Apr 272015

{UPDATE 10/12/2015: The ATO lost in the High Court case. See my post of 10/12/2015.}

On 17 April 2015 the High Court granted special leave for the Australian Taxation Office to appeal the decision by the Full Federal Court in the Australian Building Systems case.

Previously … The liquidators of Australian Building Systems Pty Ltd disposed of company property for a capital gain. The Commissioner of Taxation claimed that the liquidators were required to retain funds from the sale proceeds to pay tax arising from the gain. The Federal Court (21/2/2014) and the Full Federal Court (8/10/2014) rejected the Commissioner’s position, holding that the payment and retention obligations in s 254 of the Income Tax Assessment Act arose only when a notice of assessment was issued by the Commissioner.

Commenting on the High Court’s grant of leave to appeal against those decisions of the Federal Court, David Pratley of Minter Ellison, Lawyers, says:

“Regrettably, the tax obligations of insolvency practitioners will continue to be uncertain for some time. It will likely be at least 12 months before the High Court hands down its decision on the appeal. If the appeal is allowed it would generally have retrospective application. Hence practitioners that rely on the Full Federal Court decision in releasing funds could be exposed to the risk of personal liability.”

Extracts from the transcript of the application for special leave

Below are extracts I have made from the High Court transcript number [2015] HCATrans 082.  CLICK HERE to see full transcript.  The application for special leave to appeal was before KIEFEL J and KEANE J. The full name of the case is : Commissioner of Taxation v Australian Building Systems Pty Ltd  (In Liquidation); Commissioner of Taxation v Ginette Dawn Muller and Joanne Emily Dunn as Liquidators of Australian Building Systems Pty Ltd (In Liquidation) [2015] HCATrans 82 (17 April 2015)

MR J T GLEESON, SC (representing the Commissioner of Taxation):

…. So, in practical terms, a commissioner contends that if the liquidator sells a block of land on a certain date in the year for, let us say, a $10 million gain, the section requires the liquidator as a trustee to ensure that sufficient moneys remain in his or her hands to meet the tax when it is assessed at some future point. The obligation cuts in because the gain has been derived and it has its particular force at the time the liquidator is contemplating paying away money from the fund. So, in the example I have given, assuming they were the only facts known to the liquidator and the corporate tax rate was 30 per cent, the liquidator before making distributions to creditors or contributories would always make sure $3 million remained in the bank to pay the tax.

KIEFEL J: Do you say the obligation arises upon the receipt on each occasion of income or each transaction by which profit or gain is – – –

MR GLEESON: Yes, it arises because the derivation under paragraph (a), which is treated as being a derivation by the trustee or agent, and he thereby is bound under the obligation for the very good purpose that the whole point is so that the money remains there rather than the liquidator pay it away and then, when an assessment is later issued, the Commissioner would have to try and chase the creditors or the contributories.


KIEFEL J: What do you say – I think you have dealt with this in your reply – to the respondents’ argument that your construction leads to difficult results about how the liquidator has to estimate exact amounts?

MR GLEESON: It may or may not require attention by the liquidator to those questions. If it does, that does not call for any different construction, because the point of being a liquidator or a trustee or an agent, by taking on that responsibility the Act has placed upon you the duty to sufficiently inform yourself of the circumstances of the trust estate or the principal’s affairs with which you are acting in a representative capacity.

What the liquidator does – I have given a simple example where the liquidator says, “I must keep $3 million back from the creditors”, and if later on in the year there are further transactions on the tax account which the liquidator has information which might adjust the amount that he or she needs to keep, he or she makes an adjustment. But the critical thing is, the purpose of it is, do not pay away the money which needs to be there to make sure the Commissioner can recover the tax. By taking on the duty of trustee or agent you take on a statutory responsibility to ensure that is done. May it please the Court.


MR S DOYLE, QC (representing the liquidators of Australian Building Systems Pty Ltd Acn 094 238 678 (In Liquidation)):


The respondent’s contention is “due” there means payable and our learned friend’s contention is that it means “owing” and it turns therefore on the question of whether there need be or need not be an assessment.

The construction for which the respondent contends, we would submit, is plainly right. It is required by the language of 254(1)(d), which speaks of a sum which is due but, more importantly, of a sum which will become due, not as the case against us requires that it be understood as if it might become due because our learned friend’s capital gain tax case is a good example upon the sale for a capital gain one can postulate that tax might become due, one cannot say that tax will become due without having regard to the totality of the affairs of the principal, the underlying taxpayer.

Additionally, the construction for which we contend gives defined content to the obligation to retain sufficient to pay because it is only when there is an assessment that one can know what that figure is. Our learned friend says against us that a liquidator has an obligation to understand the affairs of the company or a trustee has an obligation to understand the estate assets. This is not a question of diligence. This is a question of certainty. There is a defined obligation which requires one to be able to say, what is the sum sufficient to pay for the tax? The construction for which the respondent contends – which was favoured below – permits that to occur; the opposite construction does not.

KIEFEL J: Are you saying that the liquidator should only be required to be in a position to understand the overall obligations to pay tax on behalf of the company for the whole year rather than it being considered on a transactional basis?

MR DOYLE: It can only be when there is an assessment made. Assuming there are other affairs of the company within that period, it is only when there is an assessment issue that one can say that there is tax which will become due and that gives definition to the content of the obligation to retain a sum sufficient to pay it. It also gives content to – I hope I have answered your Honour’s question.



…. To answer your Honour Justice Keane’s question, it is right to say the liquidator conducts the affairs of the company and has the obligation to put the tax return in. But our learned friend’s contention is the content of the obligation to withhold the money from the principal and to retain it under relevantly (d) and (e) arises long before that is done – arises at the moment of each receipt as it was put to you. That requires one to be able to say, the statute imposes a definable obligation on someone to withhold – as is the case here – a sum sufficient to pay the tax due upon a sale which gives rise to a capital gain in circumstances where there is no sum which can be defined as the tax due, or will become due, because of the other uncertainties which will influence the amount, if any, of tax which will become due.

That is, in our submission, the real difficulty with the case which is put by the applicant. It requires you to be able to say that when a liquidator makes a sale at a capital gain, he is obliged to do something to retain that money – that is, obliged by the Tax Act – forgetting his obligations as a liquidator – obliged by the Tax Act to do something with that money in circumstances where it is not possible to say how much. It is not possible to say there will, in fact, be tax due because subsequent events may mean there is no tax due.


KIEFEL J: Yes, there will be a grant of special leave in this matter. The Court notes the Commission is undertaking to pay the respondent’s costs, regardless of the outcome in this matter. The parties should obtain a copy of the directions for the filing of submissions with respect to this matter and, of course, to adhere strictly to the timetable there set out. Time estimate? No more than a day? ….


Links to previous post about tax on this blog site:

“Post-appointment income tax debts of liquidator” – 10 October 2010
“Taxing capital gains made during liquidation” – 15 October 2010
“Legal opinion warns external administrators about personal liability for company taxes” – 16 November 2010
“Decision only partly resolves tax puzzle for liquidators” – 7 March 2014
“ATO appeals against decision in Australian Building Sysytems case” – 19 March 2014
“Tax Office loses to liquidators in test case regarding tax obligations” – 10 October 2014