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.

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