Guidance for receivers on post-appointment tax liabilities

The Commissioner of Taxation (Commissioner) recently issued draft taxation determination TD 2019/D2 (TD 2019/D2) dealing with the important question of a receiver’s obligation to retain money for post-appointment tax liabilities. A link to TD2019/D2.

The Commissioner’s guidance should be welcomed by receivers as it resolves the uncertainty as to the Commissioner’s approach since the High Court of Australia (HCA) handed down its 2015 decision in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liquidation)(ABS).[1]

Background

Under section 254 of the Income Tax Assessment Act 1936 (ITAA 1936), an agent or trustee (which includes a receiver) is “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”.[2]  A receiver can be personally liable for failing to comply with this requirement.[3]

In Taxation Determination TD 2012/7, the Commissioner controversially ruled that a “receiver who is an agent of the debtor is required … to retain from the sales proceeds [on disposal of a CGT asset as agent for the debtor] … sufficient money to pay tax which is or will become due as a result of disposing of [the asset]”.

However, in ABS, the HCA held that the obligation under section 254 did not arise unless and until the Commissioner issued an assessment.[4] 

In withdrawing TD 2012/7, the Commissioner acknowledged that the ABS decision was inconsistent with the views in the tax determination and that he would “look to provide a replacement public advice product … or to test the Commissioner’s view in an appropriate case”.

The draft determination

In TD 2019/2, 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”.[5] 

Importantly, the Commissioner accepts that the “amount that is retained does not have to exceed the amount of income tax that can be legally recovered by the Commissioner from the entity”.[6]  The Commissioner notes that, as receivers are not subject to section 556 of the Corporations Act (which provides a priority for expenses of a liquidator, which might include tax[7]), any “tax liabilities incurred by a taxpayer after a receiver is appointed are simply unsecured debts with no greater priority to payment than any other unsecured debt”.[8]  As a result, the Commissioner acknowledges that, even after a tax assessment has been issued, if there is “no enforceable right [for the Commissioner] to be paid before a secured creditor”, “the receiver’s retention obligation under section 254 relates to the amount that the Commissioner is entitled to be paid after the secured creditors are paid” and that this may be zero in some situations.[9]

Impact for receivers

As noted at the outset, the new guidance should generally be welcomed by receivers as it will often leave them free to realise assets of a debtor company to pay back the secured creditors that appointed them, without having to be concerned about potential personal exposure for the consequential tax liabilities.

However, receivers will need to be mindful of any assessments which are made by the Commissioner, or which are deemed to be made.  Under the full self-assessment regime which applies to companies, an assessment is deemed to arise when a company lodges its tax return.[10]  Relevantly, paragraphs (a) and (b) of section 254 of the ITAA 1936 provide that an agent or trustee (including a receiver) is responsible for filing a company’s tax return, although the Commissioner would generally accept that he will look to the liquidator for such returns if the liquidator has control of the company’s financial records.[11]

Also, there may be situations where the Commissioner does have an enforceable priority.  An example is for the annual vacancy charge on residential property owned by a foreign person (which can include a foreign controlled Australian company) which is vacant for more than 6 months in a year.  Section 115K Foreign Acquisitions and Takeovers Act 1975 creates a statutory charge over the land for any unpaid fee and penalties, which is given priority over any other interests (including registered mortgages) by section 115M.

Lastly, to the extent that the funds received from post-appointment trading, or the sale of the debtor company’s assets, exceed the amount owed to secured creditors, receivers will not need to retain the excess funds after setting aside sufficient amounts to pay taxes actually notified by the Commissioner[12], but may retire and transfer the excess funds to the liquidator or, if the company is not in liquidation, to the company (assuming of course that the receiver has no outstanding personal liability pursuant to s419 or s419A of the Corporations Act).

Comments on the draft determination are open until 26 April 2019.  Once finalised, the determination is proposed to apply to arrangements commenced on or after 27 March 2019.