4 January, 2016
High Court clarifies tax obligations of liquidators, but some questions about the priority of post–liquidation tax remain
What you need to know
- By a majority of 3 to 2, the High Court of Australia has upheld the primary judge's finding in the case of Australian Building System Pty Ltd v Commissioner of Taxation [2014] FCA 116 (ABS) that the liquidators were not obligated to retain an amount for income tax liability associated with a capital gain made from the sale of land by a company in the absence of a tax assessment.
- The High Court unanimously confirmed that, once an assessment for post-liquidation tax is issued, liquidators can be held to be personally liable for the tax to the extent of amounts retained or which should have been retained.
- Justice Gordon (who was in dissent on the primary issue) expressed the view (albeit as obiter dictum) that post- liquidation tax liabilities would be a priority expense under section 556 of the Corporations Act 2001 and should be paid proportionately with other priority creditors. This may support a view that the tax legislation itself does not afford any priority on the Commissioner of Taxation where there are insufficient funds to meet the claims of all creditors.
What you need to do
- It is now clear that section 254 of the Income Tax Assessment Act 1936 does not itself compel liquidators to retain amounts for income tax liabilities which arise during a liquidation until a tax assessment is issued.
- Liquidators and other external administrators such as receivers will need to consider whether that liability could qualify as a priority expense under the Corporations Act or as a matter of general law and make provision accordingly.
Retention obligation of agents and trustees under s 254 of the Income Tax Assessment Act 1936 clarified
Section 254 of the Income Tax Assessment Act 1936 (ITAA 1936) imposes certain obligations and liabilities on an "agent" or "trustee" (which includes a liquidator or receiver) of a taxpayer, including an obligation to "retain from time to time out of any money which comes to" them in their representative capacity so much as is sufficient to pay tax "which is or will become due" in respect of the income, profits or gains derived by the agent or trustee in their representative capacity or by the taxpayer by virtue of their agency. Where the retention obligation arises, the agent or trustee is made personally liable for the tax payable in respect of the income, profits or gains to the extent of any amount that they have retained, or should have retained.
The High Court has now confirmed by majority that, consistent with the reasoning in Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598, the reference to tax "which is or will become due" is a reference to tax which has been assessed.
Therefore, the obligation of an agent or trustee (including a liquidator or receiver) to retain an amount for the tax liability of the taxpayer they are representing does not arise in the absence of an assessment.
Personal liability can arise once assessment issued
All judges of the High Court rejected the view of the majority in the Full Court of the Federal Court that a liquidator could only be made liable to pay tax as the trustee of a trust estate under Division 6 of Part III of the ITAA 1936 (because a liquidator will ordinarily not be a trustee of a trust estate) and a liquidator (and therefore any receiver) cannot be made personally liable for the tax payable by a company under section 254 of the ITAA 1936 itself.
It is also reasonably clear that a liquidator would not be personally liable for a shortfall for assessed post-liquidation tax which arises as a result of a liquidator distributing money prior to the assessment being issued. This comes from:
- the conclusion of the majority judges of the High Court that a liquidator does not need to retain an amount for tax until an assessment is issued;
- the comments of Gageler J (in the majority) that the retention obligation attached to money received from time to time following assessment; and
- the rejection by the majority of the Commissioner's arguments that a liquidator must retain an amount for any tax from the moment income, profits or gains are derived in a representative capacity or by virtue of their appointment.
Although there is no obligation to retain an amount for tax before an assessment is issued, comments by Logan J at first instance and French CJ and Kiefel J (in their joint High Court judgment) may suggest that, in order to avoid a personal liability under section 254 of the ITAA 1936, a liquidator may consider it prudent to take into account any post-liquidation tax that might be payable before distributing money to creditors prior to a tax assessment being issued in respect of post-liquidation tax. This seems somewhat difficult to reconcile with the conclusion of the majority that section 254 of the ITAA 1936 only imposes a retention obligation after an assessment is issued. In any case, liquidators will still need to have regard to their obligations and the rights of creditors under the
Corporations Act.
Interaction with clearance procedures
Justice Gordon (who was in dissent on the primary issue) confirmed that section 254 of the ITAA 1936 deals with post- liquidation/receivership tax liabilities and the clearance provisions in section 260-45 and 260-75 of Schedule 1 to the Taxation Administration Act 1953 (TAA) only deal with pre-liquidation/receivership tax liabilities.
Those clearance provisions broadly require a liquidator or receiver to notify the Commissioner of their appointment within 14 days and set aside an amount to discharge any outstanding tax-related liabilities notified by the Commissioner on a proportionate basis taking into all of the unsecured debts of the company.
Draft Tax Determination TD 2012/D6 should be withdrawn
In Draft Taxation Determination TD 2012/D6 the Commissioner states income tax does not need to have been assessed before an agent or trustee has an obligation under section 254 of the ITAA 1936 to retain sufficient money to pay tax which is or will become due as a result of their agency or trusteeship. The effect of the High Court judgment is that TD 2012/D6 is wrong and should be withdrawn.
Draft Tax Determination TD 2012/D7 and priority questions
In Draft Determination TD 2012/D7 the Commissioner states that when a receiver sells an asset as agent or trustee, section 254 of the ITAA 1936 gives the Commissioner priority over other creditors for the purpose of collecting tax on a capital gain made on the sale of the asset and the receiver is required to retain an amount equal to the tax on the entire gain, even if part or all of the gain relates to a period before the receiver was appointed.
While the ABS case does not specifically address the obligations of receivers, the comments made by Gageler and Gordon JJ may support a view that questions of priority should be determined outside of the tax legislation. That is, the priority of creditors is determined by the Corporations Act and the general law. We understand that, consistent with the comments by Gordon J, the Commissioner accepts that in the liquidation of a company the Commonwealth is subject to the priority provisions of the Corporations Act and where the Commissioner ranks equally with other priority creditors he is only entitled to recover any post-liquidation tax on a proportionate basis with other priority creditors under section 556 of the Corporations Act.
We would encourage the Commissioner to clarify his views on the priority of post-appointment income tax liabilities in a receivership and liquidation, having due regard to the comments of the High Court in the ABS case, in any finalised tax determination so as to give clarity to liquidators, receivers and creditors.
For further information please contact:
Tony Ryan, Partner, Ashurst
tony.ryan@ashurst.com
