On 21 February 2014 Justice Logan in the Federal Court of Australia handed down his decision in Australian Building Systems Pty Ltd v Commissioner of Taxation [2014] FCA 116 (ABS).
The decision in ABS has the potential to affect insolvency practitioners and how they deal with funds received by them from the realisation of property, during the course of an insolvency administration, which may cause a capital gains tax event (CGT event).
Facts
On 6 April 2011 ABS was placed into liquidation. The liquidators, during the course of the liquidation, sold a property located in Crestmead, south of Brisbane in Queensland. 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).
In January 2012 the liquidators of ABS applied for a private ruling concerning how they were to deal with the proceeds of the sale of the property at Crestmead.
The liquidators sought answers to the following questions:
The liquidators appealed (following the objection process) to the Federal Court of Australia.
Issues
On appeal to the Federal Court, the Commissioner argued that section 254 of the 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.
Determination
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 Federal Court 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.
However, importantly, Justice Logan concluded his reasons with the following:[1]
Even though, for the reasons given, 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. A prudent liquidator, like a prudent trustee of a trust estate or executor of a will, would be entitled to retain the gain for a time against other expenses which might arise in the course of the administration.
Lavan Legal comment
It follows that a liquidator may not be required to withhold funds to meet a potential taxation liability that may arise in the future, in the absence of an assessment. Lavan Legal recommends, however, that the insolvency practitioner, for the time being, continue to retain funds to meet any potential taxation liability, especially given the concluding comments by Justice Logan, and the fact that the decision of Justice Logan is on appeal to the Full Court of the Federal Court.
