In 2011 Australian Building Systems Pty Ltd was placed in liquidation. During the year ending June 2012 the liquidators sold real property in Queensland which resulted in a capital gain to the company of more than $1,000,000.
During that year the liquidators sought a ruling from the Australian Taxation Office as to whether the liquidators were required under Section 254(1)(d) of the Income Tax Assessment Act 1936 to retain money from the sale of the property to cover a potential tax liability payable by the company on the capital gain.
Section 254 provides that “with respect to every agent and with respect also to every trustee:
(d) He is authorised and required to retain from time to time out of any money which comes to him in his representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income or gain.
(e) He is made personally liable for the tax payable in respect of the income or gain to the extent of any amount that he has retained or should have retained under paragraph (d).”
The liquidators fall within the definition of “trustees” contained in the taxation laws.
At the time the matter came on for hearing in the Federal Court no notice of assessment for the income year in which the property was sold had issued.
The court held that the use of the present tense “is due” should be construed as referring to tax which is presently payable and that the use of the future tense “will become due” as referring to tax which has been assessed as owing although not presently payable (ie the time for payment has not arrived).
It was accepted that the net capital gain would be included in the company’s assessable income for the relevant year. Assessable income and taxable income are not the same. The amount, if any, of the tax liability will depend upon what amount, if any, proves at the conclusion of a given year of taxation, to be the taxpayer’s taxable income. That amount may be far from certain at the time when the CGT event occurred.
The court said that on the construction proposed by the Commissioner the liquidator would be obliged, prior to an assessment having issued, to retain out of money coming to the liquidator so much as is sufficient to pay tax that may possibly be assessed at some time in the future.
The court held that a possible obligation to pay income tax in the future does not trigger a retention obligation for the liquidators in terms of the section 254(1)(d) for the simple reason that as at that date, there is no tax presently owing and there is no tax assessment in existence which is payable at a later date.
The Court noted that any assessment that may issue in the future would issue to the company and not the liquidators.
This decision of the Full Federal Court is now subject to an appeal to the High Court.
For more information on this update or any other insolvency matter please contact David Miller on (08) 9321 3755.
The information published in this paper is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.