The High Court has ruled that a liquidator has no obligation to retain monies on account of tax until a notice of assessment has been issued. The decision will provide much needed clarity for liquidators and other statutorily deemed trustees, and agents. Partners Charles Armitage and Christopher Prestwich, Senior Tax Counsel Marc Johnston and Associate Jay Prasad report on the decision.
How does it affect you?
- The High Court in Commissioner of Taxation v Australian Building Systems Pty Ltd (in Liq)  HCA 28 has confirmed that the retention obligation in section 254(1)(d) of the 1936 Tax Act only authorises and requires a 'trustee' or 'agent' to retain funds to pay tax from monies received in their representative capacity to the extent that an assessment of tax exists at the time any monies are held by the trustee or agent.
- Liquidators can now take comfort that they are under no obligation to retain money from a sale of assets in anticipation of an assessment being made. That means that liquidators will be able to distribute available assets to creditors promptly, in accordance with the usual order of priority in the Corporations Act 2001 (Cth).
- Liquidators should proceed cautiously. Any funds from the sale of other assets they hold, or any other assets they subsequently collect in, will be required to be used to meet the assessment once issued. In practice, that means that mortgagee sales will remain as an option to be considered by receivers and secured lenders as a means of realising real properties in an enforcement scenario.
- It remains to be seen how the Commissioner will respond to this decision, which displaces the views previously expressed in Taxation Determination TD 2012/D6 where the Commissioner took the position that the obligation of an agent or trustee under s254(1)(d) to retain sufficient money to pay 'tax which is or will become due' is not restricted to tax that has been assessed.
The factual background and case history to Australian Building Systems was considered in Focus: Federal Court rules liquidator needn't account for tax on sale of assets. In summary:
- The liquidators of Australian Building Systems Pty Ltd (ABS) caused ABS to enter into a contract for the sale of real property in Queensland. By doing so, ABS realised a capital gain of approximately A$1.12 million in respect of the sale.
- On an application made by the liquidators for a private ruling on their retention obligations under s254 of the 1936 Tax Act, the Commissioner ruled that the liquidators were required to retain monies for any capital gains tax liability out of the proceeds of sale sufficient to pay such tax that arose at the time the gain was realised, even though no assessment of tax had yet been issued. An objection to the Commissioner's decision was disallowed.
- The liquidators successfully appealed to the Federal Court, where Justice Logan ruled that the liquidators were not, in the absence of an assessment, subject to any retention and payment obligations under s254(1)(d). Justice Logan relied heavily on the High Court's decision in Bluebottle UK Ltd v Deputy Commissioner of Taxation1 where the High Court held that the retention and payment obligations in s255(1)(b) of the 1936 Tax Act arose only upon the issue of an assessment.
- The Commissioner appealed the decision of the Federal Court, but that appeal was dismissed. The Full Federal Court noted that no tax was, or would become, owing by the liquidators before an assessment was issued to them. Accordingly, no retention obligation could arise before then. The majority went further and held that even if ABS had an obligation to pay tax in the future, that obligation was insufficient to trigger a retention obligation for the liquidators because when the assessment did issue, it would issue to ABS and not the liquidators. As such, there was no tax that was or would ever become owing by the liquidators.
- The Commissioner was granted special leave to appeal to the High Court. By a majority decision of 3:2, the High Court also dismissed the Commissioner's appeal.
The central question on appeal was whether the retention obligation in s254(1)(d) of the 1936 Tax Act arises before the Commissioner makes an assessment of the amount of tax payable on the income or capital gains derived by an agent or trustee in their representative capacity. The majority held that the retention obligation in s254 was limited to retaining money after an assessment had been made.
The joint judgement of Chief Justice French and Justice Kiefel held that the retention obligation in s254(1)(d) could only be given content if an assessment of tax had issued. They relied upon the reasoning in Bluebottle which dealt with a similar, but not identical, provision (s255 of the 1936 Tax Act), in which it was held that the obligation to retain an amount sufficient to pay 'tax which . . . will become due' referred to tax which, although assessed, was not yet due for payment. Despite the different wording and statutory contexts, their Honours held that, having regard to the text, context and purpose of s254, the reasoning in Bluebottle was equally applicable when construing s254.
Justice Gageler also dismissed the Commissioner's appeal. He held that the 'better view is that the retention obligation in s254, like the retention obligation in s255, is limited to retaining money after an assessment has been made'. His Honour gave five principal reasons in support of this view including that the structure of s254 gives the retention obligation an operation sequential to the performance of the assessment obligation; that is, the amount authorised and required to be retained is no more and no less than the amount for which the agent or trustee is made personally liable.
On the other hand, Justices Keane and Gordon in the minority held that the appeals should be allowed. This was because, in their view, the retention obligation in s254(1)(d) arises on and from derivation of the relevant income, profits or gains; that is, the obligation can arise in anticipation of an assessment, not merely from the time of the assessment (if any). Broadly, this was on the basis that the retention obligations in ss 254 and 255 were not the same, as there were substantial textual and contextual differences between the respective provisions and they served different purposes.
The High Court disagreed with one aspect of the majority decision of the Full Federal Court regarding the observations of Justice Edmonds that, because any assessment of tax would issue to the taxpayer rather than the liquidator, the liquidator could not be assessed as a trustee under Division 6 of Part III of the 1936 Tax Act. In the view of the court, this analysis was misconceived because there was no trust estate as between the liquidators and the taxpayer company in liquidation.
The Crown's priority in corporate insolvencies was removed in 1979, other than tax instalment deductions and withholding tax. Those final priorities were removed in 1993 following the Harmer Report. In the ordinary course, the Commissioner ranks as an unsecured creditor in respect of any unpaid tax.
If the Commissioner had succeeded in this appeal, it would have resulted in effectively moving the Commissioner up the order of priority contained at s556 of the Corporations Act in respect of certain tax liabilities. That is because the liquidator would have been obliged to retain funds and be personally liable to pay the assessed amount of tax. As Justice Gageler puts it in his reasons, this decision 'minimises the potential for disharmony between the obligations and liability of a liquidator under s 254 of the 1936 Act and the obligations of a liquidator and the rights of creditors under Ch 5 of the Corporations Act 2001 (Cth).' An earlier attempt by the Commissioner to obtain priority after a company goes into liquidation, through the issue of garnishee notices to debtors of a company in respect of pre-liquidation tax debts, was previously held by the High Court to be impermissible.2 More recently, this was also extended to post-liquidation tax debts.3
The majority decision makes it clear that the retention obligation in s254(1)(d) only authorises, and requires, the trustee or agent to retain funds to pay tax from monies received in their representative capacity if an assessment of tax exists at that time (whether the tax is due and payable or only payable in the future).
There is nothing in the majority decision which suggests that the trustee or agent could have a retention obligation retrospectively thrust upon them where, for instance, an assessment of tax issues after the trustee or agent has paid all monies received in their representative capacity to the secured creditor. In particular, the following comments from Justice Gageler support the view that the retention obligation is limited to retaining money after an assessment has been made (paragraph 62):
Neither in s 254 nor in s 255 is the money to which the retention obligation attaches necessarily linked to the income or capital gain in respect of which the tax in question is or will become due. The obligation attaches to 'any money' which from time to time 'comes to' the person in a relevant capacity. In s 254, as in s 255, the obligation attaches to any money which so comes to the person after the tax in question has been assessed.
To the extent that further monies come to the agent or trustee in their representative capacity, the retention obligation will be triggered at that time and, accordingly, any assessment that exists in respect of the income, profits or gains that the agent or trustee has derived, will need to be satisfied from those further monies. It will not matter whether the monies held by the agent or trustee were received in connection with the taxable event to which the assessment relates, or received in some other way.
In practical terms, the effect of this decision is that following a sale of assets, liquidators will likely choose to move quickly to distribute the proceeds of sale to creditors. In response, it would be expected that the Commissioner will seek to issue an assessment expeditiously. Once an assessment has been made, the obligation on liquidators to retain the assessed amount will be triggered. As such, if liquidators are retaining other funds, or if there are other assets to realise, the liquidator will be required to retain those funds for the purposes of remitting the assessed amount to the Commissioner.
Liquidators can now take comfort that they are under no obligation to retain money from a sale of assets in anticipation of an assessment being made. That means that liquidators will be able to distribute available funds to creditors promptly, in accordance with the usual order of priority in the Corporations Act, without the need to hold back funds to meet any personal liability to pay tax under s254 of the 1936 Tax Act. However, in a more complex liquidation where there are a number of assets to realise and where liquidators would ordinarily hold funds, it may still be the case that the Commissioner obtains effective priority.
-  HCA 54.
- Bruton Holdings Pty Ltd (in liquidation) v Commissioner of Taxation & Anor  HCA 32.
- Bell Group Limited (in liq) v Deputy Commissioner of Taxation  FCA 1056.