Private ruling: CGT – disposal – section 254
Date of advice: 21 February 2018
Published: June 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Did you derive any income, profits or gains of a capital nature in your representative capacity as court appointed trustee for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936) or the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Are you required to prepare and lodge an income tax return in your representative capacity as court appointed trustee for the purposes of the ITAA 1936 or ITAA 1997? | A2: No | Q3: Does section 254 of the ITAA 1936 impose any liability or obligation (including penalties or interest) on you in your representative capacity? | A3: No

Relevant facts and circumstances: You are a practicing solicitor. You were appointed to act as an independent trustee of a trust by the Supreme Court for the limited purpose of evaluating prospects, and to consider commencing proceedings to pursue causes of action, relating to claims, rights, remedies and interests which may be available to the trust relating to alleged misdealing’s in and diminution in value of the assets of the trust. You commenced proceedings, acting as court appointed trustee. The dispute was ultimately resolved after mediation and a settlement deed was entered into. The settlement deed required that you, as court appointee, take steps to abandon the claims and terminate the proceedings. The settlement deed provided that a sum be paid to you as security for any tax liability you may incur as court appointed trustee. The settlement deed provided that you will be paid costs and disbursements for you performing your role as court appointed trustee, however these are paid to you in your personal capacity and not received for the trust of which you are court appointed trustee.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 254 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 104-25

Reasons for decision: Summary: Section 254 of the ITAA 1936 sets out the obligations, liabilities and rights of agents and trustees. 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. 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). Subsection 254(1) of the ITAA 1936 also applies to general interest charge and shortfall interest charge in the same way it applies to tax (subsection 254(2) 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. In view of this, for the purposes of section 254 of the ITAA 1936, ‘derived’ has to have a meaning that is consistent with the ordinary operation of the legislation in relation to income, profits and gains of a capital nature. | Detailed Reasoning - Income: Any fees or reimbursements you have been paid in relation to the activities you carried out as a practicing solicitor will be assessable income to you as income derived in carrying on your business in your personal capacity. However, based on the facts provided, there has been no ordinary income derived by you in your representative capacity as court appointed trustee. | Detailed Reasoning - Capital gains tax (CGT): Upon your appointment as court appointed trustee, you became the trustee of the right to seek compensation in relation to the claims. These rights are CGT assets as defined in section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997). CGT event C2 occurs when your ownership of an intangible CGT asset ends by the asset being abandoned, surrendered or forfeited (paragraph 104-25(1)(d) of the ITAA 1997. The settlement deed required that you, as court appointed trustee, take steps to abandon the claims and terminate the proceedings. Upon execution of the settlement deed, CGT event C2 occurred as the intangible assets you held as court appointed trustee were abandoned. The cost base of the intangible assets included the monetary loss suffered as a result of the diminution of the assets of the trust. The Commissioner accepts that the capital proceeds from the C2 event are no more than the value of the cost base. Accordingly, there will be no capital gain arising from the C2 event. | Detailed Reasoning - Lodgment: Given the limited capacity to which you were appointed as court appointed trustee, you have no obligation to lodge any income tax returns in your representative capacity. | Detailed Reasoning - Conclusion: As you have not derived any income, profits or capital gains in your representative capacity, it follows that you will have no liability (including for penalties and interest) under section 254 of the ITAA 1936.