The eye of the tax man

How important is it for a liquidator to account for funds before the tax man issues a notice of assessment. A recent Commissioner of Taxation ruling suggests that eyebrows should be raised only when the notice of assessment issues. However, the matter is on appeal to the High Court so sit tight.

The Commissioner of Taxation made a ruling on 19 September 2012¹ that liquidators have an obligation pursuant to section 254 of the Income Tax Assessment Act 1997 (Cth) (ITAA), to retain sufficient funds to pay tax which may become due, even in the absence of a notice of assessment. This position has now been changed by the Federal Court which overturned the ruling².

The practical implications for liquidators and receivers may be far reaching – however the full impact of the section 254 obligations now rests with the High Court.

Section 254 ITAA

Section 254 provides that every trustee, which includes liquidators and receivers³, is ‘authorised and required to retain from time to time out of any money which comes to him or her in his or her representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains’.⁴ Further, the liquidator is made personally liable for the tax payable in respect of the profits gained that he/she has, or should have, retained.⁵

The decision – who wins?

In Australian Building Systems Pty Ltd v Commissioner of Taxation⁶, the liquidators had sold real property resulting in a ‘CGT Event’ for the purposes of the ITAA. The Commissioner of Taxation claimed in the private ruling that the liquidators were required under section 254 to account for the CGT Event despite a notice of assessment not having been issued. A win for the tax man. On appeal, Justice Logan held that the obligation of section 254 can only be imposed if an assessment has been issued. A win for the liquidators.

Commissioner doesn’t have priority…yet

A key issue that will keep liquidators on the edge of their seats pending the High Court ruling, is whether the Commissioner will have priority in the queue of creditors once an assessment is issued. The application of the Commissioner’s ruling, addressing the effect of the operation of section 254, remains unclear pending the High Court decision.

In the meantime, liquidators and receivers should be wary of making distributions prior to a notice of assessment being issued.

Litigation costs – ducking under a high bar

¹ (TD2012/D6 and TD2012/D7).
² Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133.
³Income Tax Assessment Act 1936 (Cth) s 6.
⁴ Income Tax Assessment Act 1936 (Cth) s 254(1)(d).
⁵ Income Tax Assessment Act 1936 (Cth) s 254(1)(e).
⁶ [2014] FCAFC 133.