The Appeal from Australian Building Systems Pty Ltd: it appears there is still certainty in death and taxes

Background and first instance decision

Earlier this year we published an article on the first instance decision of the Federal Court of Australia[1] (FCA) which overturned a private ruling of the Australian Taxation Office (ATO) in connection with Australian Building Systems Pty Ltd (ABS), a company in liquidation.

In the application for a private ruling the liquidators had sought answers to the following questions:

• Is the liquidator required under section 254 of the Income Tax Assessment Act 1936 (Cth) (ITAA36) to account to the Commissioner of Taxation (Commissioner) out of the proceeds of sale, any capital gains tax that crystallises on the sale of an asset that belonged to the company before liquidation?

Answer to Q1 – Yes

• If the answer to Q1 is yes, are the monies to be retained once an assessment issues?

Answer to Q2 – No

• If the answer to Q2 is no, are the monies to be retained at crystallisation of any capital gains? 

Answer to Q3 – Yes

At first instance Justice Logan found 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 FCA in Deputy Commissioner of Taxation v Barkworth Olives Management Ltd [2011] 1 Qd R 326 at [29] (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.

In our earlier article we noted that:

“for the reasons given (by Justice Logan), s 254 does not require retention upon the mere happening of a CGT event, that does not mean that a liquidator is obliged immediately to distribute the resultant gain or part thereof as a dividend to creditors in the course of the winding up.”

Appeal

Following on from that decision the Commissioner appealed to the Full Court of the FCA.

The Appeal was heard on 20 August 2014 and the decision handed down last week[2], confirming the earlier decision of the FCA.

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 of 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.[3]

Lavan Legal comment

The lead judgment of Edmonds J was particularly critical of the Commissioner’s “bizarre” construction of section 254 which would have meant that the trustee would be obliged, prior to assessment, to retain out of money coming to the trustee by way of further settlement, so much as is sufficient to pay tax to be assessed in the future.

This prevailing view of the Commissioner has been a major burden to trustees (including administrators, receivers and liquidators) in terms of ongoing cost and reporting, because it has required trustees to develop a practice of holding on to funds from any sale, pending the eventuality of a tax assessment.  This often had the effect of delaying retirement of receivers or finalisation of liquidations.

Consistent with the first instance decision, His Honour identified that section 254 was no more than a “collecting section” rather than a section designed to render a trustee or liquidator liable to be assessed to tax even if they were not otherwise liable.

The result of this decision is that it is now clear that absent the issue of a relevant assessment, there is no obligation on trustees to retain funds sufficient to pay tax.

While this may give trustees some breathing space (at least in terms of the threat of being sued) and potentially reduce the overall cost and complexity of administration scenarios associated with retention of funds pending assessment, it does not mean that trustees should not exercise caution in retention of funds moving forward. 

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 facilities the issue of assessments at an earlier time than following the end of the financial year.

We will provide further updates as and when any new developments occur in relation to this issue.