Private ruling: CGT - trustee obligations
Date of advice: 13 June 2017
Published: October 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 22 July 2016

Ruling: Q1: Is there an obligation on the Trustees, pursuant to paragraph 254(1)(d) of the Income Tax Assessment Act 1936 (ITAA 1936), to retain funds from the proceeds of the sale of the Properties to cover any capital gains tax (CGT) liability at the time of the sale, before an income tax return is lodged by the members of the Partnership? | A1: No | Q2: Will CGT event A1 occur on 28 February 2017 for the statutory trust? | A2: Yes

Relevant facts and circumstances: The Trustees are the trustees for the statutory trust for the sale of the Properties. The Properties were previously held by the Partnership. The Partnership did not formalise their arrangement under a written agreement. The Partnership originally acquired the Properties for the purposes of developing the land into an apartment block. However, the only activities which were undertaken prior to the vesting of the Properties in the Trustees was obtaining development approval. The Trustees were appointed as trustees for the statutory trust for the sale of the Properties pursuant to a court order (the Order). The Order provides as follows; ● The Properties vested in the Trustees and were to be held on statutory trust for sale on the terms set out in section 37A of the Property Law Act 1974 (Qld) (PL Act). ● The partners of the Partnership are entitled to offer to purchase the Properties from the Trustees. ● Upon completion of the sale, the proceeds from the sale of the Properties is to be distributed in priority as follows: i. In payment of any registered encumbrances on the title of the Properties ii. In payment of all costs and expenses necessary to effect settlement of the Properties iii. In payment of the Trustees’ fees, costs and expenses iv. In payment of legal costs and disbursements incurred for the sale of the Properties v. In payment of the parties’ legal costs associated with the court application; and vi. The net balance to be paid to the partners of the Partnership in proportion to their interest in the Properties. The Trustees are not property developers nor are they in the business of buying and/or selling property. The Trustees were appointed as statutory trustees for the sale of the Properties and act as trustees only in this limited capacity. The Properties were sold on during the 2016-17 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 254 | Income Tax Assessment Act 1936 section 255 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 109-5

Reasons for decision: Summary: Under section 254(1)(d) of the ITAA 1936, agents and trustees are authorised and required to retain funds received in their representative capacity in order to pay tax “which is or will become due” in respect of the income, profits or gains realised in that capacity. However, the obligation to retain money under section 254(1)(d) of the ITAA 1936 to cover a liability to pay tax that “is or will become due” does not exist until a notice of assessment is issued in respect of the liability. This principle comes from the case of FC of T v Australian Building Systems Pty Ltd (In Liq) & Ors [2015] HCA 48. In this case, liquidators were appointed to wind up a company called Australian Building Systems (ABS). The liquidators disposed of a property owned by ABS, which constituted a CGT event for the purposes of the ITAA 1997. The majority of the High Court agreed with the Full Federal Court’s interpretation of the provision handed down at the appeal stage. The Full Court had held that the payment and retention obligations imposed by section 254 of the ITAA 1936 only arose when a notice of assessment was issued. Here, the Commissioner had not issued a notice of assessment to ABS for the relevant income year. The liquidators were therefore not required by s 254(1)(d) of the ITAA 1936 to retain any amount from the proceeds of sale sufficient to pay a tax liability that might have arose in relation to the CGT event. The High Court cited the case of Bluebottle UK Ltd v Deputy Commissioner of Taxation [2007] HCA 54. Here, the Court linked the retention obligation in s 255(1)(b) of the ITAA 1936 to the existence of an assessment. Their Honours said at paragraph 79: “Until the tax payable by the non-resident has been assessed it is not possible to say more than that there may be tax due by the non-resident. It is not possible to say that tax is due or that tax will become due. The prediction that tax may be due (and any prediction of its likely amount) may be able to be made with more or less certainty by a person who is armed with a deal of information, but there is no reason to suppose that the controller of a non-resident’s money would ordinarily, let alone invariably, have that information and be in a position to make any useful prediction about the taxation affairs of the non-resident whose money the controller receives.” (emphasis in original) Further, their Honours concluded at paragraph 80: “Paragraph (b) of s 255(1) should be read as referring to an amount of tax that has been assessed. The phrase “tax which… will become due” is to be understood as referring to tax which, although assessed, is not yet due for payment.” In Australian Building Systems , the High Court confirmed it was appropriate to look at the interpretation of section 255(1)(b) of the ITAA 1936 to inform the meaning of section 254(1)(d) of the ITAA 1936. At paragraph 27, French CJ and Kiefel J said: “… an interpretation by this Court of a particular provision of an Act is a powerful indicator of the correct interpretation of a provision of the same Act which serves similar purposes and uses identical or substantially similar language. That is not to say it is determinative if a different construction is required by the text, context and purpose of the other provision.” This approach was used to give meaning to the word “due” in interpreting the retention obligations in both sections 254 and 255 of the ITAA 1936, two adjacent provisions serving the same general purposes and sharing a common legislative history. | Detailed Reasoning - Application of the law: There has been no assessment issued by the Commissioner in respect of the CGT position. Accordingly, there is no tax liability that is currently or will become due on the part of the Trustees. While it would be considered prudent for the Trustees to have retained an amount in expectation that a capital gain tax liability would arise, there is no obligation to retain under section 254(1)(d) of the ITAA 1936. | Detailed Reasoning - Question 2: When a taxpayer disposes of a CGT asset, CGT event A1 is taken to have occurred under section 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from that taxpayer to another entity. This change can be the result of some act or event, or by operation of law. The Trustees were appointed as trustees for the statutory trust for the sale of the Properties pursuant to the Order. Under section 38(3) the PL Act, where the entirety of the property is vested at law in co-owners, the court may appoint two or more individuals to be trustees of the property for the purpose of a statutory trusts for sale or partition of that property. On such an appointment, the property will vest in the trustees (section 38(3A) of the PL Act). Under section 37A, the trustees are obliged to sell the property. ATO Interpretative Decision ATO ID 2009/129 considers the CGT consequences of the appointment of statutory trustees under section 38 of the PL Act. It is considered that the making of the court order in such a case effects a disposal of the property from the co-owners to the trustees for sale by operation of law. Therefore, CGT event A1 happens and the statutory trustees become the owners of the property for CGT purposes. It would follow that any future dealings with the property by statutory trustees could result in further CGT events occurring. | Detailed Reasoning - Application of the law: In this case the Trustees acquired the Properties for CGT purposes on the date of the Order in accordance with section 109-5 of the ITAA 1997 and the principles provided in ATO ID 2009/129. Any subsequent disposal of the Properties by the Trustees will result in a CGT event occurring. The Trustees sold the Properties pursuant to their obligations under section 37A of the PL Act. A change of ownership occurred and therefore the Trustees are taken to have disposed of CGT assets (i.e. land). Under section 104-10 of the ITAA 1997, CGT event A1 occurred; if the event results in a capital gain, it will be included in the net income of the statutory trust.