Tax Office loses High Court appeal in test case regarding liquidators’ tax obligations

 Capital Gains Tax, Corporate Insolvency, Priority Debts, Returns, Tax liabilities, Taxation Issues  Comments Off on Tax Office loses High Court appeal in test case regarding liquidators’ tax obligations
Dec 102015
 

A High Court decision was been delivered today (10/12/2015)  in the long-running test case of the Commissioner of Taxation v Australian Building Systems Pty Ltd. The following is the summary of the judgment published by the High Court. (The full judgment will be found HERE.)


 

H I G H C O U R T O F A U S T R ALI A

COMMISSIONER OF TAXATION v AUSTRALIAN BUILDING SYSTEMS PTY LTD (IN LIQUIDATION); COMMISSIONER OF TAXATION v MULLER AND DUNN AS LIQUIDATORS OF AUSTRALIAN BUILDING SYSTEMS PTY LTD (IN LIQUIDATION) [2015] HCA 48

Today the High Court, by majority, dismissed appeals from the Full Court of the Federal Court of Australia. The High Court held that the retention obligation (as defined below) imposed on agents and trustees by s 254(1)(d) of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”) only arises after the making of an assessment or deemed assessment in respect of the income, profits or gains. Continue reading »

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Mar 192014
 

The Australian Restructuring Insolvency & Turnaround Association (ARITA) reported yesterday that the Australian Taxation Office is appealing against the decision in the test case on the obligations of liquidators upon the occurrence of a Capital Gains Tax (CGT) event.

Hand objection

ARITA’s report is as follows:

CGT UNCERTAINTY by Kim Arnold, 18/3/2014

Further to our recent article on the decision in Australian Building Systems Pty Ltd v Commissioner of Taxation [2014] FCA 116, the ATO have lodged an appeal.  The grounds of the appeal are that:

  • the judge erred in concluding that the liquidators were not required under s254(1)(d) of the Income Tax Assessment Act 1936 to retain proceeds from sale sufficient to pay any net capital gain arising from the sale; and
  • the judge erred in concluding that the obligation to retain monies sufficient to pay any tax in respect of the sale only arises when and if an assessment is issued.

The ATO’s view is that there is an obligation for the liquidators to retain proceeds from sale sufficient to meet any tax obligation and that an assessment is not required for that obligation to arise.

The issue of CGT priority and external administrator obligations on the sale of assets in insolvency administrations has been outstanding for many years and it seems that there will be no certainty for some time to come.

For my earlier post on this subject CLICK HERE.
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Mar 072014
 

[UPDATE 19/3/2014: THE ATO HAS APPEALED AGAINST THE DECISION DISCUSSED IN THIS POST] [UPDATE 10/10/2014: THE ATO FAILED IN ITS APPEAL; THE DECISION OF LOGAN J WAS CONFIRMED.]

When the Insolvency Practitioners Association of Australia (since renamed the Australian Restructuring Insolvency & Turnaround Association, or ARITA) and the Australian Taxation Office (ATO) decided to run a test case on the obligations of liquidators upon the occurrence of a Capital Gains Tax (CGT) event, they probably knew they risked broadening the contentious issues.  But they had to try settling a far-reaching and long-standing argument ­ which ARITA and the ATO had been having since 2009.  (1)

Unfortunately for ARITA and the ATO, the Court decided not to adjudicate in one important area, deeming it “unnecessary to answer in light of the conclusion reached …”

In running Australian Building Systems Pty Ltd v Commissioner of Taxation ([2014] FCA 116), decisions were sought on the following questions:

–          whether the liquidators (this was a joint appointment) are obliged by s 254 of the Income Tax Assessment Act 1936 , prior to the issuing of a notice of assessment to Australian Building Systems Pty Ltd (ABS), to retain monies so as to meet what may be a taxation liability in respect of the income year when the CGT event occurred; and

–          whether the liquidators are obliged to pay to the Commissioner the whole of any tax due by ABS in priority to other creditors of that company notwithstanding  ss 501, 555 and 556 of the Corporations Act.

Tax law gavel

On the first question the Court –  Logan J presiding – concluded:

“ … that s 254 of the ITAA36 had no application to the liquidators. They were not, in the absence of any assessment, subject to any retention and payment obligation derived from that section…..” (para 25 of the judgment) and “s 254 does not require retention upon the mere happening of a CGT event …” (para 31).

As the ATO had argued that it was not necessary for there to be a notice of assessment before the retention obligation of S. 254 could arise, this decision was a victory for the liquidators.

But Logan J added the following cautionary advice:

“… Even though, for the reasons given, s 254 does not require retention upon the mere happening of a CGT event, that does not mean that a liquidator is obliged immediately to distribute the resultant gain or part thereof as a dividend to creditors in the course of the winding up. A prudent liquidator, like a prudent trustee of a trust estate or executor of a will, would be entitled to retain the gain for a time against other expenses which might arise in the course of the administration. Further, in relation to income tax, the liquidator would at the very least be entitled to retain the gain until the income tax position in respect of the tax year in which the CGT event had occurred had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year….” (para 31).

Caution-taxes

ATO back to the drawing board

The ATO will need to withdraw its exhaustive Draft Taxation Determinations TD 2012/D7 and TD 2012/D6 of September 2012 and try again to state the correct legal position.  In those determinations the ATO took the view that

  • “a receiver who is an agent of the debtor is required by paragraph 254(1)(d) of the ITAA 1936 to retain from the sale proceeds that come to them in the capacity of agent sufficient money to pay tax which is or will become due as a result of disposing of a CGT asset”; and
  • “The phrase ‘tax which is or will become due’ in paragraph 254(1)(d) of the ITAA 1936 is not restricted to tax that has been assessed, and includes tax that will become due when an assessment is made. Consequently, the obligation to retain an amount under paragraph 254(1)(d) can arise in respect of tax that has not yet been assessed”.

 

An advisory note from ARITA?

One can imagine that the decision and the words of caution by Logan J will eventually find their way into an advisory note or practice guide from ARITA to liquidators and other insolvency practitioners.  But in getting there the Judge’s caution is bound to cause ARITA’s technical advisers and members considerable trouble.

ARITA’s initial interpretation

ARITA posted a summary of the judgment on its website on 23 February  (“Liquidator succeeds in CGT dispute with ATO” by Michael Murray), and ended with a note that it will closely examine the decision and the Judge’s comments and will raise the matter at its next liaison meeting with the ATO.

ARITA’s interpretation included the following comment:

In the case in hand, no assessment had issued when the sale took place.  This means that there is no personal liability for a liquidator if, once the assessment issues, there are insufficient funds to meet the liability.

Kicking off the discussiondiscussion meeting

I would make a couple of preliminary observations regarding this comment.

First, the fact that no assessment had issued when the sale took place is unremarkable.  Normally, a tax assessment is not made until after an event occurs.  Ordinarily, the ATO would not even be aware that an event had occurred until it was disclosed in a return lodged by the taxpayer.  (2)

Secondly, I agree that, based on this decision, there would be no personal liability under s. 254(1)(d) or (e) of the ITAA 1936 for the tax payable as the result of a profit, etc., if the money the liquidator had was expended and/or disbursed before a tax assessment was issued.

But there are other important issues to consider.  If a tax return covering
a post-appointment period was lodged and/or a tax assessment was issued showing tax payable in respect of that period, this would give rise to a debt payable by the company; and that debt would, it seems to me, be entitled to priority payment under the Corporation Act, as are other costs
of the winding up.

Such a tax debt would probably be entitled to classification as an expense “properly incurred by a relevant authority” (e.g., a liquidator) (S. 556(1)(dd) of the Corporations Act).  If so, it would have a higher priority than, for example, liquidator’s remuneration (S. 556(1)(de)) and employee entitlements (S. 556(1)(e) and (g)).

So … if, when the assessment issues “there are insufficient funds to meet the liability”, the liquidator may be deemed to have breached his or her duty to distribute the proceeds in accordance with the priorities established by law.

It seems to me that this very issue was the one being broached by Logan J in his caution at para 31 of the judgment when he said:

“ … in relation to income tax, the liquidator would at the very least be entitled to retain the gain until the income tax position in respect of the tax year in which the CGT event had occurred had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year….”.

_______________________________________________

NOTES:
(1)    In October 2012 the ATO issued draft rulings on the subject; and in February 2013 the  hearing of the test case began.
(2)    In the case being examined here, the ATO was informed of the CGT event when the company sought a private ruling from the Commissioner on whether s.254(1)(d) applied.

_______________________________________________

For more on this topic see my article “Post-appointment income tax debts of liquidator” published on this site on 10 October 2010.

 

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Insolvency practitioners cleared to provide tax and BAS agent services

 BAS, Corporate Insolvency, Insolvency practices, Personal Bankruptcy, Returns, Taxation Issues  Comments Off on Insolvency practitioners cleared to provide tax and BAS agent services
Jul 202012
 

Liquidators who provide a tax agent or BAS service to the company they are administering do not have to be registered as tax agents or BAS agents.

That is the ruling issued by the Tax Practitioners Board on 26 June 2012 in its Information Sheet TPB(1) 12/2012.

The same rule applies to most other types of insolvency practitioners appointed under the Corporations Act or the Bankruptcy Act.

CONDITIONS APPLY:

But the rule, or exemption, only applies to work done for the client after the insolvency practitioner’s appointment.  During the pre-appointment period the ban on unregistered persons providing a tax agent service or a BAS service for a fee or reward will apply.

The insolvency practitioners exempted under the ruling are liquidators, provisional liquidators, company administrators, administrators of deeds of company arrangement, receivers, receivers and managers, and bankruptcy trustees.

But the exemption might not apply to insolvency practitioners who act as agents for mortgagees in possession.  On one reading of the Information Sheet it seems that because such insolvency practitioners are not agents of the company (as are liquidators, administrators and receivers) then they might not be performing the tax/BAS agent services “in accordance with the duties and responsibilities of the insolvency practitioner under the terms of the relevant legislation” in a situation “analogous to that of a self-preparing entity”.  (See paras. 20 and 21.)

The Information Sheet also addresses the situation where, during the post-appointment period, an insolvency practitioner “bring(s) in outside consultants such as accountants or bookkeepers to deal with the entity’s tax or BAS issues”.  The Tax Practitioners Board says that such consultants would need to be registered.

In other words, the exemption only applies where the insolvency practitioners or his or her employees carry out the tax work.

To see the TPB Information Sheet CLICK HERE.

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Unauthorised amendment of receiver’s BAS gets through ATO

 BAS, GST, Insolvency practices, Returns, Taxation Issues  Comments Off on Unauthorised amendment of receiver’s BAS gets through ATO
Jul 222011
 

The Australian Taxation Office has been asked to explain how it is possible for a BAS lodged by a representative of an incapacitated entity (receivers and managers) to be later amended  by another entity without authorisation. In the actual case that gave rise to the question, a GST refund of approximately $650,000 was paid out to the receivers as a result of the unauthorised amendment. The case concerned sale of  real property by the receivers.

The Tax Institute brought this matter to the ATO’s attention in March 2011  at a meeting of one of the ATO’s community consultation forums, the GST Sub-committee of the National Tax Liaison Group.

Minutes of the Meeting, recently published on the ATO website, are reproduced in full below.  It appears that changes to ATO procedures may have already been made.

________________________________________________________

GST Minutes, March 2011

Agenda item 19 – Amendments of BAS lodged by representatives of an incapacitated entity.  Issue 13.40 raised by the Tax Institute.

The Taxation Institute requests an explanation as to how it is possible for BAS lodged by a representative of an incapacitated entity (receivers and managers) to be later amended by another entity. Are there any checks in the BAS lodgment system for these unauthorised amendments to be stopped?

The facts relevant to this issue are that two individuals (partners in an accounting firm) were appointed as receivers and managers to sell certain new residential premises owned by a property developer that had defaulted on its repayments to a bank. The receivers had been appointed by the bank.

At the time of lodging the BAS as representatives of the incapacitated entity, the receivers were not satisfied on the basis of the information made available that they could pay GST under the margin scheme and instead paid GST under the basic rules, in respect of all sales of property. The sales proceeds were all paid to the bank.

After their appointment as receivers concluded, the property developer amended the BAS lodged by the receivers (through the business or tax agent portal). A refund of approximately $650,000 was processed without the ATO apparently doing any verification or other analysis (including as to section105-65 of Schedule 1 to the TAA). That refund was paid into the bank account of the receivers and managers (as this was still current with the ATO). This was the first time the receivers became aware that their BAS had been amended.

The matter now involves an ATO investigation of various issues, including the margin scheme valuation. The only issue for the purpose of this request is whether the ATO has any checks in its systems for such unauthorised amendments.

ATO response

Representatives of insolvent or incapacitated entities must be registered, as identified in section 58-20 of the GST Act. The ATO’s practice is to register representatives under a separate Client Account Centre (CAC), but under the same ABN as the incapacitated entity. This enables transactions attributable to the period of receivership/ administration to be recorded separately to those undertaken by the entity prior to and post the period of receivership/ administration.

Authorised contact persons, as nominated by the representatives, are listed against the separate role for the representative. Although the CAC appears on the account of the incapacitated entity, the representative is effectively treated as a separate entity. As a result, only the authorised person is allowed to lodge GST returns and amendments and make changes affecting the representative’s CAC.

Accordingly, a GST return lodged by a representative of an incapacitated entity should not be amended by a person associated with the incapacitated entity itself where that person is not authorised by the representative.

However, it is possible for someone, even where not authorised, to lodge a GST return or amendment. This could be done, for example, in paper form or through the business portal. Where someone has access to the portal in respect of the relevant ABN, that access is not restricted to specific CACs. It should be noted that the portal is a safe environment; it is password protected and encrypted, however this does not prevent unauthorised action being taken by those with access to the portal. If, for example, a person authorised by the company seeks to lodge an amendment in respect of a period the company was in receivership, the fact that the amendment request is not authorised may by identified by our systems and if so the amendment would not be processed. However, this will not occur in every case. Note that all transactions in the portal are logged; identifying the specific user taking the actions, and thus even if the amendment is processed, the fact the amendment request is unauthorised could later be identified.

The ATO take a risk based approach to reviewing lodgments, including amendments. This includes pre and post issue checks to identify fraudulent behaviour.

In light of the question that has been raised, we are considering whether further steps can be taken to reduce the risk of unauthorised amendments in these circumstances.

Meeting discussion

The ATO acknowledged that the situation as highlighted in the submission can occur on the portal. This issue has initiated action by the ATO to put in place steps to stop unauthorised amendments to BAS especially in these circumstances. The ATO considers this as a risk that requires further investigation and management to mitigate.

It was suggested by members that during the period that an entity was in insolvency, the ATO should incorporate steps to close off the incapacitated entity’s registration. The ATO is exploring ways for locking down those periods when administrators have been appointed or to trigger a review for amendments made to the BAS in those periods. The ATO is investigating the matter and how processes can be changed so that there is no reoccurrence.

The ATO also noted that access to the portal is logged, so unauthorised access in these cases can be identified. The ATO confirmed that if the representative entity has not made the relevant amendment (it has been made without authorisation by the formerly incapacitated entity), the representative entity would not be liable for a penalty if the amendment is a false or misleading statement.

Action item 2011.03.15
Amendments of BAS lodged by representatives of incapacitated entity
Description The ATO will provide an update out of session or at the next meeting on the progress made to have further controls in place so that BAS cannot be amended for periods in the past when an entity was incapacitated.
Responsibility ATO
Due date 15 June 2011
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Legal opinion warns external administrators about personal liability for company taxes

 Priority Debts, Returns, Tax debts, Tax liabilities, Taxation Issues  Comments Off on Legal opinion warns external administrators about personal liability for company taxes
Nov 162010
 

A paper presented recently by two Melbourne barristers to a group of insolvency practitioners suggests that administrators, liquidators and receivers (external administrators) who do not take precautions risk personal liability for post-appointment capital gains/income tax liabilities.

Helen Symon SC is a Senior Counsel at the Victorian bar specialising in taxation and insolvency.  Mark McKillop has been a junior barrister at the Victorian Bar since 2008 specialising in insolvency, banking and taxation. 

Their paper, “Taxation – Common Issues for Insolvency Practitioners” (10 November 2010),  looks at external administrators as viewed through the eyes of taxation legislation. The authors make three key points:

“(a)      Insolvency practitioners are required to ensure that the entities to which they are appointed comply with most common tax obligations;

(b)        although the entities to which they are appointed are legally separate, insolvency practitioners can be personally liable, under some circumstances, for the payment of post appointment tax liabilities of the insolvent entity: income tax, capital gains tax, PAYG collections and GST;

(c)        choice of the type of appointment may affect the practitioner’s personal liability to pay capital gains tax liabilities of the appointee and, accordingly, the assets available to the secured creditor.”

Personal Liability under Taxation Law

In the debate so far the most troublesome law for external administrators has been Section 254 of the Income Tax Assessment Act 1936 (ITAA 1936), which deals with agents and “trustees”, and raises the prospect that, as an agent or “trustee”, a external administrator may be personal liable for a company debt.

Section 254(1)(d) states that  every “trustee”, as defined in ITAA 1936 (*), and every agent is “hereby authorized and required to retain from time to time out of any money which comes to him in his representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains.

Section 254(1)(e) states that  every “trustee”, as defined in ITAA 1936, and every agent is “hereby made personally liable for the tax payable in respect of the income, profits or gains to the extent of any amount that he has retained, or should have retained, under paragraph (d); but he shall not be otherwise personally liable for the tax.

According to Helen Symon SC and Mark McKillop, “Section 254, then, preserves the position of the Revenue vis a vis tax liabilities which arise following appointment of a liquidator, receiver or administrator …. Casting personal liability on the liquidator or receiver or administrator ensures the tax liabilities are met before funds are applied to satisfy creditors.”

Personal Liability under Other Laws

Helen Symon SC and Mark McKillop also refer to instances where personal liability may arise outside the income tax legislation.

In this context they refer to the case of Deputy Commissioner of Taxation v Tideturn Pty Ltd  (In Liquidation) [2001] NSWSC 217 (26/3/2001).  This case concerned a liquidator who kept the business of the company going after he was appointed and, in the process, deducted income tax instalments (group tax) from the post appointment wages of the employees.  The court held that the group tax deductions gave rise to a post liquidation debt payable in the liquidation as a priority payment under Section 556(1)(a) of the Corporations Law, as an expense properly incurred by the liquidator in carrying on the company’s business

The liquidator failed to pay any of the group tax, but paid other priority debts.  By failing to ensure that priority debts were paid proportionately in the circumstances of there being insufficient funds available (as is required by section 559 of the Corporations Law) the Court stated that this “would be a breach of duty by the liquidator”.  For this breach of duty the court ordered that “The liquidator must pay personally the sum of $75,000”, which was the group tax debt discounted for certain mitigating circumstances. (**)

Other interesting  judicial comments on “expenses properly incurred by a liquidator in carrying on the company’s business” and liability for breach of duty in not paying post appointment debts include:

  • Ansett Australia Ground Staff Superannuation Plan Pty Ltd v Ansett Australia Ltd and Others [2002] VSC 576 (20/12/2002);
  • Bell v Amberday [2001] NSWSC 558 (4/7/2001); and
  • Charlie Pace & Anor v Antlers Pty Ltd (In liq) [1998] FCA 2 (12/1/1998).

Conclusion

Helen Symon SC and Mark McKillop conclude their paper with the following warning:

“Practitioners need to be aware that, in effect, they will be liable either directly or under penalty provisions for CGT, income tax and GST applying to the entity to which they are appointed.  They are also required to ensure that administrative requirements, such as filing returns, are completed.  Accordingly, prudent practice requires withholding sufficient funds to cover the liabilities until they are paid.”

——————————————————————————————————————–

Note: The profile and contact details of Helen Symon SC are available at http://www.vicbar.com.au/find-a-barrister/advanced-search/search-results/barrister-profile?RollNumber=1884.  Mark McKillop’s profile and contact details are at http://www.vicbar.com.au/find-a-barrister/advanced-search/search-results/barrister-profile?RollNumber=4135    

—————————————————————————————————————–

ADDITIONAL NOTES:

(*) A “trustee” for taxation purposes is defined in Section 6(1) of the ITAA 1936 [and ITAA 1997] as: “in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of the law, includes –

(a) an executor or administrator or, guardian, committee, receiver, or liquidator; and

(b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession control or management of the income of a person under any legal or other disability.”

———————————————————————————–

(**) It is worth noting also, that as a result of his behaviour in this external administration – including his failure to pay all the expenses incurred in carrying on the business of the company after his appointment – the liquidator (William Edward Andrew) was brought before the Companies Auditors and Liquidators Disciplinary Board (CALDB) in 2001 and was persuaded to cease acting as a liquidator.  (See ASIC Media Release 01/312 at  http://www.asic.gov.au/asic/asic.nsf/byheadline/01%2F312+Time+limit+imposed+on+liquidator’s+registration?opendocument#. )

———————————————————————————–

(***) For my previous posts on this subject see “Post-appointment income tax debts of liquidator” and “Taxing capital gains made during liquidation.”

The comments and materials contained on this blog are for general information purposes only and are subject to the disclaimer.          
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Post-appointment income tax debts of liquidator

 Priority Debts, Returns, Tax debts, Tax liabilities, Taxation Issues  Comments Off on Post-appointment income tax debts of liquidator
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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Tax Returns: ATO rules relaxed for Liquidators

 Returns, Taxation Issues  Comments Off on Tax Returns: ATO rules relaxed for Liquidators
Sep 082010
 
[This post was updated on 24/3/2014.]

No one likes doing their income tax returns. So company liquidators and receivers must be relieved that the Australian Taxation Office (ATO) has relaxed its requirements for lodgment of returns, even if it is only for periods prior to the date of appointment.

The ATO’s viewpoint (from July 2010) is set out in a web document headed “Information for trustees appointed under the Corporations Act 2001”, specifically under the sub headings “Clearances – liquidators and receivers” (last modified 15/4/2013)and “Clearance notice issued” (last modified 15/4/2013).

See http://www.ato.gov.au/Tax-professionals/Insolvency-practitioners/In-detail/Responsibilities/Information-for-trustees-appointed-under-the-Corporations-Act-2001/?page=2#Clearances___liquidators_and_receivers

and

See  http://www.ato.gov.au/Tax-professionals/Insolvency-practitioners/In-detail/Responsibilities/Information-for-trustees-appointed-under-the-Corporations-Act-2001/?page=3#Clearance_notice_issued

Pre-appointment returns

The ATO says that from July 2010 ” … a risk management approach may be adopted by the ATO to determine if lodgment (of outstanding income tax returns, fringe benefit tax returns or outstanding activity statements) is required”.

A risk is defined by the Australia/New Zealand Standard for Risk Management (AS/NZS 4360:2004)  as “…the possibility of something happening that impacts on your objectives.  It is the chance to either make a gain or a loss.  It is measured in terms of likelihood and consequence.”

The ATO states that in making its risk assessment it will have regard to, but will not be limited to, certain factors.  Those factors are listed in the text box below.

Of these factors the ATO’s says that they:

” … are intended to ensure that liquidators will only be required to lodge where the circumstances reasonably support that requirement. It is expected that, in many cases, the requirement to lodge income tax returns should not arise.”

The main risk management factors to be used by the ATO in deciding whether pre-appointment returns must be lodged. 

  • The prospect for, and likely size of a dividend being paid to unsecured creditors ;
  • the likelihood that the return would, if lodged, reveal an increase in the tax liabilities owed to the ATO;
  • the availability of books and records which would make it possible to prepare the return;
  • the likelihood that the liquidator’s cost of preparing those returns would be covered by the assets of the liquidated company without resulting in an inordinate adverse impact on other creditors; and
  • the wider community benefits of having the returns lodged. 

For receivers, as distinct from liquidators, the ATO has taken the view that: ” … where a receiver has only partial control of the assets of a company, a clearance can be issued to the receiver without the need to have all income tax returns up to date. If the company is not in liquidation, outstanding returns will be demanded.”  Presumably this means that if the receiver has control of all the assets, the ATO will demand outstanding returns but will take a risk management approach if the receiver protests or refuses.

Legal principle

Under income tax legislation the ATO can require a liquidator to prepare and lodge any overdue documents for a company in liquidation, including documents for periods prior to the liquidator’s date of appointment.  This statement of principle is restated for the record in document  62547.

Post-appointment returns are required

The document also makes it clear  that post-appointment returns are required to be prepared and lodged by liquidators, receivers and administrators:

“Under section 254 of the Income Tax Assessment Act 1936, liquidators, receivers and administrators appointed under Part 5.3A of the Corporations Act 2001 are required to prepare and lodge income tax returns for the period in an income tax year from the date of their appointment. Liquidators, receivers and administrators appointed under Part 5.3A of the Corporations Act 2001, as trustees for tax purposes, are responsible for accounting for income or profits or gains derived in their capacity as liquidator or receiver or administrator appointed under Part 5.3A of the Corporations Act 2001. “

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