In late 2015, 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.
In the course of her decision (in the minority), Gordon J also remarked, in obiter, that a tax expense is a post-liquidation expense and must be paid in priority to unsecured creditors pursuant to section 556 of the Corporations Act 2001 (Cth). Gordon J noted that her analysis applies not only to income tax expenses as a result of capital gains, but also to income tax and GST more generally. The majority did not comment on this issue.
The ATO has recently issued a Decision Impact Statement (DIS) setting out its view of the consequences of the High Court's decision.
While the DIS records that the ATO accepts the decision of the High Court in relation to the primary question considered by the Court, it also agrees with the obiter remarks of Gordon J., and confirms that the Commissioner will act on the basis that tax expenses take priority over unsecured debts and claims.
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' (emphasis added).
Each of the Federal Court, Full Federal Court, and the High Court (by majority) decided against the Commissioner in relation to the application of section 254.
In the High Court, Gordon J. (who was in the minority on the primary question) made the following comments in obiter:
207. A tax expense is an expense incurred by a liquidator. A tax expense may fall within s 556(1)(a) (an expense incurred in preserving, realising or getting in property of the company, or in carrying on the company's business) or s 556(1)(dd) (other expenses). It is not a question of priority for the Commissioner but a reflection of, and consistent with, the statutory scheme under the Corporations Act that post-liquidation creditors are to be treated equally, "in priority to all other unsecured debts and claims" and paid in a particular order. Of course, those post-liquidation debts are not limited to capital gains tax. They may include GST and income tax.
Decision Impact Statement
In its Decision Impact Statement, the ATO accepts that a trustee or agent has no obligation to retain under paragraph 254(1)(d) of the ITAA 1936 until an assessment has first issued. The ATO recognises that the High Court's decision is inconsistent with its draft determinations TD 2012/D6 and TD 2012/D7 and will therefore amend and finalise these draft determinations to reflect the decision.
The DIS also includes the following statement:
The Commissioner agrees with the obiter comments made by Gordon J at  concerning the operation of section 256 of the Corporations Law, and will act accordingly.
(we note the reference to section 256 appears to be a typographical error and should be section 556).
Liquidators should be aware of the ATO's position in relation to section 556 of the Corporations Act, and the likelihood that the ATO will seek to recover tax debts arising in the course of liquidation in priority to unsecured creditors.
While this position is likely to be the subject of future litigation in other cases as it is only the subject of obiter comments in the High Court, there is likely to be a lengthy period of uncertainty before such litigation is decided.
The ATO's approach (if adopted) may also create practical difficulties in properly determining which tax expenses are incurred in the course of the liquidation, including allocation of prior year losses and current year expenses to pre- and post-liquidation income.