2 April 2019
The ATO has released a draft tax determination, TD 2019/D2, dealing with one aspect of the obligations of a receiver in handling money where a future tax liability may be assessed.
The tax rules dealing with liquidators, receivers and administrators are complex, often uncertain, and have the potential to make the individuals acting in that capacity personally liable for the entity’s tax bill.
One of the rules they are subject to is section 254 ITAA 1936, which applies to trustees and agents. Under section 254(1)(d), a receiver acting as agent for the debtor (or a liquidator or administrator) is ‘required to retain … out of any money which comes to him or her … so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains’ they derive in their representative capacity. Under section 254(1)(e) they are made personally liable for the tax to the extent of any amount they have retained, or should have retained.
There was historically some uncertainty as to whether this retention obligation covered only amounts for tax already assessed, or also amounts that are expected to become due pursuant to future assessments.
This is the nub of the ATO’s concern: an external administrator is appointed in August, they sell assets of the company in September which produces taxable gains, the proceeds are collected in October, the income year ends in the following June, the tax return is lodged in December and only then is the assessment (or deemed assessment) made, by which time the proceeds may have already been disbursed.
Unsurprisingly, the Commissioner’s historic view was that section 254(1)(d) extended to amounts that are expected to become due pursuant to future assessments, and a large number of private rulings to this effect were issued over a number of years.
One liquidator challenged such an ATO private ruling and the dispute ultimately ended up in the High Court: COT v Australian Building Systems Pty Ltd (In Liquidation)  HCA 48 (ABS). The majority of the High Court in ABS held, broadly, that the retention obligation only arises after an assessment or deemed assessment has been made. In response, the Commissioner issued a Decision Impact Statement (DIS) stating that he would accept that position and also withdrew two contrary draft tax determinations.
The drafting of the new tax determination is somewhat oblique, but effectively accepts the High Court’s decision in ABS.
Whether the ATO will push for the legislation to be amended is unclear. They could in theory seek to address the issue by making special assessments (under section 168 ITAA 1936) when they are aware of significant assets being sold under receivership, although in practice this may be difficult.
If there is an assessment before the money has been disbursed, whether the Commissioner can actually collect the tax will depend on creditor priority. The draft determination does not deal with this issue in detail, but puts receivers on notice that the Commissioner believes than in some instances he could have priority over other unsecured creditors or even secured creditors.
Comments on the draft are due by 26 April 2019. Please contact us if you would like to discuss.