Private ruling: Tax obligations on realisation of pre-liquidation CGT assets
Published: May 2012
Ruling period: Year ended 30 June 2012

Ruling: Q1: Is the liquidator required under section 254 of the Income Tax Assessment Act 1936 (ITAA 1936) to account to the Commissioner the proceeds of sale, any capital gains tax liability that crystallises on the sale of an asset that belonged to the company before liquidation? | A1: Yes | Q2: If the answer to question 1 is yes, are the monies to be retained once an assessment issues? | A2: No | Q3: If the answer to question 2 is no, are the monies to be retained at crystallisation of any capital gains? | A3: Yes

Relevant facts and circumstances: The company purchased a property. Voluntary administrators were appointed for the company. Subsequently liquidators were appointed for the company. The property purchased was sold by the liquidators of the company. The company had various secured and unsecured creditors at the time of the appointment of the liquidators.

Relevant legislative provisions: Income Tax Assessment Act 1915 Section 52 | Income Tax Assessment Act 1915 Subsection 52(e) | Income Tax Assessment Act 1936 Subsection 6(1) | Income Tax Assessment Act 1936 Section 254 | Income Tax Assessment Act 1936 Subsection 254(1)(a) | Income Tax Assessment Act 1936 Subsection 254(1)(d) | Income Tax Assessment Act 1936 Section 255 | Income Tax Assessment Act 1936 Subsection 255(1)(a) | Income Tax Assessment Act 1936 Subsection 255(1)(b)

Reasons for decision: Summary: Section 254 of the ITAA 1936 applies to every agent and trustee which is defined in subsection 6(1) of the ITAA 1936 to include a liquidator. | Detailed Reasoning - Subsection 254(1)(a) provides as follows in relation to agents and trustees:: 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 or her representative capacity, or derived by the principal by virtue of his or her agency, and for the payment of tax thereon. | Detailed Reasoning - Subsection 254(1)(d) further provides:: He or she is hereby authorized and required to retain from time to time out of any money which comes to him or her in his or her representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains. In your case therefore you are required to retain out of any money in the nature of income, profits or gains of a capital nature that is received in your representative capacity as liquidator, amounts sufficient to pay any tax on that money. Any profits or gains of a capital nature from the sale of property by you on behalf of the company, would be an example of money which you have received in your representative capacity, and subsection 254(1)(d) of the ITAA 1936 authorises and requires you to retain out of this money an amount sufficient to pay any capital gains tax in relation to the disposal. | Detailed Reasoning - Question 2: In the High Court decision in Bluebottle UK Ltd & ors v Deputy Commissioner of Taxation & anor (2007) 232 CLR 598, [2007] HCA 54 ( Bluebottle ) it was held that the phrase 'tax which is or will become due' in subsection 255(1)(b) of the ITAA 1936 was a reference to an ascertained amount of tax that had been assessed, even though it might not yet be due for payment and therefore section 255 of the ITAA 1936 does not operate before an assessment of the non-resident has been made. Subsection 255(1)(a) of the ITAA 1936 states that a person in receipt or control of money from non-residents: · shall when required by the Commissioner pay the tax due and payable by the non-resident Subsection 255(1)(b) of the ITAA 1936 states that a person in control of the money of a non-resident: · is hereby authorized and required to retain from time to time out of any money which comes to the person on behalf of the non-resident so much as is sufficient to pay the tax which is or will become due by the non-resident; | Detailed Reasoning - The High Court in Bluebottle specifically determined that:: It would be wrong to approach the construction of s 255 piecemeal. In particular, it would be wrong to treat s 255(1)(a) as wholly distinct and separate from s 255(1)(b)… pars (a) and (b) of s 255(1) have an intersecting operation. As noted earlier in these reasons, the point of that intersection is the amount with which both paragraphs deal: the tax which is or will become due by the non-resident (which defines the amount to be retained) and the amount which is to be paid to the Commissioner when required under par (a) (the tax due and payable by the non-resident). Subsection 255(1)(b) is very similar in wording to subsection 254(1)(d) of the ITAA 1936. Therefore the high court in Bluebottle considered section 52 of the Income Tax Assessment Act 1915 (ITAA 1915) which is a precursor to section 254 of the ITAA 1936 in similar terms. It found that: The authority given (and requirement made) by s 52(e) of the 1915 Act to retain "sufficient to pay the income tax which is or will become due" has obvious similarities with the present provisions of s 255(1)(b). But the context in which s 52(e) appeared is radically different from that provided by s 255 of the 1936 Act. First, s 52(a) of the 1915 Act made the agent "answerable as taxpayer for the doing of all such things as are required [by the Act] in respect of the income derived by him in his representative capacity and the payment of income tax thereon" (emphasis added). Secondly, the authority given (and requirement made) by s 52(e) related to the tax due "in respect of the income" as if the amounts with which the agent dealt both founded the relevant taxation liability and marked the outer boundary of that liability. Thirdly, the agent's personal liability for tax depended upon his paying away money from which tax could be paid after the Commissioner had required him to make a return or "while the tax remains unpaid". It is therefore clear that the court did not consider the operation of section 52 of the ITAA 1915 (and therefore section 254 of the ITAA 1936) to be similar to the operation of section 255 of the ITAA 1936 and did not decide that section 254 of the ITAA 1936 only operates when an assessment had been made. It follows that when subsection 254(1)(d) of the ITAA 1936 refers to the tax which is or will become due it envisages that the paragraph may apply before an assessment has issued and does not provide for some specific notification from the Commissioner as a precondition to its operation. In your case therefore the monies are not to be retained specifically once an assessment issues. | Detailed Reasoning - Question 3: In Fermanis v. Cheshire Holdings Pty Ltd (1989) 20 ATR 1862; 90 ATC 4201, Murray J held at ATR 1865; ATC 4203, in relation to section 254: What is clear about that provision is that it creates of itself no tax liability, which is to be otherwise derived from the provisions of the Act, so that if a tax liability is not otherwise to be drawn from the statute, none will be created by sec 254 . . . It is clear, I think, that the provision operates as a machinery provision to facilitate tax collection in relation to liable trust income when the liability is otherwise imposed than by sec. 254. In this case the Public Trustee paid a certain sum into court pending resolution of a dispute but retained an amount to cover any potential tax liabilities. The Court held that the requirement to retain monies existed even though at the time that the retention occurred, it was not certain whether the trustee or a beneficiary would bear the ultimate statutory liability for payment of taxation liabilities. ATO Interpretative Decision ATO ID 2003/506 also provides : Paragraph 254(1)(d) of the ITAA 1936, to that end, authorises and requires a trustee to retain out of any money that is received in that representative capacity, an amount sufficient to pay that tax. The administrator is then under paragraph 254(1)(e) of the ITAA 1936 made personally liable for the tax assessed in respect of the income, profits or gains resulting from the administration to the extent that money has been retained or should have been retained. ATO ID 2003/506 makes no reference to any notification requirements and requires retention of monies in all circumstances where there is an administrator appointed upon receipt of such monies. In your case therefore the monies are to be retained specifically at crystallisation of the capital gains.

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