Feb 072016
 

On 6 January 2016 the ATO issued a Decision Impact Statement concerning the High Court judgment in the Australian Building Systems case.

[See my previous post for a discussion of the High Court’s majority decision: Australian Building Systems case: plenty of common sense in the dissenting judgment by Justice Michelle Gordon]

It seems that although the ATO accepts the High Court’s majority decision (as, of course, it must), it’s interpretation of the decision is nuanced, and suggests that it has no intention of giving up on the retention obligation.

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Australian Building Systems case: plenty of common sense in the dissenting judgment by Justice Michelle Gordon

 Capital Gains Tax, Corporate Insolvency, court decisions, Insolvency Law, Priority Debts, Tax debts, Taxation Issues  Comments Off on Australian Building Systems case: plenty of common sense in the dissenting judgment by Justice Michelle Gordon
Dec 172015
 

(Judgment of December 2015)

By a majority of three to two the High Court dismissed the Australian Taxation Office’s appeal in the Australian Building Systems case: 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 (10 December 2015) .

This test case – run by the Australian Restructuring Insolvency & Turnaround Association (ARITA) and the Australian Taxation Office (ATO) – began in 2013 and has previously been before the Federal Court and the Federal Court of Appeal. It was supposed to settle a far-reaching, long-standing argument that ARITA and the ATO had been having since 2009.

Argument about when obligation arises

The primary argument in this case – framed here as an issue for liquidators in general – has been whether the “retention obligation” placed on liquidators by section 254(1)(d) of the Income Tax Assessment Act 1936 arises prior to the issue of a tax assessment or only after the issue of an assessment.
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Oct 102014
 

The Federal Court of Appeal has dismissed an appeal by the Australian Taxation Office against a court ruling that where a tax assessment has not been issued liquidators have no obligation under s 254(1)(d) of the Income Tax Assessment Act to retain from the proceeds of sale an amount sufficient to pay an apparent Capital Gains Tax liability . (Judgment dated 8/10/2014, Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133.)

The liquidators of Australian Building Systems Pty Ltd entered into a contract of sale of real property in Creastmead, Qld. The ATO argued that a tax liability for the capital gain arising from the sale arose when the sale occurred, and, accordingly, on receipt of the proceeds of sale, the liquidators were obliged under s 254(1)(d) to retain from the proceeds of sale an amount sufficient to pay that tax liability regardless of whether a tax assessment had been issued.

ATO-logoARITA logo

A couple of years ago the Australian Restructuring Insolvency & Turnaround Association (ARITA) (then the IPAA) and the ATO decided to run a test case on the obligations of liquidators upon the occurrence of a CGT event.

Justice-Blind-Scales

 

The decision in the first instance by Justice Logan of the Federal Court (in March 2013) has been confirmed by Justices  Edmonds, Collier and Davies.  Davies J summed up the decision as follows (paragraphs 34 and 35):

“Section 254(1) of the Income Tax Assessment Act 1936 (Cth) (“ITAA36”) applies to liquidators because liquidators are deemed to be “trustees” for the purposes of the taxation laws: see definition of “trustee” in s 6(1) of the ITAA36. As the consequence, a liquidator is “answerable as taxpayer” in respect of income, profits or capital gains derived by the liquidator in his or her representative capacity (s 254(1)(a)), and is required to lodge returns of such income, profits or capital gains and liable to “be assessed thereon”, but in his or her representative capacity only (s 254(1)(b)). Section 254(1)(d) then requires the liquidator to retain “out of any money” which comes to the liquidator in his or her representative capacity, sufficient money to pay tax that “is or will become due” in respect of such “income, profits or gains”, and s 254(1)(e) makes the liquidator personally liable for the tax payable to the extent of the amount retained, or which “should have been retained”. On its proper construction, it seems to me that the section contemplates that in the circumstances where the section is engaged, a post appointment tax liability, if any, will be assessed to the liquidator in his or her representative capacity, rather than to the company. That said, the analysis serves in my view to confirm that any personal liability falling upon the liquidator arises only if, and where, an assessment has issued, and there is an amount of tax that “is or will become due” in the sense of “assessed as owing”. For the reasons expressed by Edmonds J, the Commissioner’s construction of the phrase “is or will become due” as it is used in s 254(1)(d) is to be rejected. In my view the primary judge was correct to hold that the reasoning in Bluebottle UK Ltd v Deputy Commissioner of Taxation [2007] HCA 54; (2007) 232 CLR 598 in respect of the proper construction of s 255 of the ITAA36 applies equally to the proper construction of s 254, and that s 254(1)(d) is to be read as referring to an amount of tax that has been assessed. “

Interestingly, the appeal judges did not comment on Justice Logan’s cautionary advice to liquidators at the first hearing, which was:

“… 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….” __________________________________________________________________________________

For my other posts on this topic see: “Post-appointment income tax debts of liquidator” 10 October 2010 “Decision only partly resolves tax puzzle for liquidators” 7 March 2014 “ATO appeals against decision in Australian Building Sysytems case” 19 March 2014

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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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Sep 062012
 

An insolvent company, Mortlake Hire Pty Ltd (Mortlake), owed a debt  to the Australian Tax Office (ATO).  A related company, Antqip Pty Ltd, paid $70,000 to the ATO in respect of Mortlake’s debt.  The liquidator of Mortlake took legal action against the ATO to recover the $70,000 as an “unfair preference” under section 588FA of the Corporations Act.  The ATO claimed the payment was not an “unfair preference” because it had come from Antqip and had resulted in one creditor (ATO) being substituted by another (Antqip).  The Full Federal Court (on 31/8/2012) rejected the ATO’s argument and found in favour of the liquidator.

The case is Commissioner of Taxation v   Kassem v Secatore [2012] FCAFC 124

 

For an excellent analysis of the case – which also addressed the ATO’s practice of unilaterally reallocating payments made by taxpayers of tax liabilities from one account (such as the integrated client account) to another (such as the superannuation guarantee account) – see this blogpost by Carrie Rome-Sievers, a commercial law barrister and insolvency specialist of Melbourne.

 

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Apr 202012
 

The Government is again proposing to extend the director penalty regime to cover employee superannuation entitlements.

The original Bill was introduced to Parliament on 13 October 2011. (I wrote about this in my blog post on 18/10/2011: see “Parliament sees new tax laws to protect superannuation and deter phoenix companies”.)

In its media release on 18 April 2012, the Government says it “held further consultation with industry after withdrawing an earlier  version of the legislation in November. Following this consultation, the  Government has made amendments to the draft Bill, including to ensure that new  directors have time to familiarise themselves with corporate accounts before  being held personally liable for corporate debts and requiring the ATO to serve  director penalty notices on directors in all cases before commencing  action.”

This is the full GOVERNMENT MEDIA RELEASE of 18 April 2012:

“Draft  legislation released today will help to protect workers’ superannuation  entitlements, said Assistant Treasurer, David Bradbury.

Under the director penalty regime,  which has been in operation since 1993, company directors are personally liable  for amounts withheld by their company that have not been remitted to the  Australian Taxation Office (ATO). The Tax  Laws Amendment (2012 Measures No. 2) Bill 2012: Companies’ non-compliance with  PAYG withholding and superannuation guarantee obligations will extend the  regime to cover Superannuation Guarantee amounts.

As well as  strengthening directors’ obligations to arrange for their companies to meet Pay  As You Go (PAYG) withholding and superannuation obligations, the measure will  also help counter phoenix behaviour.

“The Gillard  Government is committed to protecting workers’ entitlements,” said Mr Bradbury.

“This  legislation makes it clear that directors have an obligation to ensure that  provision is made for the ongoing payment of workers’ superannuation.

“It also  ensures that fraudulent directors who use phoenix companies to try and avoid  their debts will be held personally liable for their PAYG withholding and  superannuation obligations.”

The  Government held further consultation with industry after withdrawing an earlier  version of the legislation in November. Following this consultation, the  Government has made amendments to the draft Bill, including to ensure that new  directors have time to familiarise themselves with corporate accounts before  being held personally liable for corporate debts and requiring the ATO to serve  director penalty notices on directors in all cases before commencing  action.

The draft  legislation also includes a new defence for directors liable to penalties for  superannuation debts where, broadly, they reasonably thought the worker was a  contractor and not an employee,” he said.

“The  measure strikes the appropriate balance between protecting workers’ entitlements  while not discouraging people from becoming company directors.”

The  Government looks forward to receiving submissions from the public about this  important reform.  Submissions close on 2 May 2012 to allow for the  introduction and passage of the legislation in the Winter 2012 sittings of  Parliament.

The draft legislation, explanatory memorandum,  and a summary of the policy changes can be found on the Treasury website.

CANBERRA 18 April 2012″

Click on the following link to go to THE TREASURY WEBSITE LOCATION WHERE DETAILS WILL BE FOUND.  The closing date for submissions regarding the proposed legislation is 2 May 2012. 

End

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GST liability on asset sales by mortgagees: Treasury review completed

 GST, Insolvency practices, Tax debts, Tax liabilities, Taxation Issues  Comments Off on GST liability on asset sales by mortgagees: Treasury review completed
Feb 172012
 

A draft of  legislation to clarify how the GST Act operates where a mortgagee in possession sells the property of a corporation has been issued for comment .

This exposure draft, issued on 14 February 2012,  follows a consultation paper issued on 7 June 2011.  The Treasury says that: “The exposure draft material has been developed taking into account comments made by stakeholders.”  

What those comments and views were will be available for public viewing on the Treasury website soon. It is Treasury practice to publish submissions on the consultation paper after the legislation has been introduced into the Parliament.

 The Treasury says that “The exposure draft legislation seeks to clarify the GST law for entities in the mortgage lending sector so that representatives of incapacitated entities will no longer need to differentiate between different provisions of the GST law and will be able to report and account under a single registration.”

The Treasury has invited interested parties to comment on the latest exposure draft.  Closing date for submissions: Tuesday, 13 March 2012. Address written submissions to:
The General Manager
Indirect Tax Division
The Treasury
Langton Crescent
PARKES ACT 2600
Email: gstpolicyconsultations@treasury.gov.au

Copies of the Exposure Draft, the Explanatory Memorandum and the original June 2011 Consultation Paper are available HERE.

My own submission to the June 2011 consultation paper was as follows:

“I make this brief submission in response to your Consultation Paper of 7 June 2011, in which it is proposed that section 195‑1 of A New Tax System (Goods and Services Tax) Act 2000 (the GST Act)  be amended to expressly provide that Division 105 operate to the exclusion of Division 58 where a mortgagee in possession or control sells the property of a corporation.  You have also asked a much broader question, which is “Is there an alternative way to better achieve the Government’s policy objective of a representative of an incapacitated entity being liable for GST for supplies of property in their possession or control belonging to a corporation?”
 
In my opinion:
  • Division 105 of the GST Act should not be amended as is proposed.
  • Where a mortgagee takes possession of most of the assets of a corporation, the GST outcome should be the same regardless of the mechanism the mortgagee employs to exercise its rights of repossession and sale.
ATO was just resolving a conflict
 
 The proposal in the Consultation Paper seems to be guided and influenced by ATO Interpretive Decision 2010/224.  However, that decision by the ATO does not seem to give much consideration to the tax and equity issues involved.  Rather, it just seems to resolve the conflict by applying “the accepted principle of statutory interpretation (which) is that a general provision would give way to the more specific provision where there is conflict between the provisions”. 
 
Not just a tax issue
 
There is a good reason why the term ‘controller’ in the Corporations Act 2001 includes a mortgagee who takes possession or control of a corporation’s property in the event of a default by the mortgagor.  Its arises out of abuses of corporate insolvency accountability principles that used to occur prior to 1993.  Back then, to deprive the ATO of its right to priority payment of outstanding group tax, and to avoid the reporting and compliance duties imposed under company law, banks and other mortgagees decided to use the “agent for the mortgagee in possession” option.  Amendments arising out of the ALRC’s 1988 General Insolvency Inquiry took the attractive advantages out of this option.
 
Even though the “agent for mortgagee in possession” and “mortgagee in possession” mechanisms are now caught by the Corporations Act, I believe we ought to carefully consider what influence the proposed change to Division 105 of the GST Act may have on the choices that mortgagees make when taking possession of a company’s assets.  (I refer here to those who have charges over most of a company’s assets.)  No doubt, if there are tax advantages or cost advantages in them, these alternative mechanisms will become popular again.  In which case we ought to consider whether this development might be to the detriment of accountability to employees, other creditors and the public. 
 
Division 58
 
It appears to me that Division 58 was drafted as it was because there would have seemed to be no logical or perceptible reason why the GST outcome of a mortgagee taking possession of a company’s assets should be determined by whether they appointed someone called a “receiver” or someone called an “agent for the mortgage”.  Personally, although I have read lots of relevant material I still cannot see why the GST outcomes should be different.  However, I can see a case for applying a provision such as Division 105 where a financier takes possession of an asset or two under right given in chattel mortgages or the like.
 
 Division 105
 
If Section 105.5 of the GST Act was intended to apply in a situation where a mortgagee takes possession of most of the assets of a company, I find this hard to see in its narrow wording.  It seems to apply to a very specific situation.  In my view Treasury should focus in this review on uncovering the meaning of Division 105 of the GST Act and defining what situation – other than those addressed by Division 58 of the GST Act – that Division 105 is trying to address, or should address.”
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Jun 092011
 

 The Government has just issued a consulation paper headed “GST treatment of property in possession of a mortgagee”. 

It is asking for views on whether “there an alternative way to better achieve the Government’s policy objective of a representative of an incapacitated entity being liable for GST for supplies of property in their possession or control belonging to a corporation”.

 The Government claims that amendments made to GST legislation in December 2009 had “unintended consequences” for the business mortgage lending sector.  It announced in May 2011 that it would amend the GST law “to ensure that the provisions dealing with the GST treatment of property in possession or control of a mortgagee operate as intended and reduce compliance costs, particularly for entities in the mortgage lending sector”.

Closing date for submissions: 6 July 2011.

For a copy of the paper CLICK HERE.

Email: gstpolicyconsultations@treasury.gov.au
Mail: The General Manager, Indirect Tax Division, The Treasury, Langton Crescent, PARKES  ACT  2600
Enquiries: Enquiries can be initially directed to Ms Joanne Kennedy
Phone: 02 6263 2079

 

NOTE:

If the proposed amendment goes ahead, it will take effect from 1 July 2012.  However, the amendment has, in reality, been made already, as a result of the ATO Interpretive Decision (ATO ID 2010/224) issued in December 2010.

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Budget 2011: Tax Office director penalty notices (DPN) extended and tightened

 Insolvency practices, Tax debts, Taxation Issues, White collar crime  Comments Off on Budget 2011: Tax Office director penalty notices (DPN) extended and tightened
May 112011
 

Under the heading “countering fraudulent phoenix activities by company directors”, the Australian Government has announced in the Budget that with effect from 1 July 2011:

  • the director penalty regime will be extended to superannuation guarantee amounts, making directors personally liable for their company’s failure to pay employee superannuation;
  • the Australian Taxation Office (ATO) will be given the power to commence recovery against directors under the director penalty regime, without providing a 21 day grace period, for certain unpaid company liabilities that remain unreported after three months of becoming due; and
  • in certain circumstances directors and associates of directors will be prevented from obtaining credits for withheld amounts in their individual tax returns where the company has failed to pay withheld amounts to the ATO.

The Budget paper describes fraudulent  phoenix activity as:

“… which involves a company intentionally accumulating debts to improve cash flow or wealth and then liquidating to avoid paying the debt. The business is then continued as another corporate entity, controlled by the same person or group and free of their previous debts and liabilities.”

This measure is estimated to result in an additional $260 million in revenue in fiscal balance terms over the forward estimates period. There is a related increase in ATO departmental expenses of $22.1 million over the same period. In underlying cash terms, the estimated increase in receipts is $245 million over the forward estimates period.

See http://www.budget.gov.au/2011-12/content/bp2/html/bp2_revenue-07.htm

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