Retention of funds to meet CGT liabilities - certainty at last, for liquidators, administrators and receivers

We last updated the position with respect to the matter of Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) in a Lavan Legal Insolvency Update on 17 October 2014.

As we noted in that article:

There is still the scope for the Commissioner to appeal this decision to the High Court and/or for the Commissioner to find other mechanisms to assess major asset sales.  For example, by issuing a new law administration practice statement, decision impact statement or seeking legislative change to facilitate the issue of assessments at an earlier time than following the end of the financial year.

Since then the Commissioner appealed to the High Court and on 10 December 2015 the High Court handed down its decision on the Commissioner’s appeal in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq)¹.

The facts

On 6 April 2011 Australian Building Systems Pty Ltd (ABS) was placed into liquidation.  The liquidators, during the course of the liquidation, sold a property located in Crestmead, south of Brisbane (Crestmead Property). 

The sale of that property by the liquidators constituted an A1 CGT event for the purposes of section 104.10 of the Income Tax Assessment Act 1997 (Cth) (ITAA97).

First instance decision

On appeal to the Federal Court, the Commissioner argued that section 254 of the Income Tax Assessment Act 1936 (ITAA36) required the liquidators to retain from the proceeds of sale of the Crestmead Property, when those proceeds came into their hands, an amount sufficient to pay the tax that will become due in respect of the net capital gain arising from the disposal of that property.

The liquidators sought to argue that the requirement to withhold funds only arose upon the issue of a valid assessment by the Commissioner.

Justice Logan found, at first instance, that the construction of section 254(1)(d) of the ITAA36 accorded with a construction of section 254 favoured by the Full Court of the Federal Court in Deputy Commissioner of Taxation v Barkworth Olives Management Ltd² (Barkworth Olives).

In Barkworth Olives the Court observed that “tax which is or will become due” is “an expression that postulates a degree of certainty about the fact and amount of the tax liability which might not be present before a notice of assessment is served.”  On this reasoning (amongst other things) Justice Logan held that section 254 of the ITAA36 had no application to the liquidators.  They were not, in the absence of any assessment, subject to any retention and payment obligation.

Court of appeal decision

Confirming the earlier decision of the Federal Court, in a unanimous decision the Court dismissed the Commissioner’s submission that the liquidators’ taxation liability arose on their entry into a contract of sale for property and instead affirmed the trial judge’s view that:

• no tax liability arose on the entry into the contract of sale of the subject property in the financial year ending 30 June 2012, either for ABS or, more relevantly, the liquidators;
• at most, ABS made a capital gain which entered into computation of its net capital gain for the year ended 30 June 2012 (which could not be determined until the end of that year of income);
• the most that could be said is that on 30 June 2012, ABS had an obligation to pay income tax in the future;
• even if ABS had, on 30 June 2012, an obligation to pay income tax in the future, that does not trigger a retention obligation for the liquidators as trustees in terms of section 254(1)(d) for the simple reason that, as at that date, no tax “is ... due” in the sense of “owing”, by them, and no tax “will become due”, in the sense of “owing”, by them; and
• the words “as is sufficient to pay tax which is or will become due” referred to tax due or to become due by the liquidators (defined as trustees in the ITAA36) in their representative capacity.  In other words, it did not embrace tax due, or to become due in the future, in the sense of owing, under an assessment of ABS.

High Court decision

On 10 December 2015 the High Court by a majority of 3:2 dismissed the Commissioner’s final appeal.  As in the courts below, the High Court considered that the construction of the retention obligation imposed by section 254 of the ITAA36 is limited to retaining money after an assessment has been made. 

This issue was also considered in Bluebottle UK Ltd v Deputy Commissioner of Taxation³ (Bluebottle).  While the majority accepted that there were differences between section 254 and section 255, they held that the High Court’s reasoning in Bluebottle was persuasive and “equally applicable to the retention requirement in section 254(1)(d)”.

The Justices made the following comment concerning the Commissioner’s view of section 254:

…the agent or trustee would be burdened with a continuing obligation to retain sufficient money to pay at any time the amount of tax that would be payable upon a notional assessment made at that time. Losses and deductions would have to be factored in to avoid the agent or trustee exceeding the retention authority conferred by Section 254(1)(d). Linked to the continuing obligation would be a continuing and variable personal liability defined by reference to the difference between what the agent or trustee has retained and what would have been sufficient to pay the relevant tax at that time.

Gageler J, in a separate judgment also noted the practical benefit of the High Court’s interpretation in that it creates certainty as to the amounts trustees and agents need to retain.

The Commissioner’s view

The ATO has published the Commissioner’s view of the High Court’s decision.  The Commissioner has stated that:

The Commissioner 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 in respect of the IPG.

The Commissioner will consider where it is now necessary to finalise draft taxation determinations TD 2012/D6 and TD 2012/D7. He will also consider the content of any revised Determinations.

Lavan Legal comment

For receivers, liquidators and administrators, this case provides certainty that, in the absence of an assessment, they have no obligation under section 254 to retain amounts out of the proceeds of the sale of a company asset to meet any capital gains tax which may become payable.