In this world nothing can be said to be certain, except death and taxes

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 (ITAA36) 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 addition to preserving the position of the Australian Taxation Office (ATO) in relation to the tax liabilities which arise following the appointment of a receiver and manager, section 254 imposes obligations on a ‘trustee’ or ‘agent’ of a taxpayer, including an obligation to pay CGT. 

For the purposes of the ITAA36, a receiver and manager is a ‘trustee’ of a taxpayer (see section 6(1)).  Generally speaking, that means that a receiver and manager will be personally liable for capital gains derived from assets the subject of the receivers’ and managers’ appointment during the course of the receivership.  However, there may be some exceptions.

Late last year, the ATO met with the Insolvency Practitioners Association (IPA) to develop a series of tax rulings that will clarify the obligations of insolvency practitioners under section 254 of the ITAA36 which arise as a result of the sale of a CGT asset.  The four ruling topics that have been agreed upon (in order of their priority) are:

• receivers (also covering the situation where there is also a mortgagee-in-possession undertaking the sale of the asset);
  
  
• liquidators;
  
  
• dual appointments, that is, both a receiver and a liquidator appointed; and
  
  
• bankruptcy.

The ATO is aiming to publish a draft ruling on the first and main topic - receivers and mortgagees - in the first half of 2012.  Development of the later rulings would commence once feedback has been received on the first draft ruling.  The ATO ruling process is explained at http://www.ato.gov.au/taxprofessionals/content/19658.htm.

Lavan Legal comment

Lavan Legal will continue to monitor the developments in this area of law.  In the meantime, we recommend that:

• receivers and managers consider whether any CGT obligations will arise from the sale of any assets;
  
  
• if receivers and managers are unsure about potential CGT obligations that arise from a sale, they obtain legal advice about potential CGT issues before they enter into a sale contract; and
  
  
• secured creditors give due consideration to potential CGT obligations when considering what form of appointment to make.

For more information, please contact: