Private ruling: CGT liability of Receiver and Manager
Published: November 2011
Ruling period: Year ending 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: A5: 


Relevant legislative provisions: Income Tax Assessment Act 1936 Section 6 | Income Tax Assessment Act 1936 Section 254 | Income Tax Assessment Act 1936 Section 104-5 | Income Tax Assessment Act 1936 Section 104-10 | Income Tax Assessment Act 1936 Section 100-45 | Income Tax Assessment Act 1936 Section 106-60

Reasons for decision: Summary: For the purposes of this ruling application we note the following: · The Property was owned, prior to sale, by the Company. · The Property was encumbered by a mortgage to the Bank. · The Property was held by the Company on capital account and is a capital gains tax asset. · The Receiver and Manager of the Property was appointed by the Bank. · The Receiver and Manager executed a contract for the sale of the Property. The sale of the Property has given rise to a CGT event A1 under section 104-5 and 104-10 of the ITAA 1997. The time of the CGT event is the date of the contract of sale pursuant to subsection 104-10(3) of the ITAA 1997. Section 100-45 provides instruction on how to calculate the capital gain or loss for most CGT events:- Work out your capital proceeds from the CGT event. Work out the cost base for the CGT asset. Subtract the cost base from the capital proceeds. If the proceeds exceed the cost base, the difference is your capital gain. If not, work out the reduced cost base for the asset. If the reduced cost base exceeds the capital proceeds, the difference is your capital loss. If the capital proceeds are less than the cost base but more than the reduced cost base, you have neither a capital gain nor a capital loss. You have stated in your ruling application that you used this method in calculating the capital gain made on the sale of the Property. | Detailed Reasoning - Questions 1 & 2: Section 254 of the ITAA 1936 applies to an entity that is an agent or trustee for the purposes of the ITAA 1936 and 1997, and contains provisions which describe the duties and obligations of persons who act as the agents or trustees of taxpayers. A Receiver and Manager satisfies the definition of 'trustee' in subsection 6(1) of the ITAA 1936. Paragraph 254(1)(a) of the ITAA 1936 provides that a trustee is answerable as taxpayer 'for the payment of tax' on the income, or any profits or gains of a capital nature, derived by him in his representative capacity. Paragraph 254(1)(b) of the ITAA 1936 provides that a trustee is assessed on that income or those profits or gains 'but in his representative capacity only'. Therefore, section 254 of the ITAA 1936 does not create a personal responsibility in you for tax assessed to the Company. However, it makes you liable to pay tax on income, profits or gains of a capital nature derived by you in your capacity as trustee (for tax purposes) of the Company in relation to the sale of the Property. Paragraph 254(1)(d) of the ITAA 1936, to that end, authorises and requires you to retain out of any money that is received in that representative capacity, an amount sufficient to pay that tax. You are then under paragraph 254(1)(e) of the ITAA 1997 made personally liable for the tax assessed in respect of the income, profits or gains resulting from that representative capacity to the extent that money has been retained or should have been retained. Consequently, you have a personal liability to pay income tax as Receiver and Manager for the Company. However, that liability only extends to money that has come to you in that representative capacity and which you have been authorised and required to retain, and which has been retained or should have been retained for the purpose of paying the income tax. The liability to pay tax is created under all the relevant provisions of the income tax legislation (in respect of income, capital gains etc.) and section 254 of the ITAA 1936 works in conjunction with these provisions to provide that a Receiver and Manager is liable in relation to any such tax liability that arises in the course of their administration. | Detailed Reasoning - Question 3: Division 106 explains the special rules that apply in cases where a capital gain or loss is made by a person other than the entity to which a CGT event happens. These special rules apply to partnerships, bankruptcy trustees and company liquidators, trustees where a beneficiary is absolutely entitled to a CGT asset as against the trustee, and security holders. Section 106-60 will apply to an act done by an entity (or an agent of the entity) in relation to a CGT asset for the purpose of enforcing or giving effect to a security, charge or encumbrance the entity holds over the asset as if the act had been done instead by the person who provided the security. Example : A lender sells property under a power of sale after the failure of the owner of the property to make payments on the loan. Any capital gain or loss is made by the owner of the property, not the lender. In your case, when you, as Receiver and Manager, disposed of the Property it is considered to be an act done by the Company. | Detailed Reasoning - Questions 4 & 5: As discussed in question 1 and 2, the Receiver and Manager is required to withhold sufficient funds to pay any resulting CGT liability from the sale of the Property. This is the case, even if there is a mortgage on the Property.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Subject: CGT liability of Receiver and Manager: 1. Does subsection 254(1) of the Income Tax Assessment Act 1936 (ITAA 1936) apply to impose a tax liability on you, as Receiver and Manager, in the event that there is any tax liability for the Company in relation to the net capital gains made on the disposal of their Property? | 2. Does the Receiver and Manager have a liability to withhold tax under paragraph 254(1)(d) of the ITAA 1936 in respect of the capital gain made by the Company on the sale of the Property? | 3. Will the rule in section 106-60 of the Income Tax Assessment Act 1997 (ITAA 1997) apply when the Property was sold by the Receiver and Manager, when the Receiver and Manager is appointed by the Mortgagee, but the Receiver and Manager is acting as the agent of the Mortgagor when the Property is sold? | 4. If the Receivers and Managers are required under section 254 of the ITAA 1936 to retain out of any money which came to him in his representative capacity as is sufficient to pay the capital gains tax (CGT) owing on the capital gain from the sale of the property. Is this the case where the mortgagee requires that all the money paid by the purchaser of the Property must be paid to it before it will be released to allow the Receivers and Managers to transfer the property free of the mortgage? | 5. Under the circumstances in Question 4, are moneys which are paid to the mortgagee moneys which come to Receivers and Managers under Section 254 of the ITAA 1936? | Relevant facts: You were appointed Receiver and Manager for the sale of the Property owned by the Company. | Based on current Australian Securities and Investments Commission (ASIC) records, the Company is currently "under external administration and/or controller appointed". | Pursuant to the Deed of Appointment of Receiver and Manager under Mortgage, clause 2 states: | (a) Pursuant to the terms of the Security, the Mortgagee appoints the Receiver and Manager to be the receiver and manager of the Secured Property. | (b) The Receiver and Manager is appointed as agent of the Mortgagor pursuant to the terms of the Security and the Mortgagor alone is responsible for the Receiver and Manager's act and defaults as provided in the Security. | (c) If the appointment, of the Receiver and Manager under this Deed is invalid under the Security, then that invalidity will not affect the appointment made of the Receiver and Manager pursuant to any other securities held by the Mortgagee over the Property of the Mortgagor. | (d) A person paying money to the Receiver and Manager shall not be concerned to enquire whether any cause has happened to authorise the Receiver and Manager to act." | Liquidators were appointed by an order of the Supreme Court for the company. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.