Section 254 of the Income Tax Assessment Act 1936 sets out the obligations, liabilities and rights of agents and trustees. An agent or trustee is answerable as taxpayer for things required to be done by the tax Acts in respect of income, or any profits or gains of a capital nature, derived by the agent or trustee in his/her representative capacity or derived by the principal by virtue of the agency. This includes the payment of tax. An agent or trustee can be personally liable for non-compliance with this requirement.
On 19 May 2021, the Australian Taxation Office (ATO) released Taxation Determination TD 2021/5 explaining the Commissioner’s view of a receiver’s obligation to retain money under section 254 where the entity in receivership has an assessed post-appointment tax liability. TD 2021/5 only applies to receivers appointed as agent for the entity in receivership. Court-appointed receivers are not within the scope of TD 2021/5. TD 2021/5 replaces Draft Taxation Determination TD 2019/D2.
TD 2021/5 resolves some of the uncertainty as to the Commissioner’s approach since the High Court handed down its decision in FCT v Australian Building Systems Pty Ltd (in Liquidation) [2015] HCA 48. In 2016, the Commissioner withdrew Taxation Determinations TD 2012/D6 and TD 2012/D7 following the High Court decision in Australian Building Systems.
In Australian Building Systems, the liquidators of Australian Building Systems arranged for the sale of property which gave rise to a capital gain. The High Court considered whether, prior to an assessment for tax being made in respect of the derivation of income, profits, or gains, section 254 requires and authorises the agent or trustee to retain money in their hands sufficient to pay any tax on the income, profits, or gains. The High Court held that the retention obligation in section 254 does not arise until Commissioner makes an assessment.
In TD 2021/5 the Commissioner says that when income, profits or gains of a capital nature are derived by an entity through the actions of a receiver acting as the entity’s agent, the receiver must retain enough money to pay the tax that has been assessed on the income, profits or gains. Once an assessment has been made, the obligation to retain remains ongoing. Importantly, the amount that the receiver must retain does not exceed the amount of the liability that the Commissioner can legally recover from the entity.
The examples in TD 2021/5 have been changed from TD 2019/D2 to clarify that a receiver will generally be entitled to pay secured creditors before retaining an amount for payment of tax as the Commissioner does not have a legally-enforceable right to be paid before a secured creditor. Example 2 (below) illustrates this.
Ben's Balloons Pty Ltd (Ben's Balloons) carries on a balloon manufacturing business. It has a loan facility from Big Bank Co secured by a fixed and floating charge over all of Ben's Balloons' assets. Ben's Balloons defaults on the loan at the beginning of the 2018 income year. As a result, Big Bank Co appoints Dipika as receiver and manager of the secured property. The deed of appointment specifies Dipika as agent for Ben's Balloons.
After her appointment, Dipika continues to trade on a 'business as usual' basis while seeking a purchaser for the business. Ben's Balloons makes trading profits during this time. Although Dipika, as receiver and manager, has management and control of Ben's Balloons' income, it is Ben's Balloons that derives the income, not Dipika. Ben's Balloons derives the income through Dipika's agency. Dipika then starts a wind-down phase in which she realises the vast majority of the company's stock, which was subject to Big Bank Co's security interest. A few months later, the creditors resolve that Ben's Balloons be wound up in insolvency and liquidators are appointed. By this time, Dipika has realised most of Ben's Balloons' assets and is in a position to retire as receiver and manager.
Ben's Balloons lodges an income tax return for the 2018 income year. The trading profits derived by Ben's Balloons during the receivership are taken into account in calculating the company's taxable income, as are capital gains made on the sale of Ben's Balloons' assets. The Commissioner assesses the income tax payable on the taxable income. Dipika is obliged to retain (out of money that has come to her as receiver of Ben's Balloons) enough money to pay the tax assessed to the extent the Commissioner can legally recover that tax.
Dipika discharges Big Bank Co's secured debts out of the proceeds she received from the disposal of Ben's Balloons' fixed assets. The trading proceeds and any remaining sale proceeds make up the surplus. It is out of this surplus, reduced by any other claims with priority over the unsecured tax debt, that Dipika must retain enough money to pay the amount of the assessed income tax.
Dipika is personally liable for the tax assessed on the trading profits and capital gains to the extent of any amount that she has retained, or should have retained, after having been assessed. She is not otherwise personally liable for the tax. The Commissioner may seek to recover the tax debt from Dipika, to the extent of her personal liability, which is limited to the amount the Commissioner can legally recover from the entity. The Commissioner does not have a legally-enforceable right to be paid income tax ahead of Big Bank Co.
Dipika pays the amount of tax that the Commissioner is legally entitled to using the retained funds because [section 254] makes her answerable as taxpayer for all things required to be done by the ITAA 1936, including the payment of tax.
However, TD 2021/5 only applies to receivers appointed as agent for the entity in receivership and does not apply more broadly to (say) liquidators or trustees in bankruptcy (despite section 254 applying to all agents and trustees (except for a mortgagee in possession)). Further, TD 2021/5 does not include additional examples on the interaction of the status of the ATO as against secured creditors and situations where assessments have, and have not, been made prior to funds being distributed or the situation where an assessment is rendered and there are no longer any fund available for the receiver to retain.
In summary, while TD 2021/5 is helpful, a broader scope would have been useful.
To discuss or for more information, please contact:
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Lucy Liang
Lawyer
T +61 9611 0131
E lliang@sladen.com.au
