Private ruling: Obligations under section 254 of the Income Tax Assessment Act 1936
Published: October 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: Year ended 30 June 2014

Ruling: Q1: Pursuant to section 254 of the Income Tax Assessment Act 1936 (ITAA 1936), is the Security Trustee answerable as taxpayer (in relation to Company X (Receivers and Managers Appointed)) for the doing of all such things as are required to be done by virtue of the Income Tax Assessment Act 1936 (ITAA 1936) or the Income Tax Assessment Act 1997 (ITAA 1997) in respect of any income, or any profits or gains of a capital nature derived from the disposal by the Security Trustee of the assets and for the payment of tax thereon? | A1: No | Q2: Is the Security Trustee required by section 254 of the ITAA 1936 to retain out of any money which comes to it, in its proposed capacity as mortgagee exercising a power of sale, as the proceeds of the disposal of the assets so much as is sufficient to pay income tax which is or will become due in respect of any income, or any profits or gains of a capital nature referred to in Question 1 above? | A2: No | Q3: Pursuant to section 254 of the ITAA 1936, is the Security Trustee personally liable for any income tax payable in respect of any amount of income, profits or gains of a capital nature referred to in Question 1 above? | A3: No

Relevant facts and circumstances: Company X (Receivers and Managers Appointed) (Company X) 1. Company X is an Australian resident company and a subsidiary of a company listed on the Australian Securities Exchange, but is not a member of any tax consolidated group. Financing and security structure 2. Company X granted a registered fixed and floating charge (the "Charge") to Company D in respect of all Company X's "present and future assets and undertaking" to secure moneys owing by Company X from time to time. 3. The Security Trustee was appointed pursuant to a deed ("the Security Trust Deed") . The Security Trust Deed applies to the Security Trustee only in its capacity as trustee of the Company X Security Trust. 4. Company D's rights, title and interest in the property charged by Company X to Company D pursuant to the Charge were assigned to the Security Trustee as trustee for itself and any other Mortgagee, to secure repayment of the secured money. 5. Pursuant to the terms of the Security Trust Deed, the Security Trustee holds the benefit of the security interests created by the Security (including the Charge) on trust for the current Participants under a Credit Facility Agreement. 6. Pursuant to the terms of the Credit Facility Agreement, financial accommodation has been made available to Company X as the Borrower. The current Participants under the Credit Facility Agreement are owed monies. 7. The property the subject of the charge ("the Mortgaged Property") includes certain contracts that Company X is a party to (the "Project Agreements"): 8. The Mortgaged Property includes all of Company X's presently existing rights (the "Contractual Rights") under or in relation to the Project Agreements. The Contractual Rights have material market value. 9. The Security Trust Deed entitles the Security Trustee to exercise all powers under the securities (including those conferred by law) as if the Security Trustee were the sole beneficial owner of the securities and has absolute discretion as to the steps to take to enforce those securities, to recover money payable and to the manner of enforcement (including the terms of any sale under those securities and any controller appointed under those securities). 10. The Charge is a "Security" within the definition of that term in the Security Trust Deed. 11. The Security Trust Deed sets out the extent of the Security Trustee's discretion and ability to seek instructions from the Finance Parties (which include the Participants). 12. The Security Trust Deed requires the Security Trustee to enforce a Security as directed by the Majority Finance Parties and recover the Secured Moneys following an Event of Default. 13. The Charge allows the Security Trustee to exercise any Power of a Receiver at any time an Event of Default subsists in addition to any Power of the Mortgagees and without giving notice and it may exercise those Powers and its Powers without taking possession or being liable as mortgagee exercising a power of sale. The Powers are defined to include a power to sell any of the Mortgaged Property (whether or not the Security Trustee has taken possession). Default and Appointment of Receivers and Managers 14. Company X was notified that a series of events of default had occurred on various dates under the Credit Facility Agreement and that such Events of Default were subsisting. 15. On the basis of these Events of Default, the Participants instructed the Security Trustee, to appoint joint and several receivers and managers ("the Receivers") of the Mortgaged Property. 16. The appointment of the Receivers was effected pursuant to a deed of appointment of receivers between the Receivers and the Security Trustee ("Deed of Appointment"). 17. Pursuant to the Deed of Appointment, the Receivers are the agents of Company X, and Company X is responsible for the Receivers' acts, defaults and omissions and for the Receiver's remuneration. Events occurring post appointment of Receivers and Managers 18. Subsequent to the appointment of the Receivers, certain parties commenced negotiations to acquire the Contractual Rights from the Security Trustee. That offer did not include the other assets of Company X or to acquire the business of Company X as a going concern. 19. Following commencement of the negotiations, the Participants requested the Receivers to undertake a sale process for the assets of Company X including, on a going concern basis, to comply with its duty under section 420A of the Corporations Act 2001 . 20. The Receivers advertised the assets of Company X for sale and called for expressions of interest from third parties. A number of expressions of interest and indicative bids were received by the Receivers from a range of parties, most of whom offered to acquire the business of Company X as a going concern. 21. Following analysis by the Receivers and the Security Trustee of those offers, it was determined that the transaction which would result in the highest net sale proceeds and is consistent with the controller's duty of care, was in fact the proposal to assign the Contractual Rights. 22. The decision of the Security Trustee to exercise its statutory and contractual powers of sale in respect of the Contractual Rights, is the decision of the Security Trustee, in consultation with the Participants, upon its own advice and is not at the direction or advice of the Receivers. 23. As a consequence, the Security Trustee has determined not to proceed with a sale of the business as a going concern by the Receiver but rather to: a. retire the Receivers from the Contractual Rights, b. enter into the assignment of the Contractual Rights in its own name; and c. leave the Receivers appointed over the balance of the assets. Assignment of the Contractual Rights 24. The Participants will direct the Security Trustee to exercise its power of sale as mortgagee under the relevant State Conveyancing Act and the Charge by entering into assignment deeds ("Assignment Deeds") for the assignment of the Contractual Rights specified therein to respective purchasers (the "Assignees"). 25. Pursuant to these Assignment Deeds, the Security Trustee will assign its right, title and interest in the Contractual Rights to each relevant Assignee in return for consideration. 26. Upon execution of the Assignment Deeds, certain conditions precedent contained therein are to be either satisfied or waived for the assignment of the Contractual Rights to be legally binding. 27. The assignment of the Contractual Rights will have no legal effect until the Stated Time on the Effective Date as specified in the Assignment Deeds (contingent on the conditions precedent being satisfied or waived). 28. The Receivers will not be parties to the Assignment Deeds. 29. The Security Trustee will receive and hold the proceeds of sale on trust for the Participants in accordance with the Security Trust Deed. The Security Trustee, will then distribute such proceeds, net of applicable fees and expenses and any required retentions, to the Participants shortly thereafter. Retirement of Receivers and Managers 30. The Receivers will retire from their appointment as joint receivers and managers insofar as that appointment relates to the Contractual Rights. 31. The retirement of the Receivers is given effect upon execution of the Deed of Retirement of Receivers & Managers. 32. The Deed of Retirement of Receivers and Managers will be executed before the Effective Date under the Assignment Deeds but after the Assignment Deeds are executed. 33. The Receivers will not be appointed to the Contractual Rights at the time they are assigned. 34. The Security Trustee will require the Receivers to remain over the remaining assets of Company X. These assets are of little value. 35. The Security Trustee does not presently intend to, and does not have plans to exercise its power of sale in relation to the remaining assets of Company X. Assumption The proceeds to be received by the Security Trustee are less than the total amounts owing by Company X under the Credit Facility Agreement.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 254 | Income Tax Assessment Act 1936 subsection 254(1) | Income Tax Assessment Act 1936 paragraph 254(1)(a) | Income Tax Assessment Act 1936 paragraph 254(1)(d) | Income Tax Assessment Act 1936 paragraph 254(1)(e)

Reasons for decision: Summary: Section 254 of the ITAA 1936 applies to an entity that is an agent or trustee for the purposes of the ITAA 1936 and the ITAA 1997. It contains provisions which describe the duties, obligations and rights of persons who act as the agents or trustees of taxpayers. Subsection 254(1) of the ITAA 1936 sets out the responsibilities of agents and trustees. Relevantly, it states: With respect to every agent and with respect also to every trustee, the following provisions shall apply: (a) He or she shall be answerable as taxpayer for the doing of all such things as are required to be done by virtue of this Act in respect of the income, or any profits or gains of a capital nature, derived by him or her in his representative capacity, or derived by the principal by virtue of his or her agency, and for the payment of tax thereon. In Chant v. Deputy Federal Commissioner of Taxation 94 ATC 4733; (1994) 29 ATR 403 ( Chant's Case ) the Court stated at ATC 4737; ATR 407 with respect to mortgagees exercising a power of sale: When a mortgagee exercises the powers of realising the security, including the power of sale, the proceeds of realisation are the property of the mortgagee although received subject to a duty to account. The mortgagee will normally be the vendor under any contract of sale... ...The duty of a mortgagee, who has exercised the statutory power of sale [and]..[t]he position of a mortgagee who exercises powers of realisation conferred by the mortgage instrument is not relevantly different. The mortgagee is not a trustee of the power of sale or of any other powers of realisation...A mortgagee is a trustee of the proceeds of sale or other realisation only to the extent of any surplus after payment of the amount due under the mortgage.... And at ATC 4737; ATR 407 "In our opinion therefore the appellant's fiduciary capacity, as agent, in relation to the bank does not assist the DCT in this case because s 221P has no application to agents who are trustees as defined only because they are fiduciaries. The section however does apply to fiduciaries who are not agents or otherwise within the definition." In Deputy Commissioner of Taxation (Vic) v. General Credits Ltd [1988] VR 571; 87 ATC 4918; (1987) 19 ATR 372 ( General Credits ) the Court referring to a couple of authorities stated at VR 575; ATC 4922; ATR 376: ...each made an exhaustive examination of the obligations of mortgagees exercising a power of sale. In neither judgement was it suggested that mortgagees were to be equated with trustees. And at VR 575; ATC 4922; ATR 377: In my opinion s 6 does not assist the appellant. Before us emphasis was placed upon the phrase "or acting in any fiduciary capacity" but this concept is just not appropriate to that of a mortgagee in possession... These two cases concerned a mortgagee entering into possession through agents, who then exercised a power of sale to realise assets. Both cases state that a mortgagee exercising a power of sale does not act in a trustee capacity or fiduciary capacity with respect to the mortgagor. A mortgagee exercising a power of sale is a trustee of the proceeds of sale only to the extent of any surplus. The Participants are currently owed monies under the Credit Facility Agreement. Those amounts are secured by virtue of the Charge. The Contractual Rights to be assigned under the Assignment Deeds are subject to the Charge. The Charge and other security interests are held on trust by the Security Trustee for itself and on behalf of the other Participants under the Credit Facility Agreement. Pursuant to the Security Trust Deed and the Charge, the Security Trustee may exercise any powers under the Securities (including the Charge) as if it was the sole beneficial owner including a power to sell the assets subject to the Credit Facility Agreement and therefore the Charge. The Security Trustee is thus a mortgagee with respect to the Contractual Rights. As a result of Company X defaulting under the Credit Facility Agreement, the Security Trustee as mortgagee, is planning to exercise its statutory power of sale with respect to the Contractual Rights under the relevant State Conveyancing Act and its contractual power of sale pursuant to the Charge. It will do so by entering into Assignment Deeds for the Contractual Rights with the Assignees for consideration. As mortgagee exercising a power of sale, the Security Trustee will therefore not be acting in a trustee capacity or fiduciary capacity (including as agent) with respect to the mortgagor, Company X ( Chant's Case and General Credits ). Further, as it is assumed that the proceeds to be received by the Security Trustee are less than the total amounts owing by Company X under the Credit Facility Agreement, and the Security Trustee does not presently intend to, and does not have plans to exercise its power of sale in relation to the remaining assets of Company X, the Security Trustee will not be a trustee of any surplus with respect to Company X, there being none ( Chant's Case and General Credits ). Consequently, subject to there being no surplus of proceeds over the amounts owing by Company X, the Security Trustee will not be answerable pursuant to paragraph 254(1)(a) of the ITAA 1936 as Company X, for the doing of all such things as are required to be done by virtue of the ITAA 1936 or the ITAA 1997 in respect of any income, or any profits or gains of a capital nature derived from the assignment by the Security Trustee of the Contractual Rights. For the reasons stated above in response to Question 1, subject to there being no surplus of proceeds in excess of the amounts owed by Company X, the Security Trustee is not answerable pursuant to section 254 as Company X, for the doing of all such things as are required to be done by virtue of the ITAA 1936 or the ITAA 1997 in respect of any income or any profits or gains of a capital nature derived from the assignment of the Contractual Rights. Accordingly, the Security Trustee will not be required by paragraph 254(1)(d) of the ITAA 1936 to retain out of any money which comes to it as the proceeds of the assignment of the Contractual Rights, so much as is sufficient to pay income tax which is or will become due in respect of any income or any profits or gains of a capital nature arising from the assignment. For the reasons stated above in response to Question 1, subject to there being no surplus of proceeds in excess of the amounts owed by Company X, the Security Trustee is not answerable pursuant to section 254 of the ITAA 1936 as Company X, for the doing of all such things as are required to be done by virtue of the ITAA 1936 or the ITAA 1997 in respect of any income or any profits or gains of a capital nature derived from the assignment of the Contractual Rights. Accordingly, the Security Trustee will not be personally liable pursuant to paragraph 254(1)(e) of the ITAA1936 for any tax payable in respect of any income, profits or gains arising from the assignment.