A recent decision of the Full Federal Court gives liquidators comfort that they are not required to set money aside to meet the future tax obligations of a company until those obligations have been assessed by the Tax Office. Although liquidators must retain money 'sufficient to pay tax which is or will become due', this obligation only applies to tax liabilities that have been assessed and are presently payable or payable in the future, not to liabilities that might be created by future assessments.
In Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq)  FCAFC 133, the Full Court considered the operation of section 254(1)(d) of theIncome Tax Assessment Act 1936 (Cth). That provision states that a liquidator must '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 defendant liquidators had caused a company in liquidation to sell a property, resulting in a capital gain of $1.12 million. It was foreseeable that the capital gain would affect the calculation of the company's assessable income for that financial year. But did this mean that the liquidators were required to retain sufficient money from the sale price to pay the increase in the company's tax liability that would result from the sale?
The court said no. Although the phrase 'tax which is or will become due' is ambiguous, a number of factors pointed to an interpretation by which the retention obligation only arises once an assessment had been made:
- the precise content of the obligation could not be determined prior to assessment;
- the obligation applies to 'any money' liquidators receive, not just money that may have tax consequences;
- the retention obligation is ancillary to the company's tax obligation, which does not arise until assessment at the end of the financial year; and
- if the liquidators were immediately required to retain money to meet the potential tax liabilities of the company, that money would never truly become 'income' of the company upon which tax could be assessed.
For those reasons, the court unanimously held that liquidators are not required to retain money to meet tax liabilities until those liabilities have been assessed.