priority debts – ░░░ INSOLVENCY INTERFACE

Tax Office loses to liquidators in test case regarding tax obligations

Capital Gains Tax, CGT, Corporate Insolvency, court decisions, Insolvency Law, Tax debts, Tax liabilities, Taxation Issues Comments Off

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.

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

ATO appeals against decision in Australian Building Systems case

Capital Gains Tax, CGT, Corporate Insolvency, court decisions, Insolvency Law, Practitioners Association (IPAA), Priority Debts, Returns, Tax debts, Tax liabilities, Taxation Issues Comments Off

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.

Decision only partly resolves tax puzzle for liquidators

Capital Gains Tax, Case Reports, CGT, Corporate Insolvency, court decisions, Insolvency Law, Insolvency practices, law reports, Priority Debts, Returns, Tax debts, Tax liabilities, Taxation Issues Comments Off

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 discussion

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.

Employers and unions trade blows on GEERS scheme

Corporate Insolvency, Employee Entitlements, GEERS, Personal Bankruptcy Comments Off

Jul 172012

(From SCR: Supply Chain Review. July 12, 2012 – http://www.supplychainreview.com.au/news/articleid/80211.aspx )

“The General Employee Entitlements and Redundancy Scheme (GEERS) has become an industrial relations and regulatory football, two weeks after its near-death experience in the High Court.

Federal Employment and Superannuation Minister Bill Shorten fast-tracked GEERS payment to 1st Fleet employees amongst others two months ago but industry and union heads are now engaging in robust debate on the issue sparked by a recent surge in payouts.

The latest into the fray is Australian Industry Group (Ai) CEO Innes Willox, who lambasted the Australian Council of Trade Unions (ACTU) over accusations that employers were milking GEERS.

“Union assertions that the $1 billion paid out to the employees of insolvent employers under the scheme over the past decade is money taken by employers from their employees is arrant nonsense,” Willox says.

ACTU Secretary Dave Oliver, in a statement reportedly in tune with the thinking in Shorten’s office, put the issue at the door of managers.

Oliver has called for tougher penalties for company directors who breach corporations laws, including trading insolvent or failing to make superannuation contributions, saying the taxpayer should not have to pay for employer malfeasance.

“The amount of money being covered by taxpayers highlights the important role this scheme plays, but also backs up union calls for greater penalties,” he says.

“It should be the responsibility of employers to make provision for workers’ entitlements, and directors who run their companies into the ground with no funds left for workers should be punished.

“These entitlements have been earned over years of loyal service, and employers have a legal obligation to pay them.

“But all too often businesses go broke leaving nothing in the bank. Frequently, companies treat workers’ entitlements as a kind of unsecured, interest-free loan – without telling the workers and often with no intention of ever paying it back. It is left to taxpayers to come to the rescue.

“This type of behaviour must be punished through tougher penalties.”

But Willox hit back, describing the union imputation as “deserving of the strongest condemnation”.

“Under the Corporations Act, directors have a legal duty not to trade insolvently and penalties for individuals of up to $220,000 or imprisonment for up to five years apply,” Willox says.

“Directors can also become personally liable for debts incurred while the company is insolvent.”

He points out that, under the Act, to enter into an agreement or transaction with the intention of avoiding the payment of employee entitlements is an offence.

A court can order those convicted to compensate employees who have suffered loss or damage because of the agreement or transaction.

Penalties of up to $110,000 or imprisonment for up to 10 years apply.

“When companies go broke there are no winners,” Willox says.

“Often directors and business owners experience great hardship.

“Employees are in a different position; they have the GEERS scheme to prevent hardship in these unfortunate circumstances.”

He adds that Ai had warned the Government in January 2011 that increasing redundancy protection from a maximum of 16 weeks to an entitlement of up to four weeks per year of service “could create a huge budget shortfall” if even one large company with a generous redundancy scheme failed.

Payment Priority for Child Support Debts

Priority Debts Comments Off

Sep 102010

Australia’s Child Support Agency (CSA) is reminding insolvency practitioners of the status of pre-appointment child support deductions.

CAS says that unremitted child support deductions withheld from an employee’s wages by an insolvent employer must be paid ahead of most other debts, whether preferential, secured or unsecured.

It is pointing out that liquidators, receivers, receivers and managers, company administrators and deed administrators are “trustees” as defined in section 4 of the Child Support (Registration and Collection) Act 1988 (the CSRC Act).

The CSRC Act makes trustees liable to pay the child support debt to CSA (Section 50(1)). It also endows such debts with priority over other preferential, secured or unsecured debts (S.50(2)(a)).

CAS says that this section takes precedence over the priority provisions of the Corporations Act 2001 because it is made applicable “notwithstanding any other law of the Commonwealth or any law of a State or Territory”.

Fortunately for insolvency practitioners/trustees the CSRC Act ranks the trustee’s remuneration ahead of the child support debt (S.50(2)(a)). Trustees remuneration is specifically included in the only class of costs granted priority over child support debts, namely “costs, charges or expenses of the administration of the estate or of the winding up of the company that are lawfully payable out of the assets of the estate or of the company”.

Also specifically included in this special class are the “costs of a creditor or other person on whose petition the sequestration order or the winding up order (if any) was made”.

To obtain this priority both the remuneration and the costs of the petitioning creditor must be “lawfully payable out of the assets of the estate or of the company”. Presumably this means that they must satisfy all relevant requirements in the Corporations Act 2001.

According to the Insolvency Practitioners Association of Australia (IPA), CSA is seeing an increase in letters from liquidators claiming, incorrectly, that a child support debt has no priority.

Notice of appointment and clearance from CSA

Although there appears to be no specific law requiring a “trustee” to notify CSA of his or her appointment, it should be done:

where the trustee is aware that a current or former employee or contractor of the company is or has been making child support payments to CSA; and
where there is amongst the company’s records a letter from CSA titled either Schedule of Child Support Deductions or Notice Pursuant to Section 72A.

Even if such circumstances don’t appear to exist but the company has used or is using the services of employees or non-corporate contractors, trustees should – with the possibility of a high priority debt existing – take the precaution of informing CSA of the insolvency appointment and requesting written advice as to whether CSA has anyone on its books for the company.

According to Ms Sue Saunders, Assistant Director of CSA’s Employer Services division, who I spoke to today, CSA is happy to check its records and respond to such requests.

END OF POST

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