Section 254 of the Income Tax Assessment Act 1936 sets out the circumstances when a 'trustee' (which is defined to include a liquidator and a receiver) must account to the Commissioner, out of the proceeds of sale, for any capital gains tax (CGT) liability that would result as a consequence of the sale. Justice Logan of the Federal Court of Australia1 last Friday found that a liquidator does not have any obligation to pay under section 254 unless and until an assessment has been issued. A similar analysis would also apply to a receiver.
The decision has important implications for most contracts of sale2. While any CGT will be assessed to the year in which the contract of sale was executed, the actual CGT event does not occur until settlement. For this reason, it is difficult to see how the Commissioner would be in a position to issue an assessment prior to the settlement of the sale or before proceeds are remitted to the secured creditor. In circumstances where there is no secured creditor, liquidators should take the usual steps to obtain tax clearance before distributing any proceeds.
The decision also confirms that the provision is merely a collection provision, rather than anassessment provision. This should be comforting for those mortgagees who have taken a 'belts and braces' approach by exercising their power of sale or appointing an agent to settle the sale. The fact that section 254 is a collection provision means that the anti-avoidance provisions in Part IVA of the Act (which only deal with assessments) could not apply in those circumstances.
Pending any appeal or the issuing of a Decision Impact Statement by the Commissioner, it would be prudent for secured creditors to continue to settle any sale by exercising their power of sale or appointing an agent.
While his Honour made some obiter comments to the effect that it would be appropriate for the liquidator or receiver to hold funds pending the determination of the amount of any capital gain and the subsequent issuing of an assessment, given the substance of his decision, these comments should be seen as relating to a situation where there are funds surplus to the requirements of the secured creditors and where any potential tax exposure has not been ascertained.
It is not yet known whether the Commissioner will appeal the decision or seek amendments to the legislation to overcome the decision.