In Commissioner of Taxation v Australian Building Systems Pty Ltd (in Liq) [2015] HCA 28, the High Court has held that during the administration of a company, liquidators are not required to retain monies for tax until a notice of assessment has been issued by the tax office.
Take-home points
1. Liquidators can confidently proceed in the winding up of a company knowing they do not have an obligation to retain money from the sale of assets in anticipation of an assessment being made. Liquidators will be able to distribute available assets to creditors promptly in the usual priority under Part 5.6 of the Corporations Act 2001 (Cth).
2. However, liquidators should be mindful that once an assessment has been issued, any assets they hold or are subsequently collected in will be required to meet the assessable amount.
3. The decision also extends to types of agents and trustees normally covered under section 254 Income Tax Assessment Act 1936 (Cth) including livestock agents selling cattle or sheet, agents selling collectables at auction and retail selling agents generally.
Facts of the case
The facts of the case concerned the winding up of Australian Building Systems (ABS). The liquidators of ABS entered into a contract for sale of real property which gave rise to a capital gain designated as a CGT event under the Income Tax Assessment Act 1997 (Cth) of approximately $1,120,000.00.
The liquidators applied to the ATO for a private ruling and asked whether or not under section 254 of the Income Tax Assessment Act 1936 (Cth) they were required to retain monies for any capital gains tax liability from the time the capital gain crystallised or only when an assessment was issued, and when they were required to pay the CGT from the sale.
The Commissioner for Taxation ruled that they were required to retain monies for any capital gain tax liability out of the proceeds of sale from the time of crystallisation of the capital gain and that they were required to account to the Commissioner for that liability out of the proceeds of sale, even if no assessment of tax had yet been issued. The liquidators objected to the ruling but was disallowed. The liquidators successfully appealed the decision to the Federal Court where his Honour Justice Logan held that there was no obligation to retain and pay amounts for tax to the Commission in the absence of an assessment (subject to the provisions of s254(1)(d) of the Income Tax Assessment Act 1936 (Cth). His Honour relied on the reasoning of the High Court in Bluebottle UK Ltd v Deputy Commissioner of Taxation [2007] HCA 54 that the retention and payment obligations under section 255(1)(b) of the Income Tax Assessment Act 1936 (Cth) (by a person in receipt or control of money from a non-resident) only arose when an assessment was issued.
The Commissioner appealed the decision to the Federal Court though that appeal was dismissed and adopted the reasoning of Logan J. The Commissioner appealed to the High Court, and by a majority decision of 3:2, the appeal was dismissed.
High Court decision
The Court was asked to consider whether or not the retention obligation under section 254(1)(d) of the Income Tax Assessment Act 1936 (Cth) arose before the making of an assessment or deemed assessment in respect of income, profits or gains. Section 254(1)(d) provided that:
“every agent and every trustee to retain from time to time out of any money which comes to him or her in his or her representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains.”
Chief Justice French and Justice Kiefel held that the retention obligation under section 254(1)(d) would only make sense after a tax assessment had been issued. They relied on the reasoning in Bluebottle dealing with similar provisions in s255 of the Income Tax Assessment Act 1936 (Cth) in which the phrase “tax which…will become due” was considered. Their Honour’s held that despite the different wording, the reasoning was applicable in determining the limits of the obligations under section 254.
Justice Gaegler also agreed that the retention obligation only arose after an assessment had been issued. His Honour agreed with the reasoning in Bluebottle and noted that “the better view is that the retention obligation in s254, like the retention obligation in s255 is limited to retaining money after an assessment had been made” because:
1. It fit within the structure of s254 in giving the retention obligation sequential on the performance of an assessment;
2. produced certainty as to the amount which the agent or trustee is required to retain (fixed to the assessment);
3. resulted in less confusion between different business models (a tax payer carrying business alone is not ordinarily required to retain money as it is received for future tax payment. A taxpayer carrying on business through an agent would be disadvantage if the agent were required to retain money for future payment of tax as it is received in his/her representative capacity); and
4. minimised the potential for conflict between the obligations of a liquidator under the Income Tax Assessment Act 1936 (Cth) and the obligations of a liquidator and rights of creditors under the Corporations Act 2001 (Cth).
However, Justices Keane and Gordon in the minority held that the Commissioner’s appeal should be allowed as they reasoned that the retention obligation arose and derived from the relevant income, profits or gains and that the obligation could rise in anticipation of an assessment. In summary, they reasoned that section 254 and 255 of Income Tax Assessment Act 1936 (Cth) were not the same and plain wording in their view, of s254 was aimed at a different purpose to s255 and should be given full effect.
Conclusion
Under the current winding up provisions, the Commissioner for Taxation ranks equally as an unsecured creditor in relation to any unpaid tax. The High Court’s majority decision clarifies that a trustee or agent’s obligation to retain funds to pay tax from monies received in their representative capacity under section 254(1)(d) of the Income Tax Assessment Act 1936 (Cth) is triggered only if a tax assessment exists at that time (whether tax is due and payable or only payable in the future. This fits within the reasoning of the Commissioner ranking as an unsecured creditor in that regard. However, it should be noted that there is nothing in the judgment to suggest that a trustee or agent could not have the obligation to retain monies imposed on them after the payment of all monies received in their representative capacity to a secured creditor. The Court’s finding that the “obligation to any money which so comes to the person after the tax has been assessed” may support this contention. Finally, further monies that an agent or trustee may receive in their representative capacity (for example, in complex liquidations where there are multiple assets to be realised) may trigger the retention obligation and assessment that exists in respect of the income, profits or gains will need be satisfied from those further monies.