The recent decision of Australian Building Systems Pty Ltd v Commissioner of Taxation [2014] FCA 116 involves a significant development in the taxation collection obligations of liquidators involved in winding up a company.

In this Alert, Special Counsel Justin Byrne and Solicitor Rachael Nyst discuss the implications of the case in regard to the need to retain an amount from sale proceeds of a property in order to meet capital gains tax (CGT) liabilities.

Key points

  • This case considered whether liquidators disposing of real property are obliged under section 254 of the Income Tax Assessment Act 1936 (ITAA36) to retain an amount from the sale proceeds of that property in order to meet any potential CGT liability associated with the sale. 
  • The decision is significant for liquidators and receivers as it confirms that the retention obligations under section 254 of the ITAA36 only arise once a notice of assessment has actually been issued, although liquidators should still take caution in distributing the sale proceeds to creditors. 
  • In the Federal Court’s view, a prudent liquidator would at the very least be entitled to retain the gain until the tax position in respect of the income year had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year.
  • It is noted that the decision is inconsistent with the views expressed by the Commissioner in Draft Taxation Determination TD 2012/D6 and TD 2012/D7.  It is expected that these draft determinations will be reviewed or withdrawn.

The facts

The case involved a company, Australian Building Systems Pty Ltd (Company) which was in voluntary administration.  The Company’s creditors resolved that the Company would be wound up.  As part of the winding up, the liquidators sold some of the Company’s real property located South of Brisbane, Queensland.  The sale gave rise to a CGT event but no notice of assessment was issued for the income year in which the property was sold.

The liquidators of the Company sought a private ruling from the Commissioner to determine whether they were required under section 254 of the ITAA36 to retain funds from the sale proceeds to meet the potential CGT liability arising from the sale.  The Commissioner’s private ruling found that the obligation to retain funds arises when the capital gain crystallises, not when a notice of assessment is issued, and therefore the liquidators were required under section 254 to retain funds to meet the potential CGT liability arising on the sale.  The Company objected to this decision and appealed to the Federal Court.

Decision of the Federal Court

The Federal Court ultimately found that the liquidators were not obligated under section 254 to retain an amount out of the sale proceeds to pay the potential CGT liability that may arise from the sale of the property.  It was noted that the obligation to retain an amount for tax “which is or would become due” can only arise once a notice of assessment has actually been issued.  In this case, the notice of assessment had not been issued.

In reaching its decision, the Federal Court had regard to the decision in Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598 where the High Court found that the words “tax which is or will become due” should be read as referring to an amount of tax that has been assessed, even if it is not yet due for payment.

It is important to note the Federal Court’s comments that although section 254 does not require an amount to be retained to meet a potential CGT liability where an assessment has not been issued, liquidators should still take caution in distributing the sale proceeds to creditors.  In the Federal Court’s view, a prudent liquidator would in the very least be entitled to retain the gain until the income tax position, in respect of the year in which the CGT event had occurred, became certain by the issuing of an assessment.

What does this mean for liquidators and receivers?

The decision is significant for liquidators and receivers as it confirms that the retention obligations under section 254 of the ITAA36 only arise once a notice of assessment has actually been issued.  Even though there is no formal requirement to retain proceeds where an assessment has not been issued, liquidators should be mindful of Justice Logan’s comments that a liquidator would at the very least be entitled to retain the gain until the tax position in respect of the income year had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year.  It appears apparent, then, that the prudent course for liquidators to take is to retain the sale proceeds until the assessment is actually issued notwithstanding that there is no actual obligation to do so at that point in time.

It is noted that the decision is inconsistent with the views expressed by the Commissioner in Draft Taxation Determination TD 2012/D6 and TD 2012/D7.  It is expected that these draft determinations will be reviewed or withdrawn.

Furthermore, the Commissioner has now lodged an appeal against the Federal Court’s decision.