Tax liabilities – Page 2 – ░░░ INSOLVENCY INTERFACE

Insolvency Practitioners Assoc urges member caution on tax liability

Practitioners Association (IPAA), Priority Debts, Tax debts, Tax liabilities, Taxation Issues Comments Off

Mar 102011

Australia’s Insolvency Practitioners Association (IPA) has told members to:

“be aware that the sale of an asset of the insolvent company or individual may trigger a capital gains tax (CGT) liability. The practitioner then needs to determine the status of that liability. The law in relation to where CGT liability falls on the sale of an asset by an insolvency practitioner is not clear”.

The warning appears today (March 10, 2011) on the IPA website.

The issue of post-appointment tax debts has been highlighted on this blog as follows:

o Post-appointment income tax debts of liquidator (October 10, 2010)

o Taxing capital gains made during liquidation (October 15, 2010)

o Legal opinion warns external administrators about personal liability for company taxes (November 16, 2010)

The IPA’s complete statement reads:

“Capital gains tax – need for caution in insolvency administrations

Insolvency practitioners should be aware that the sale of an asset of the insolvent company or individual may trigger a capital gains tax (CGT) liability. The practitioner then needs to determine the status of that liability. The law in relation to where CGT liability falls on the sale of an asset by an insolvency practitioner is not clear.

For example, in the case of a controllership, the liability may be a liability of the company itself, or a personal liability of the controller. In the case of a bankruptcy, the CGT liability may fall on the bankrupt or become a liability of the trustee or simply be a post-bankruptcy debt.

The IPA has been in discussions with the ATO for some time in an attempt to come to a correct position. The ATO is yet to give its view or issue any ruling.

The IPA will advise members of any developments in clarifying the legal position with the ATO. In the meantime, members should be aware of this issue and take their own advice as necessary in relation to CGT liabilities in their administrations.

Any questions, please contact us.”

It would be interesting to know what the IPA’s point of view is on this tax issue. Presumably there is disagreement between it and the ATO as the two of them work together to “come to the correct position”. More than likely the point of contention concerns the personal liability of external administrators.

Legal opinion warns external administrators about personal liability for company taxes

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

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.

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.

——————————————————————————————–

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.

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.

Newer Entries