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Client Update: Insolvency/GST – 19 December 2008

Liquidator's GST liability

In brief: A recent Federal Court case has dealt with the issue of whether a liquidator is personally liable for GST payable on supplies made while a company is being wound up. Partner Ross Stitt (view CV) and Summer Clerk David Allen report.


A test case


Deputy Commissioner of Taxation v PM Developments Pty Ltd [2008] FCA 1886 (Unreported, Logan J, 12 December 2008) is a test case on whether a liquidator of a company is personally liable for goods and services tax (GST) on taxable supplies made while the liquidator is winding up the company.


In this case, the liquidator of a property development company had entered into a contract to sell a parcel of real property owned by the company, approximately two months after the court had ordered the company be wound up. The Federal Court decided that the company in liquidation, and not the liquidator, was liable for any GST payable. 


The court emphasised that there must be a taxable supply, within the meaning of section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act), in order to create a GST liability. Section 9-5 provides that an entity makes a taxable supply if it makes a supply for consideration in the course of an enterprise, the supply is connected with Australia, and the entity is registered, or required to be registered, for GST.


The court held that, ordinarily, a liquidator does not personally make a taxable supply when it exercises any of the powers conferred on it by s477 of the Corporations Act 2001 (Cth). Although the making of a winding up order changes the control of the affairs of a corporation, it does not affect the corporation's beneficial ownership of its assets; they are not vested in the liquidator. Therefore, it was held to be the company, not its liquidator, that sold the parcel of real property, and so made a taxable supply.

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The Commissioner's view


The Commissioner had argued that Division 147 of the GST Act deems the liquidator to be the entity that makes taxable supplies and carries on the enterprise when a company is in liquidation. Section 147-5 provides:

147-5  Representatives are required to be registered


(1)  A representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entity is registered or required to be registered.

  



The definition of 'incapacitated entity' includes a company in liquidation and 'representative' includes a liquidator.


The court rejected the Commissioner's submission, and said that clear and unambiguous words would be required to create a taxation liability on the part of a liquidator in a way that was contrary to how s9-5 of the GST Act would ordinarily operate. The court decided that s147-5, and the other ancillary provisions in Division 147, were not sufficiently clear to deem a supply made by a company under the control of a liquidator to be a taxable supply made personally by the liquidator.  Division 147 addresses only one of the four elements of a taxable supply – the requirement of registration. 


The Commissioner contended that it was clear from the Explanatory Memorandum to the GST Bill that the government intended that a liquidator should be personally liable for any GST payable during a winding up. While the court could not dispute the legislative intent evidenced by the Explanatory Memorandum, it saw Division 147 as falling short of achieving this intent. The court was not prepared to draw the implication from the division that a liquidator is to be taken to make the incapacitated entity's supplies and to carry on its enterprise from the date of a winding up order. 


Therefore, the company was liable for the GST in respect of the sale of the land. Payment of the GST had priority over other unsecured debts of the company, since it was an expense properly incurred in the liquidation. However, it was anticipated that only a proportion of the GST would be paid to the Commissioner, as the amount of the company's priority payments exceeded the amount available for distribution by the liquidator.

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Where from here?


The decision shows that some judges will go only so far in order to ameliorate shortcomings in legislation, particularly where the matter relates to the imposition of a tax. This is highly relevant in the context of GST, given problems in the drafting of other parts of the GST Act. Nevertheless, considering the conflict between this decision and the apparent legislative intent, there must be a reasonable prospect of either a successful appeal by the Commissioner or a change in the law.

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