Liquidators not personally liable for CGT prior to issue of notice of assessment
On 8 October 2014 the Full Court of the Federal Court delivered judgment in favour of the liquidators in the much anticipated Australian Building Systems appeal1 (Appeal).
Barring the Commission of Taxation seeking special leave to appeal to the High Court, liquidators (and other trustees, including receivers and managers) can now take comfort that they are not personally liable for failing to hold sufficient funds for any anticipated CGT liability, in the absence of a notice of assessment.
It remains an open question whether the Commissioner obtains priority of payment ahead of ordinary unsecured creditors as a result of the operation of the relevant legislation in circumstances where a notice of assessment is issued and the liquidator is in funds to pay the assessed liability.
In summary, s 254 of the Income Tax Assessment Act 1936 (1936 Act) imposes personal liability on trustees (including liquidators and receivers), to remit tax. Sub-section 1(d) provides:
[the trustee] is hereby 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, profit or gains.
The key issue in the primary decision before Logan J and the Appeal, was the meaning of the words ‘which is or will become due’, and consequently, whether a notice of assessment was required to be issued by the Commissioner before the liquidators were personally liable to remit CGT.
In the Appeal, Edmonds J (with whom Collier J agreed), after reviewing the legislative history of s 254 of the 1936 Act, held:
- The words ‘which is or will become due’ in s 254(1)(d) are to be interpreted in light of the purpose of s 254 as a ‘collecting section’, meaning that s 254 does not operate to render a liquidator liable to be assessed for tax if the liquidator is not otherwise liable to be assessed under the provisions of Div 6 of Pt III of the 1936 Act.
- Prior to the issue of an assessment, there is no tax which is ‘due’ by the liquidators, in the sense of ‘owing’. Tax is only ‘owed’ when a notice of assessment is issued .
- To hold otherwise, has a ‘cascade effect’, in that the amount required to be retained prior to the end of the year income could never be income to which the company in liquidation was presently entitled. That is, it would create a liability to tax for the liquidators where otherwise none would exist – see .
Davies J, while agreeing with Edmonds J, added, relevantly in response to the liquidators’ and Commissioner’s agreement that any assessment would issue to the company (rather than the liquidators):
- Any post appointment tax liability, will be assessed to the liquidator in his or her representative capacity, rather than to the company .
It remains to be seen whether the Commissioner agrees with Davies J’s analysis and will issue assessments to liquidators (and other trustees) under s 254 of the 1936 Act, rather than the primary taxpayer.
In any event, as a result of the judgment in the Appeal and once the 28 day period to seek special leave to appeal expires on 6 November 2014, a receiver who has already remitted funds to his or her appointor (the secured creditor) prior to the issue of a notice of assessment will not be personally liable for the assessed tax.
A liquidator is similarly protected from personal liability under s 254 of the 1936 Act, save to note that a liquidator cannot finally wind up a company (and disburse any funds) without dealing with the Commissioner as a creditor. The live issue is whether the Commissioner claims as an ordinary unsecured creditor, or potentially, as a result of the requirement that the liquidator personally pay tax once a notice of assessment is issued, as a priority creditor because any assessed tax is arguably now an ‘expense’ of the liquidation with a higher priority under s 556 of the Corporations Act 2001. This issue is still to be determined by the courts.
1Commission of Taxation v Ginette Dawn Muller and Joanne Emily Dunn as liquidators of Australian Building Systems Pty Limited (in liquidation)  FCAFC 133.
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