Following an appeal by the ATO to the Full Federal Court, judgment was delivered on 8 October 2014 concerning the tax obligations of a liquidator when selling an asset which results in a net capital gain.
On appeal, the issue was whether s254(1) (d) of the Income Tax Assessment Act 1935 required the liquidators to retain from the sale proceeds of a property, an amount that would be sufficient to pay the tax that arose from the sale, prior to an assessment being issued. Alternatively whether the obligation to retain the amount arose only after the issue of an assessment.
The Commissioner challenged the reliance of the trial judge Justice Logan on the Bluebottle case in construing the phrase “is or will become due”, by the use of the present tense as referring to tax which is presently payable, and by the use of the future tense “will become due” as referring to the tax which had been “assessed as owing” although not presently payable. The Commissioner submitted that the word “due” meant owing and not “presently payable”. This would mean that the obligation would come into existence as soon as an asset was obtained, even if an assessment had not yet been supplied by the Commissioner. However, the Full Court considered that even if the word “due” meant owing, that nothing would become owing by the liquidator prior to the issue of an assessment, so there was no obligation to retain an amount prior to that time.
The Full Court upheld the decision of Justice Logan with Justice Edmonds confirming 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.”
Accordingly, the liquidators are not obliged to pay the tax on settlement of the sale. Rather the situation only arises once an assessment has been issued for that tax year. The decision leaves unresolved whether the tax on the capital gain from the property sale is a s556 priority expense, or whether it ranks equally with unsecured creditors in the winding up of the company.