October 2010 – ░░░ INSOLVENCY INTERFACE

Mystery of ION Ltd $13 million income tax refund continues despite massive report

Tax debts, Tax liabilities, Taxation Issues Comments Off

Oct 212010

The insolvency administrators’ 200 page report on ION Limited and subsidiaries (20/10/10) does not mention the once-anticipated income tax refund of $13 million.

So the mystery – described in my article “Insolvency administration income tax refund held up” – continues.

But then a tax dispute over $13 million could be regarded by some as trivial, compared with the momentous and complex issues addressed in the Deed Administrators’ report. The report deals with ION Limited and its 17 subsidiary companies. It was produced after the Deed Administrators had received from shareholders “numerous allegations of misconduct by ION”, and after the Deed Administrators obtained directions/permission regarding the report from the Federal Court of Australia.

The report’s main purpose is described in its introduction:

“In this Report we set out details of the work that has been done to date in relation to shareholder claims and the steps which remain to be taken to enable the Deed Administrators to determine these claims and to distribute funds to creditors. “

The present position in the administrations is summarised as follows:

“Since the initial appointment of the Administrators and the appointment of the Deed Administrators on 27 May 2005, the realisation of ION’s businesses and assets has been completed. The review of proofs of debt lodged by suppliers of goods and services and by financiers has largely been completed with only a small number of complex claims still in dispute. The only matter of significance still to be concluded is the adjudication of proofs of debt lodged (or to be lodged) by shareholders.”

A taste of the report’s contents can be seen in the main headings in its Table of Contents, namely:

PART A – UPDATE AND WAY FORWARD

1. Introduction
2. Executive Summary
3. The Fund
4. Who can share in the Fund
5. Calling for and lodgement of Proofs of Debt or Claim
6. Estimated Return to Creditors
7. Updates to Creditors and Creditors’ Committee meetings
8. Purpose of Report
9. The Way Forward

PART B – OVERVIEW OF RESULTS OF INVESTIGATIONS

10. Overview of ION Group
11. Overview of Forensic Investigation Process
12. Factual Overview
13. ION’s disclosures regarding Financial Outlook
14. Consequences if tru position disclosed
15. Potentially Actionable Disclosures and Non-Disclosures

PART C – DETAILED RESULTS OF INVESTIGATIONS

16. Introduction
17. Financial Controls
18. Albury
19. Altona
20. Wingfield
21. North Plympton
22. Auckland
23. Kentucky
24. Energy Services
25. ION’s disclosures regarding Financial Outlook
Annexure 1. Pooled and Non-Pooled Entities.

For the full report go to http://www.ionlimited.com and click on the link to ION Report to Creditors 20 October 2010. For a short version click on the link to Creditor information.

Enjoy the read!

Any information on what happened to the expected income tax refund would be gratefully received.

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The comments and materials contained on this blog are for general information purposes only and are subject to the disclaimer.

ION insolvency income tax refund is held up

Priority Debts, Tax debts, Tax liabilities, Taxation Issues Comments Off

Oct 192010

It appears that the Deed Administrators of the ION group of companies have not yet received an anticipated income tax refund of $13 million.

Why the hold up? Is the refund no longer anticipated? If so, why not?

The possibility of an income tax refund was first mentioned by the Deed Administrators, Colin Nicol and Peter Anderson of McGrathNicol, in their report dated 23 October 2006:

“The Administrators have completed and lodged the income tax return for the year ended 30 June 2004 and are working on finalising the subsequent returns. These are expected to result in a refund of income tax, however the final amount is not clear until it is established whether the ATO will have any claims which it is permitted to set off against the refund. “

The next word on an income tax refund came in the Deed Administrators’ report dated 15 March 2007:

“With the completion of the income tax returns for the year ended 30 June 2005 (covering all pre-appointment activities), the Administrators expect a refund of income tax instalments paid by ION in respect of the 2004 and 2005 tax years, in addition to a possible refund of tax paid following an adjustment to the 2003 tax year return. The final amount is not clear, pending further discussions with the ATO.”

Then in the Deed Administrators’ report dated 30 September 2009, they said: “(we) are anticipating a cash inflow of approximately $13 million in the coming months from the receipt of an income tax refund”.

Then in their December 2009 report they said: “(we) were anticipating a cash inflow during the last quarter from the ATO in relation to an income tax refund. The payment of this amount has been delayed by the ATO and the Deed Administrators now anticipate payment in early 2010.”

The quarterly reports that followed contained the same information. On 30 July 2010 the Deed Administrators said: “the payment of this amount continues to be postponed by the ATO, however the Deed Administrators anticipate payment in 2010.”

Subsequent reports were made on 24 September and 14 October 2010, but these make no reference to the income tax issue, probably because the reports address shareholders rather than creditors.

What is going on?

[To read these and other reports go to http://www.ionlimited.com/ and click on the link to “Creditor information”.]

Taxing capital gains made during liquidation

Priority Debts, Tax debts, Tax liabilities, Taxation Issues Comments Off

Oct 152010

Asset sales during a winding up, receivership or administration may give rise to a capital gain as defined in Australia’s tax laws (mainly the Income Tax Assessment Act 1997).

The possibility that a post-appointment tax debt may arise as a result, and that such a debt may have a right to payment ahead of other creditors (even secured and preferential creditors), is a cause for concern to insolvency practitioners.

I wrote a little on this subject in my article titled “Post-appointment income tax debts of liquidator” (published on this blog on 10/10/2010).

At that time I was not sure whether revenue losses accumulated at the date of the liquidator’s appointment could be offset against a “net capital gain” made post-appointment.

I said:

“Ordinarily, an insolvent company would have revenue tax losses at the date of the liquidator’s appointment. In most cases these would be available as a tax deduction against any net revenue income made during the liquidation period. But the same may not be true for net capital gains in this period.”

Since then I have obtained some expert advice, which is as follows:

1. A “net capital gain” forms part of a company’s “assessable income”. (See ITAA 1997, Chapter 3, Part 3-1, Division/Section 102-5.)

2. An excess tax loss of an earlier year may be deducted from the assessable income of a current year. (See ITAA 1997, Chapter 2, Part 2-5, Division/Section 36-17.)

So it appears what I should have said is: revenue tax losses at the date of the liquidator’s appointment would be available as a tax deduction against any net revenue income made during the liquidation period and any net capital gains made during the liquidation period.

Although under these rules the chances of post-appointment tax debts arising would probably be reduced – as would the size of such a debt should it arise – it remains important that insolvency practitioners be aware of tax laws and the need to prepare income tax returns.

As to the remaining questions of (a) where a post-appointment tax debt would rank in priority on the Corporations Act 2001, and (b) whether the insolvency practitioner may be held personally liable for it under Section 254 of the Income Tax Assessment Act 1936, we will have to await further developments.

The Insolvency Practitioners Association of Australia (IPA) has been discussing these issues with the Australian Taxation Office (ATO). However, the correspondence between the two is not publicly available.

It appears that the ATO is seeking advice from Senior Counsel.

The IPA may also be considering running a test case in court.

Marriage of insolvency laws to be considered

Insolvency Laws, Official Inquiries, Productivity Commission 2010, Regulation Comments Off

Oct 132010

The Australian Productivity Commission (APC) has recommended that a taskforce be established “to identify personal and corporate insolvency provisions and processes that could be aligned. The case for making one regulator responsible for both areas of insolvency law should also be examined.”

This recommendation is made in the APC’s report, titled “Annual Review of Regulatory Burdens on Business: Business and Consumer Services Sector” , released yesterday.

For the APC’s discussion and recommendation concerning insolvency practitioners, see Chapter 4 – Regulatory barriers for occupations, Part 4.5, pages 169 to 176.

(The full report on the numerous business sectors examined can be found here.)

Post-appointment income tax debts of liquidator

Priority Debts, Returns, Tax debts, Tax liabilities, Taxation Issues Comments Off

Oct 102010

Is it still safe for a liquidator of an insolvent company to assume that no income tax debt has arisen during his or her administration of the company?

Until fairly recently the issue was almost a non-issue, because the Australian Taxation Office (ATO) did not appear to be interested in chasing income tax returns.

But in 2005 the ATO flexed its muscles when it declared (again) – this time through Interpretive Decision 2005/257 – that liquidators are responsible for lodgement of the company’s tax returns up to the date of appointment.

The ATO did, however, relax this rule in response to an outcry from liquidators. See my article on this blog site entitled “Tax Returns: ATO rules relaxed for Liquidators”.

But, importantly, at the same time the ATO pointed out that “liquidators, receivers and administrators … are required to prepare and lodge income tax returns for the period in an income tax year from the date of appointment … (and) … are responsible for accounting for income or profits or gains derived in their capacity as liquidator or receiver or administrator …”

Ordinarily, an insolvent company would have revenue tax losses at the date of the liquidator’s appointment. In most cases these would be available as a tax deduction against any net revenue income made during the liquidation period. But the same may not be true for net capital gains in this period.

It would seem prudent for liquidators to make sure that proper income tax returns are prepared and lodged for the pre-appointment and post-appointment periods. And also to look out for developments in interpretation of the relevant laws.

We have already seen that a liquidator, as a “trustee” for income tax purposes, has a duty under income tax legislation to prepare and lodge tax returns for the period of his or her appointment.

It follows that the ATO will issue a notice of assessment when a return is lodged and, if their is a tax liability arising as a result, will seek to collect that debt.

(Of course, the ATO also has the right to issue a tax assessment – a default assessment – even if a return is not lodged.)

The company (or “incapacitated entity”, as it is often referred to in tax legislation) is liable to pay such a tax debt.

In the winding up the debt would then have to be classified under the priority rules of the corporations legislation. It seems clear to me that it would rank, at least, in the class of “other expenses properly incurred” by the liquidator. This would put it ahead of the liquidator’s remuneration. It may also rank even higher – in fact, at the top – as one of the “expenses properly incurred by a liquidator in preserving, realising or getting in property of the company or in carrying on the company’s business”. (See section 556 of the Corporations Act 2001.)

A liquidator, as a “trustee” under income tax legislation, also has a duty to retain, out of any money received in his or her representative capacity, an amount sufficient to pay any post-appointment income tax debt. See section 254(1)(d) of the ITAA 1936. See also ATO Interpretive decision 2003/506.

Also, a liquidator appears to have a personal liable for the post-appointment tax debt “to the extent of any amount that he/she has retained, or should have retained”. See section 254(1)(e) of the ITAA 1936.

The question of what is the precise meaning and what are the precise ramifications of sections 255 and 254 of the ITAA 1936 has recently caused headaches for government officials and judges. See Income Tax Rulings IT 2544 of June 1989 and IT 2544W of June 2010. See also Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) HCA 54; and Barkworth Olives Management Limited v Deputy Commissioner of Taxation (2010) QCA 80.

Early destruction of books by liquidator

Forms, Records Management, Regulation, Retention and Disposal Comments Off

Oct 082010

With the necessary approval, a liquidator may legally destroy his or her records of a winding up soon after it is finalised. The same is true of books and records of the liquidated company. (See section 542 of the Corporations Act 2001 “the Act”.)

In the case of a creditors’ voluntary winding up approval must be obtained from creditors and then the Australian Securities and Investments Commission (ASIC). In a winding up by the Court approval must be obtained from the Court.

The provisions in the Act for early destruction make sense. Or at least they do in so far as they pertain to the books and records of the liquidated company that exist at the commencement of the winding up. At that stage a company may have a vast collection of books and records. Without special laws a liquidator would be required to store them for 5 years after the company ceased to exist. Multiply this cost by the many administrations that a liquidator may have and the sum becomes exorbitant, and needlessly so.

But in the case of books and records created subsequent to commencement of the winding up, the argument for early destruction is much weaker, particularly now that society seems to be demanding that liquidators be more accountable and more closely supervised. (For example, see the Australian Senate Committee Report: “The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework“, September 2010.)

(This aspect of the law in relation to retaining books is discussed in my earlier article headed: “Retaining books and records post liquidation”.)

Nonetheless, the main purpose of this article is to draw the attention of liquidators to an application form that I have prepared for use in applying for early destruction of books in a creditors’ voluntary liquidation. (There is no statutory form for an application.)

My standard form may be found at:

www.insolvencyresources.com.au/CvoliqPractPack.htm

Before applying to ASIC a resolution approving/directing the early destruction must be passed by creditors, either through the committee of inspection – if there is one – or at a meeting of creditors. This is usually a standard item on the agenda at the first or second meeting.

ASIC’s Regulatory Guide 81 (RG 81) sets out what information the application must contain. A little less information is required if the application is made after the company is deregistered. But an application can be made before deregistration and even up to 2 months before the final meeting of members and creditors.

Essentially the application requires the liquidator to supply a copy of the committee or creditors’ resolution and to state that:

no litigation by or against the liquidator or the company is in process, is contemplated or is expected;
no one has asked for access to the books;
no circumstances exist in relation to the company or an associate (as defined in section 11 of the Act) which may result in the books being required within 5 years of the company’s deregistration;
the liquidator has lodged his or her investigation report and received a “no further action” type clearance from ASIC;
the liquidator has satisfied all his or her lodging and reporting requirements; and
there are insufficient funds in the liquidation to meet the costs of storing the books for 5 years.

Presumably if there are circumstances which exist in relation to the company or an associate which may result in the books being required within 5 years of the company’s deregistration, a liquidator who, nevertheless, wants permission to destroy the books would have to present a submission to ASIC for its consideration.