On 8 October 2014 the long-awaited appeal decision of the Full Federal Court in Australian Buildings Systems (in liq) v Commissioner of Taxation confirmed that receivers and liquidators are not personally liable for post-appointment tax payable from funds received by them in the absence of a tax assessment. Thus the Commissioner's appeal from the judgement of Logan J was dismissed. In fact the majority decision goes further than this and places a question mark over whether liquidators can ever be personally liable for a post-appointment tax liability. The decision will require the ATO to rethink draft taxation determinations TD 2012/D6 and TD 2012/D7.
The background to the issue and facts of the case are set out in our earlier update (please see link below). In a nut-shell, the case concerned a capital gain triggered by the sale of real estate by the company post-appointment of the liquidators and whether the liquidators were personally liable for the resulting capital gains tax liability under section 254 of the Income Tax Assessment Act 1936.
On appeal, the majority judgement of Edmonds and Collier JJ held that no tax liability arises on entry into a contract of sale of property. At most, a capital gain arises at that point which must be included in the computation of the net capital gain at the end of the year of income. Therefore, a liability to pay tax in future may or may not arise, depending on the tax characteristics of the company in question. Any tax liability will crystallise on 30 June but, in the absence of an assessment, that will only be an obligation to pay income tax in the future, and that does not trigger a retention obligation for liquidators or receivers under section 254(1)(d) of the Income Tax Assessment Act 1936.
To this point, the appeal judgement accorded with the judgement of Logan J at first instance.
Edmonds and Collier JJ reiterated that section 254 is a collection mechanism only and is not a section imposing a primary liability for tax. This led to the most interesting finding of the majority judgement. Edmonds and Collier JJ considered that section 254 does not impose any liability on liquidators or receivers that is not already imposed under the taxation of trusts provisions found in Division 6 of the Income Tax Assessment Act 1936. Therefore, unless a tax assessment could be issued to the liquidators under Division 6, then section 254 had no operation. They then found that in these circumstances any assessment would issue to the company, and not to the liquidators, and that was the correct result because otherwise a tax assessment issuing to the liquidators could prevent the company being "presently entitled" to the proceeds of the sale and in effect create a tax liability for the liquidators that would not otherwise exist. The corollary of this was that there would be no tax due and owing by the liquidators in their representative capacity and therefore no personal liability could be imposed on the liquidators by section 254. Essentially, this analysis rendered section 254 toothless.
In this respect, Davies J expressed a divergent opinion, considering that in circumstances where section 254 is engaged, a post appointment tax liability, if any, will be assessed to the liquidator in his or her representative capacity, rather than to the company.
Thus, the decision confirms that no personal liability arises for liquidators and receivers under section 254 unless and until a tax assessment is issued. Further issues remain as to whether section 254 can ever impose personal liability on liquidators in respect of post-appointment tax liabilities. This would make any question regarding the ATO's priority in relation to secured creditors largely academic. A different analysis may apply to receivers who are normally appointed as agents for the company.
The ATO response to the judgment will need to be closely monitored. Given the dramatic ramifications of the reasoning of the majority judgement, we would expect the ATO to seek leave to appeal to the High Court. At the very least, the ATO is likely to seek to undermine the underlying assumption made by the majority that assessments would issue to the company and not to the liquidators.