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Focus: Currency restriction on tax retention notices overturned

4 December 2013

In brief: The Full Federal Court has overturned a recent decision which stated that Australian Taxation Office notices requiring entities to retain funds owing to non-Australian persons could not operate on amounts of foreign currency. Partner Martin Fry (view CV) and Lawyer Chris Lum look at the appeal decision and its implications. 

How does it affect you?

  • The appeal decision states that a person served with a notice under section 255 of the Income Tax Assessment Act 1936 (Cth) must retain, from money it holds on behalf of a non-Australian person, an amount sufficient to pay the specified amount of Australian tax owing by that person.
  • The decision states that the liability of the notice recipient is limited to the amount it retains or should have retained, irrespective of the currency of the funds retained or subsequent changes in exchange rates. The risk of exchange rate fluctuations lies with the taxpayer and the Australian Taxation Office (the ATO).
  • Sale of business agreements should manage the risk of a s255 notice being issued and address the timing of the conversion of retained funds and payment to the ATO. 

Resource Capital Fund Appeal

The ATO can issue notices under s255 of the Income Tax Assessment Act requiring a person who controls 'money' belonging to a non-Australian person to retain an amount from that money to pay an Australian tax liability owed by the non-resident.

In a previous Focus article (see Garnishee notices limited to Australian currency) we reported on the Federal Court's recent decision in Resource Capital Fund IV LP v Commissioner of Taxation.1  In that decision, Justice Edmonds stated that s255 notices could only operate on amounts of Australian currency and could not compel a person to retain or pay to the ATO any part of amounts held in foreign currency on behalf of non-Australian persons.

The Commissioner of Taxation has successfully appealed that decision.2 On 22 October 2013, the Full Federal Court overturned Justice Edmonds' decision and stated that the obligations imposed by s255 notices apply to amounts of money owed to the non-resident taxpayer, whether such amounts are denominated in Australian dollars or in foreign currency.

The court drew a distinction between the money required to be retained and the money required to be paid to the ATO, noting that s255 does not require the tax payment to come directly from the retained money. Accordingly, it was not necessary that the money retained be the actual Australian dollar sum applied to discharge the tax liability.

Rather, the court found that the retention requirement in s255 merely requires the notice recipient to retain so much money as is sufficient to pay the tax. It considered that this obligation is not affected by the currency in which the money is retained.

The court stated that a notice recipient would satisfy its obligations if it retained a sum of foreign currency sufficient to pay the tax, even if changes in the exchange rate meant that this sum was worth less in Australian dollar terms by the time the notice recipient paid the tax to the ATO. The court noted the shortfall that may result would be an issue for the non-resident taxpayer and the ATO but not for the notice recipient, since s255 caps the notice recipient's liability to the amount of money it retained or should have retained.

The implications

Section 255 notices most commonly arise in the course of the sale of entities or businesses by foreign persons. The ATO may issue a s255 notice to a purchaser (or other relevant person) as a means of collecting tax payable by a non-Australian vendor.

Parties entering sale agreements should be aware that s255 notices can extend to debts owed in foreign currency and should manage the risk of a s255 notice in the agreement.

As the effect of fluctuating exchange rates means that an amount retained by the purchaser may not completely cover the vendor's Australian tax debt when it is due for payment, the vendor and purchaser may wish to come together to agree a regime for when a retained amount of foreign currency should be converted, how it should be held and when the tax debt should be paid.

Footnotes
  1. [2013] FCA 801.
  2. Commissioner of Taxation v Resource Capital Fund IV LP [2013] FCAFC 118.

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