Our insolvency update in May 2012 entitled “In this world nothing can be said to be certain, except death and taxes” stated:
Benjamin Franklin once famously wrote that “in this world nothing can be said to be certain, except death and taxes”.
One of the exceptions to this rule, may be the obligation to pay capital gains tax (CGT) from the proceeds of asset sales. At least insofar as a secured creditor who enters into possession pursuant to a mortgage or security interest is concerned, as section 254 of the Income Tax Assessment Act 1936 (ITAA 1936) operates such that a secured creditor is not required to retain from any surplus sale proceeds an amount in anticipation of the payment of CGT.
In mid September 2012 the Australian Taxation Office released draft tax determination 2012/D7 (TD 2012/D7) for public comment. Draft tax determinations can be relied upon by taxpayers to provide protection from penalties and interest in the event that they are subsequently incorrect.
TD 2012/D7 sets out that a mortgagee in possession is generally not an agent or trustee of the debtor for the purposes of section 254 of the ITAA 1936 and accordingly, is not required to retain an amount equal to the CGT from the sale proceeds.
For the purposes of clarification, TD 2012/D7 offers the following example (which is analogous to a number of mortgagee sales):
Bianca's Bikes defaults on its mortgage with Large Bank Pty Ltd. Large Bank Pty Ltd takes possession of the mortgaged land. Raymond is appointed to act as agent for Large Bank Pty Ltd. Raymond makes a gain of a capital nature by executing Large Bank Pty Ltd's power of sale as a mortgagee in possession and sells the mortgaged land. In these circumstances Raymond is not the agent for Bianca's Bikes and no income, profit or gain of a capital nature is derived by Raymond as a representative of Bianca's Bikes .
Paragraph 254(1)(d) of the ITAA 1936 does not apply to require Raymond to retain an amount from the income he derives as a result of selling the mortgaged land.
We anticipate providing an update in relation to the effect on receivers when the draft determination is finalised, which is expected to be in early 2013.
Lavan Legal comment
Lavan Legal will continue to monitor the developments in this area of law. In the meantime, we recommend that secured creditors give due consideration to potential CGT obligations when considering what form of appointment to make.