The point of contention was whether s254(1)(d) required the liquidators (who were deemed to be trustees for the purposes of s2541) to retain from the proceeds of sale an amount sufficient to pay the tax to be assessed on the sale of the property before the issue of a notice of assessment, or whether the obligation under s254(1)(d) took effect only after the issue of the notice of assessment.
Section 254(1)(d) of the Act provides:
With respect to every agent and with respect also to every trustee, the following provisions shall apply:
(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
THE DECISION AT FIRST INSTANCE
At first instance, Justice Logan ruled that the liquidators were not, in the absence of an assessment, subject to any retention and payment obligations under s254(1)(d).
Justice Logan's reasoning relied heavily on the principles distilled from the decision in Bluebottle UK Ltd v Deputy Commissioner of Taxation2, where the High Court held that the retention and payment obligations in s255(1)(b) of the Income Tax Assessment Act (which is framed in similar terms to s254(1)(d)) arose only upon the issue of an assessment.
Following the same approach, his Honour concluded that the phrase 'tax which is or will become due' in s254(1)(d) requires a degree of certainty about the nature and the amount of a tax liability, which cannot be ascertained until a notice of assessment is issued.
Justice Logan drew attention to the distinction between assessable income (which would include the net capital gain realised on the sale of the property) and a taxpayer's taxable income (which determined the taxpayer's tax liability for the income year).
His Honour made the point that the amount, if any, of the taxpayer's taxation liability was dependent on the amount of its taxable income, which could not be determined until the conclusion of the relevant income year. In other words, at the time the capital gain was crystallised, the amount of ABS's taxable income for the year could not be determined. As such, it was not possible to give content to the retention obligation imposed by s254(1)(d) until an assessment was issued.
However, Justice Logan also observed that:
- while s254 does not require the retention of monies on the happening of a taxable event, that did not mean that a liquidator is obliged to immediately distribute the proceeds received; and
- a 'prudent liquidator' would be entitled to retain the proceeds until the income tax position for the tax year in which the taxable event occurred had become certain, by an assessment being issued or by the Commissioner confirming that no tax was payable.
These observations created considerable uncertainty for insolvency practitioners about their ability to deal with monies ahead of an assessment being issued and how s254 might apply once an assessment was issued.
The Commissioner appealed the decision.
The Full Federal Court dismissed the Commissioner's appeal and upheld the decision at first instance, though for different reasons.
The Commissioner had contended that the reference in s254(1)(d) to 'tax which is or will become due' was to tax which is presently payable ('is due') as well as tax which is 'owing' but not presently payable ('will become due') and that expression 'owing' was wide enough to capture an obligation to pay income tax in the future (upon an assessment being issued).
The majority (Justices Edmonds and Collier) rejected this argument, on the basis that:
- No tax was, or would become, owing by the liquidators before an assessment was issued to them. Accordingly, no retention obligation could arise before then.
- Even if ABS had an obligation to pay tax in the future, that obligation was insufficient to trigger a retention obligation for the liquidators because when the assessment did issue, it would issue to ABS and not the liquidators. As such, there was no tax that was or would ever become owing by the liquidators.
- The retention obligation imposed by s254 (when it arose) only applied to tax that was, or would become, due by the liquidators (in their capacity as trustee) and did not extend to tax that was or would become due under an assessment issued to ABS.
Justice Davies agreed with the majority on the first issue (that no retention obligation arose before an assessment was issued) but not on the second and third issues.
However, nothing particularly turns on this, as the first issue was sufficient for the appeal to be decided in favour of the taxpayer. Consequently, the case stands as authority for the view that a liquidator cannot be exposed to personal liability under s254, unless and until an assessment has issued. It is only once an assessment issues that there is an amount of 'tax that is or will become due' to which the retention obligation imposed by s254(1)(d) can apply.
Interestingly, none of the judges made any comment about the observations made by Justice Logan as to whether a 'prudent liquidator' might retain monies until the income tax position for the year had become certain.
The decision makes clear that a liquidator's obligation to retain monies under s254(1)(d) does not arise at the time that a taxable event occurs or when the liquidator receives money from the taxable event. Rather, a retention obligation can only arise once an assessment is issued, as it is only at that point that there can be said to be an amount of tax owed.
The decision directly contradicts the Commissioner's position adopted in TD 2012/D6. It remains to be seen whether the Commissioner will seek special leave to appeal to the High Court. Until the outcome of the appeal process is known, there remains lingering uncertainty as to how the Australian Taxation Office (the ATO) will administer the law. It has also been our recent experience that the ATO is reluctant to provide private rulings on the operation of s254 while this litigation has been on foot.
It is possible that the ATO may continue to adopt the same practice until the appeal process has been exhausted, in which case it may be difficult for insolvency practitioners to obtain comfort from the ATO as to the extent of any obligations they may have under s254. Given the risk of personal liability under s254, insolvency practitioners may be reluctant to change how they approach these issues until there is greater certainty about the outcome of any appeal process and how the ATO may respond more broadly to these issues.
The Commissioner has until early November to lodge an application seeking special leave to appeal.