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Focus: Draft Tax determinations highlight tax obligations of agents and trustees

8 october 2012

In brief: Two long-awaited draft Tax Determinations released by the Australian Taxation Office highlight the obligations of insolvency practitioners, and others who act as an agent or trustee, to retain sufficient money to pay tax which is, or will become, payable on any income, profits or gains arising from their appointment. Partners Charles Armitage (view CV) and Michael Quinlan and Senior Associate Joanne Langford report.

How does it affect you?

  • These draft Tax Determinations will be of particular relevance to receivers and secured creditors.
  • According to the Commissioner of Taxation, if you act as an agent or trustee for a taxpayer, and you fail to retain an amount to pay certain tax liabilities of the taxpayer, you could become personally liable for that amount, even if those tax liabilities have not yet been assessed.
  • The Commissioner of Taxation considers that a receiver will generally be acting as agent for the relevant debtor and therefore, the receiver will become personally liable for the amount that should have been withheld from the proceeds of sale of an asset.
  • The interpretation adopted in the draft Tax Determinations means that the Commissioner effectively has a priority, over a secured creditor, for the payment of tax on profits and gains derived by the agent or trustee in their representative capacity.
  • When the draft Tax Determinations are finalised and take effect, they will have the status of public rulings and be binding on the Commissioner. A public ruling is not law but because the Commissioner's view has been published, if a person acts contrary to the rulings, the Commissioner is unlikely to be lenient when imposing penalties and interest.

Draft Tax Determinations

The draft Tax Determinations set out the Commissioner's interpretation of section 254 of the Income Tax Assessment Act 1936 (the 1936 Act). Broadly, s254 imposes a number of obligations upon agents and trustees in respect of any income, profits or gains of a capital nature that are derived in their representative capacity, including the following:

  • an agent or trustee is authorised and required to retain sufficient money to pay tax which is, or will become, due and payable in respect of any income, profits or gains received (in their representative capacity) (paragraph 254(1)(d)); and
  • an agent or trustee is personally liable for the tax payable in respect of the income, profits or gains, to the extent that an amount should have been retained under paragraph (d) (paragraph 254(1)(e)).
Tax Determination 2012/D6

In TD 2012/D6, the Commissioner takes the position that the obligation of an agent or trustee under paragraph 254(1)(d) to retain sufficient money to pay 'tax which is or will become due' is not restricted to tax that has been assessed.

If this obligation is not complied with, and 'the agent or trustee dissipates the funds representing relevant gross income, profits or gains without sufficient retention' (paragraph 14), the agent or trustee would be personally liable under paragraph 254(1)(e) to the extent that there is a shortfall.

In reaching the conclusion that the obligation imposed by paragraph 254(1)(d) extends beyond tax that has been assessed to tax that will later become due when an assessment is made, the Commissioner has relied heavily on his assumption that an agent or trustee would generally have sufficient information in their possession (or at least be entitled to obtain such information) to calculate the amount of tax that will become due.

Notwithstanding that it may be difficult for some agents or trustees to determine accurately whether an appointee will be in a tax-paying position at a time when money is received, the Commissioner is of the view that any alternative interpretation (ie one that would involve the liability to withhold only arising at such time that an assessment is made) would be contrary to the 'straightforward operation of the section'.

Tax Determination 2012/D7

TD 2012/D7 specifically deals with the issue of whether a receiver who disposes of a CGT asset as the agent for a debtor has an obligation under s254 to retain from the (gross) sale proceeds sufficient money to pay tax which is, or will become, due (by the debtor) as a result of disposing of the asset. Unsurprisingly (when regard is had to TD 2012/D6), the Commissioner concludes that such an obligation does arise.

Interestingly, despite s254 applying to 'agents and trustees', and the definition of 'trustee' in s6(1) of the 1936 Act extending to a broad range of relationships, TD 2012/D7 only contemplates a situation in which a receiver is acting as agent of the debtor.

In the Determination, the Commissioner's primary focus is the person who is selling the property, and for whom they are acting as agent. It is clear that the Commissioner is of the opinion that this characterisation is easy to determine from the relevant documentation under which the receiver has been appointed and, even if the documentation is silent, it will most likely be possible to conclude that the receiver is acting as agent of the debtor.

The Determination draws a careful distinction between:

  • a receiver who is acting as an agent of the debtor; and
  • an entity appointed by a secured creditor who has exercised its rights as mortgagee to take possession of the relevant assets, to act as its agent in exercising the mortgagee's power of sale to effect the sale of an asset.

In the case of a receiver acting as agent for the debtor, the Commissioner considers that, upon the sale of the asset, paragraph 254(1)(d) would authorise and require the receiver to retain sufficient money to pay the tax which is, or will become, due as a result of the CGT event occurring. He specifically notes that this obligation 'takes precedence over the contractual right of the secured creditor to the proceeds from the disposal of the secured asset'. Therefore, the retention of money contemplated by paragraph 254(1)(d) takes precedence over any other claims on the money.

In the case of an agent acting for a mortgagee in possession, as the money would not be received in the person's capacity as agent for the debtor, there would be no obligation to withhold (and therefore, all money received from the sale of the asset could be remitted to the secured creditor).

Receivers should also note that the Determination specifically states that, in the event that an asset of the debtor is sold, a receiver acting as agent of the debtor would have an obligation to withhold and remit tax (to the extent that sufficient proceeds have been received) on the full amount of any gain (broadly, the proceeds reduced by the asset's cost base), not simply the amount (if any) that the asset has appreciated in value since the receiver's appointment.

Legal effect and application date

When the draft Tax Determinations are finalised and take effect, they will have the status of public rulings. This means that  the Commissioner will be bound to follow them. It also means that, while they will not be law, if a taxpayer acts contrary to the rulings, the Commissioner is unlikely to be lenient when imposing penalties and interest.

TD 2012/D6 will apply both before and after the date of issue of the final Determination. In contrast, TD 2012/D7 is to apply only from the date of issue of the final Determination.

The due date for submissions on both draft Tax Determinations is 19 October 2012.

Significance of the draft Tax Determinations

The key point to be taken from the draft Tax Determinations is that the Commissioner considers that he effectively has a priority, over a secured creditor, for the payment of any tax on profits and gains derived by the agent or trustee in their representative capacity.

Significance for agents and trustees generally

The issue arising from TD 2012/D6 for agents and trustees generally is that the Commissioner assumes that any entity acting in that capacity has access to all of the information required to compute the tax liability of the entity over which they have been appointed. In cases where information is scarce, or not readily available, this could have a significant impact upon the willingness and timeliness, of an agent or trustee – who is concerned that a tax liability may arise in the future – distributing money received to creditors.

Significance for receivers and other representatives

The draft Determinations highlight the importance of receivers and others acting in a representative capacity understanding the precise terms of their appointment: eg are they a receiver acting as agent of a debtor, or are they appointed to act as agent for a secured creditor in exercising its rights as mortgagee in possession?

It will be important for anyone acting in a representative capacity to be aware of the effect of any relevant legislation (eg the Corporations Act 2001 (Cth)) on whether they are acting as agent for the debtor or not.

Significance for secured creditors

Secured creditors need to be aware that, if TD 2012/D7 is finalised in its current form, when a secured asset is sold by a receiver (acting as agent for the debtor), the secured creditor may not receive all of the proceeds of sale if the receiver is of the opinion that the debtor may have a tax liability referable to the gain made. Therefore, secured creditors should have regard to their security documentation to determine the capacity in which a receiver or other representative is acting when an asset (over which they have security) is sold.

Secured creditors may also be interested in a footnoted comment in the draft Determination, where, in contrasting an agency relationship with that of a mortgagee in possession, the Commissioner notes that a mortgagee in possession does not act in a trustee capacity and does not assume a fiduciary relationship with the mortgagor and, as such, would generally not be an agent or trustee of the debtor for the purposes of s254.

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