Private ruling: Receiver obligations
Date of advice: 26 October 2017
Published: March 2018
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the Receiver required to set aside funds for any potential income tax or capital gains tax liability? | A1: No

Relevant facts and circumstances: The Receiver was appointed as Receiver of X with respect to the property asset only. The Receiver did not have control of any other asset or business operated by X in its own right or as trustee. The Receiver was also appointed Receiver and Manager of Y and Z for their respective rights and interests in the business conducted at the property and not in respect to any other asset or business owned by these companies in their own rights or as trustee. The Director had negotiated the sale of the property and business for an amount of $XXX, however the contract for sale had not been executed or exchanged prior to the appointment of the Receiver. The Director was bankrupt at date of appointment. The Receiver reviewed the proposed contract for sale and satisfied himself by undertaking an independent valuation, that the price negotiated by the Director was fair market price for the property and business. The contact for sale was executed and exchanged by the Receiver during the 2012-13 financial year. No notice of assessment for either X or Y has issued for the 2012-13 financial year as at the date of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 254

Reasons for decision: Summary: Section 254 of the Income Tax Assessment Act 1936 (ITAA 1936) sets out the obligations, liabilities and rights of agents and trustees. A receiver satisfies the definition of 'trustee' in subsection 6(1) of the ITAA 1936. Accordingly, a receiver may have obligations under section 254 of the ITAA 1936. Under paragraph 254(1)(a) of the ITAA 1936, an agent or trustee is answerable as taxpayer for things required to be done by the Act in respect of income, or any profits or gains of a capital nature, derived by the agent or trustee in his or her representative capacity or derived by the principal by virtue of the agency. This includes the payment of tax. In respect of income, profits or gains referred to in paragraph 254(1)(a) of the ITAA 1936, the agent or trustee is required to furnish tax returns and to retain out of money which he or she receives as agent or trustee an amount sufficient to pay tax that is or will become due (paragraph 254(1)(d) of the ITAA 1936). He or she is personally liable for any tax payable to the extent of any amount that has been retained or should have retained (paragraph 254(1)(e) of the ITAA 1936). Section 254 of the ITAA 1936 does not itself create a liability for tax. Rather, any liability to pay tax is created under the relevant substantive liability provisions of the income tax legislation. The effect of the section subjects the agent or trustee to certain obligations which have the effect of protecting the Commissioner’s right to collect certain tax liabilities. The obligation to retain funds under s 254(1)(d) only arises after a notice of assessment has been issued in respect of the tax liability ( FC of T v Australian Building Systems Pty Ltd (In Liq) & Ors [2015] HCA 48). This is because the liability needs to be one that “is or will become due”. Only a notice of assessment can crystallise that liability to pay. That said, it would be prudent (but not a legal requirement) for the trustee to retain funds anyway in anticipation of a possible tax liability that will be due and payable in the relevant income year. This was discussed by Logan J at first instance in Australian Building Systems ([2014] FCA 116): “… that does not mean that a liquidator is obliged immediately to distribute the resultant gain or part thereof as a dividend to creditors in the course of the winding up. A prudent liquidator, like a prudent trustee of a trust estate or executor of a will, would be entitled to retain the gain for a time against other expenses which might arise in the course of the administration. Further, in relation to income tax, the liquidator would at the very least be entitled to retain the gain until the income tax position in respect of the tax year in which the CGT event had occurred had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year. Yet further, in the event of a controversy after the issuing of an assessment as to whether the tax debt that was provable in the winding up, the liquidator would be entitled to retain the gain or some part thereof sufficient to meet the assessed tax until that controversy was resolved. Whether there proves to be such a controversy in the present case must await the course of future events. If it comes to pass, the liquidators would be entitled to seek declaratory relief from the Court to resolve it. ” (emphasis added) Accordingly, in this case as no assessment has issued for the relevant entities in the 2012-13 financial year, there is currently no legal requirement for the Receiver to set aside funds for any potential income tax or capital gains tax liability.

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