Case note,
Liquidators not obliged to retain funds for tax in anticipation of an assessment
Taxation
On 10 December 2015, the High Court, in Commissioner
of Taxation v Australian Building Systems Pty Ltd (in liq)
[2015] HCA 48, rejected the Commissioner for Taxation’s
(Commissioner) appeal from the Full Federal Court by a
3:2 majority. French CJ and Kiefel J (jointly) and Gageler
J held that the retention obligation under section
254(1)(d) of the Income Tax Assessment Act 1936,
which states that trustees must retain monies sufficient to
pay tax which is or will become due in respect of the
income, profits or gains, does not arise prior to the issue
of an assessment. Therefore, the liquidators of Australian
Building Systems (ABS) were not obliged under section
254(1)(d) to account to the Commissioner out of the
proceeds of sale, for any capital gains tax liability that
crystallised on the sale of an asset before an
assessment had been issued.
Practical implications for liquidators (and other
trustees and agents)
This decision confirms that a liquidator’s obligation under
section 254(1)(d) is not triggered until an assessment is
issued. However, it should be noted that the
Commissioner’s powers to issue special assessments
are very broad, meaning that he may simply issue such
assessments in circumstances where he becomes aware
of the disposal of substantial assets by a liquidator.
Practically, this decision will also mean that secured
lenders will not have the same incentive to enforce their
securities as mortgagee in possession. They may now
prefer to allow assets to be disposed of by way of a
receiver sale without the risk of the Commissioner
obtaining an effective priority to the proceeds of sale by
reason of the operation of section 254.
It is worth noting that under Division 260 of Schedule 1 of
the Taxation Administration Act 1953. Liquidators and
receivers remain prevented from disposing of any assets
available for unsecured creditors before first receiving a
clearance notice from the Commissioner notifying the
amount which is sufficient to discharge pre-appointment
tax liabilities. This decision does not alter liquidators’ and
receivers’ obligations under Division 260.
The Commissioner will be disappointed with this decision
and the impact it has on his ability to collect tax debts, as
alluded to by Gordon J in her honour’s dissenting
judgement. It will be interesting to see if this High Court
decision will trigger a legislative response from the
Government.
Background
The liquidators of ABS caused ABS to sell a property and
as a result ABS made a $1.12m capital gain. The
liquidators sought a private ruling to clarify their
obligations in respect of the proceeds and the
Commissioner ruled that the liquidators were required to
retain sufficient monies out of the proceeds of the sale to
cover any capital gains tax liability from the time the
capital gain crystallised under section 254(1)(d). ABS
objected to the private ruling but the Commissioner
disallowed the objections. ABS then appealed the
Commissioner’s decision. Logan J at first instance, held
that section 254(1)(d) should be interpreted consistently
with a recent High Court decision, Bluebottle UK Ltd v
Deputy Commissioner of Taxation (2007) 232 CLR 598
(Bluebottle), which considered section 255, the
companion provision to section 254 that deals with the
obligations of a controller of money belonging to a nonresident. In Bluebottle, the High Court held that the
obligation on the controller to retain only arises once an
assessment is issued.
The Commissioner unsuccessfully appealed the first
instance decision where the majority of the Full Federal
Court largely relied on the proposition that ABS was
“presently entitled” to the proceeds of the sale and that
any capital gains tax would be assessed to ABS, and not
to the liquidators as trustees by virtue of the operation of
Div 6 of Pt III of the 1936 Act. All parties agreed that the
reliance on Div 6 by the Full Federal Court was
erroneous and this was not pursued in the High Court.
Subsection 254(1)(d)
Broadly, section 254(1)(d) requires trustees (which
covers liquidators and receivers) to retain out of any
money which comes to them in their representative
capacity as trustee so much as is sufficient to pay tax
which is or will become due in respect of any income,
profits or gains. Where the trustee does no retain
sufficient monies to cover the tax liability of the company,
the trustee will be personally liable to cover the shortfall.
The High Court’s decision
The key question to be determined by the High Court
was whether section 254(1)(d) required the liquidators to
retain money from the $1.12m capital gain sufficient to
pay the tax liability in respect of the gain once the
assessments were issued for the financial year in which
the gain was made. That is, whether section 254(1)(d)
only compels liquidators to retain money to pay tax when
an assessment has actually been made by the
Commissioner or does it require liquidators to also preempt the Commissioner and only distribute what they
calculate to be the post-tax capital gain. Ultimately,
French CJ and Kiefel J (jointly) and Gageler preferred
the former, narrower, interpretation of section 254(1)(d)
meaning that the Commissioner’s appeal was dismissed
by a 3:2 majority.
French CJ and Kiefel J held that the retention obligation
in section 254(1)(d) does not arise prior to the issue of an
assessment, largely in reliance on the decision in
Bluebottle, their honours stated at paragraph 42:
“The Commissioner’s submissions pointed to the
treatment by s 254 of agents and trustees as notional
taxpayers, asserted the consistency of his construction
with that treatment and pointed to adverse
consequences flowing from the Full Court’s construction.
His textual and contextual submissions cannot overcome
the weight of the considerations which supported the
construction of s 255(1)(b) in Bluebottle. They are
equally applicable to the same language in s 254(1)(d).
The acceptance of the construction of s 254(1)(d) for
which the Commissioner contends would produce
such a marked difference between that provision and
the almost identically worded language of s 255(1)(b)
that nothing less than strong contextual support
would justify it. The matters of context referred to by
the Commissioner do not justify this construction.”
(emphasis added)
Gageler J also held that an assessment is required
before the obligation under section 254(1)(d) is triggered.
His honour accepted that sections 254 and 255 are
different and that a trustee is more likely to be able to
calculate the taxpayer’s tax liability prior to an
assessment than a ‘controller’ under section 255.
However, his honour held that the better view is that the
retention obligation in section 254, like the retention
obligation in section 255, is limited to retaining money
after an assessment has been made. His honour listed
five factors supporting this position, including that this
position fits with the structure of section 254 which
places the retention obligation after the performance of
the assessment obligation, and that it produces certainty
about the total amount the agent or trustee must retain.
254(1)(d) as well the differences between sections 254
and 255 and held that the once the profit or gain is
derived the obligation to retain arises. Gordon J also held
that the obligation to retain arises as soon as the profit or
gain is derived and that the contrary construction of
section 254, not only is inconsistent with the evident
purpose of section 254, the text of section 254 and the
other legal obligations of trustees (including liquidators)
but leads to (or at least has the capacity to lead to)
absurd results – such as that there will be no money to
pay the tax liability once the assessment is issued
because it would have already been distributed.
Contacts
If you would like further details about the information
contained in this bulletin or assistance with any taxation
related issues, please contact:
Clint Harding, Partner
Telephone 61 2 9226 7236
charding@abl.com.au
Paul Sokolowski, Partner
Telephone 61 3 9229 9770
psokolowski@abl.com.au
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Keane and Gordon JJ dissented. Keane J focussed on
the ordinary meaning of the language in section
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