ION insolvency income tax refund is held up

 Priority Debts, Tax debts, Tax liabilities, Taxation Issues  Comments Off on ION insolvency income tax refund is held up
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 on Taxing capital gains made during liquidation
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.

Insolvency Inquiry: Treasury’s Guide

 Australian Senate 2009-2010, Official Inquiries  Comments Off on Insolvency Inquiry: Treasury’s Guide
Aug 182010
 

In December 2009 the Australian Senate Economics Committee invited the Treasury Department to make a submission to its inquiry into liquidators and administrators. Treasury obliged in February 2010 by pointing the Senate Committee to some useful background material. A copy of  Treasury’s covering letter is produced below.  I have added a few comments to improve and update the internet links.  [The Committee subsequently questioned Treasury and requested more information. Copies of these exchanges will be included in a future post to this site.]

An overview of the relevant legal framework is attached for the assistance of the Committee.  There are a number of completed reviews and reports that deal with many of the issues encompassed by the Committee’s terms of reference. The Committee may find it useful to review these in the course of the Inquiry.

Corporate Insolvency Laws: A Stocktake

The Parliamentary Joint Committee on Corporations and Financial Services (PJC) released the Corporate Insolvency Laws: A Stocktake report in 2004. The PJC recommended that the Australian Securities and Investments Commission (ASIC) work with professional bodies to encourage the adoption of best practice standards for remuneration and the prompt disclosure of the basis of fees charged by liquidators and administrators. A copy of this report is available at:

http://www.aph.gov.au/senate/committee/corporations_ctte/completed_inquiries/2002-04/ail/report/ail.pdf 

Review of the Regulation of Corporate Insolvency Practitioners

A review of the regulation of corporate insolvency practitioners was completed in 1997 (Report of the Working Party on the Review of the Regulation of Corporate Insolvency Practitioners, June 1997). The recommendations contained in the Report of the Working Party cover eight areas: 

  • regulatory system;
  • registering authority for insolvency practitioners;
  • registration requirements; discipline and remedial supervision;
  • general supervision; appointments and qualifications;
  • remuneration of insolvency practitioners; and
  • administrative requirements for controllers.

A copy of the Report is available on the Treasury website at:

www.treasury.gov.au/contentitem.asp?Navid=013&ContentID=295   

The following materials have also been issued by ASIC or by the insolvency Practitioners Association.

•             Guide to Fees of insolvency practitioners

•             Approving Fees: a Guide for Creditors

Copies of these documents can be downloaded from http://www.asic.gov.au/    NOTE BY pjk:  A more useful link is the following:

http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Approving_fees_guide_for_creditors.pdf/$file/Approving_fees_guide_for_creditors.pdf 

Insolvency Practitioners Association  

The IPA Code of Professional Practice (The Code) addresses a range of matters dealing with the conduct of insolvency practitioners. This includes setting out a series of principles that should be followed in regard to practitioner. Included in the Code is a Creditor Information Sheet for approving remuneration in external administrations. A copy of the Code can be downloaded from http://www.ipaa.com.au/.  

Listed below are a number of remuneration and conduct related reforms passed or initiated in recent years. 

Corporations Amendment (insolvency) Act 2007

These amendments were the first significant change to Australia’s insolvency laws since 1993 and focused on improving outcomes for creditors, deterring misconduct by company officers, improving regulation of insolvency practitioners and voluntary administration. These reforms introduced the requirement for liquidators and administrators to complete Declarations of Relevant Relationships. Administrators are also required to complete Declarations of Indemnities. In relation to remuneration, there was a codification of principles and improvements in the information available to creditors and the Court. This included the Insertion of criteria into the Corporations Act for the Court to consider when assessing the reasonableness of an external administrator’s claim for remuneration.  

Personal Insolvency Reform

The Bankruptcy Legislation Amendment Bill 2009 was introduced in the House of Representatives on 28 October 2009. The Bill aims to provide a more streamlined process for fixing trustee remuneration and a more transparent process for reviewing remuneration. The Attorney‑General’s Department has released a discussion paper, Amendments to the Bankruptcy Regulations 1996: Remuneration of Registered Trustees, which is available at http://www.ag.gov.au/

 International resources and guidelines 

The Office of Fair Trading (OFT) in the United Kingdom has recently launched a study into Corporate Insolvency. The study will look at the market structure, regulation, remuneration and competition between firms and practitioners. Initially, this will involve collection and analysis of data from interested parties including accountancy and law firms, government, regulators and industry. Further investigations will depend on the results of the initial investigation. The OFT expect to complete their investigation by the end of 2010. Information regarding this study can be found at:

 Final report of OFT   http://www.oft.gov.uk/shared_oft/reports/Insolvency/oft1245

 In April 2001 the World Bank released a detailed statement of principles and guidelines for effective insolvency and creditor rights systems: www.worldbank.org/ifa/ipg_eng.pdf   

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Retaining Books and Records Post-Liquidation

 Records Management, Retention and Disposal  Comments Off on Retaining Books and Records Post-Liquidation
May 242010
 

Is it time for a “Guideline for Record Retention and Disposal” in corporate insolvency administration?

In Australia the insolvency practitioners association (the IPAA) has a Code of Professional Practice (COPP) of over 100 pages.   A lot of it refers to the importance of maintaining proper records, especially for calculating fees and documenting proceedings at meetings of creditors.  But there is no discussion or recommendation about what to do with books and records after the insolvency appointment ends.

The corporations law requires that books and records be retained for 5 years from the date of a company’s deregistration.  However,  when a company has been wound up under a creditors’ voluntary winding up, and creditors have directed that the books and records may be destroyed within those 5 years, the law permits early destruction in accordance with that direction provided the Australian Securities and Investments Commission (ASIC) gives its consent. [Corporations Act 2001, sec. 542]

Naturally, the IPAA expects insolvency administrators to comply with the law.  But the insolvency law  is dangerously  imprecise because it lumps together the  “books of the company and of the liquidator”.  

Insolvency practitiones should be asking themselves what they should regard as the meaning of the phrase “all books of the company and of the liquidator that are relevant to affairs of the company at or subsequent to the commencement of the winding up” . [sec. 542(1)] [emphasis added]

If there are practitioners who believe that once early destruction has been officially authorised by ASIC, this wording gives them carte blanche to destroy every record to do with the liquidation as soon as the shortened period has ended, a few words from the IPAA about exercising caution and prudence might be worthwhile.

In my view, if a shortened period for retention of the books and records is authorised  –  and that period is less than, say, 3 years  –  practitioners should nevertheless retain the “core” books and records of the liquidation for a longer period .

 In deciding what are the “core” books and records, the liquidator should take into account particular events and problems occurring during the liquidation, and bear in mind the normal professional responsibility to possess evidence supporting transactions and justifying decisions. 

 Such core books and records may include:

  • Liquidator’s accounting records, e.g., bank statements, EFT transaction statements, cheque books/stubs, payment and receipt vouchers, employee and pay records, journals and ledgers.
  • Liquidator’s budgets and financial statements.
  • Liquidator’s checklists, diaries, project management tools, working papers and timesheets.
  • Liquidator’s lists of books and records received, showing where they are stored.
  • Liquidator’s notes of significant telephone conversations and events at meetings.
  • Important written contracts.
  • Accident and worker’s compensation records.
  • Minutes of meetings, attendance registers and proxies.
  • Proofs of debt.

By not pointing out to insolvency practitioners the dangers present in early indiscriminate destruction, the IPAA may be doing the profession a disservice by leaving its membership vulnerable to accusations of  questionable or unprofessional behaviour.

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