CGT liability for receivers and liquidators update Commissioner’s appeal dismissed

CGT liability for receivers and liquidators update
Commissioner’s appeal dismissed
October 2014
The dismissal of an appeal of a recent Federal Court decision means that the operation of section 254 of the Income
Tax Assessment Act 1936 (Cth) has been clarified. The obligation of a liquidator or receiver to retain proceeds from
the sale of assets that generate a capital gain only arises once a tax assessment has issued.
In Australian Building Systems Pty Ltd v Commissioner of Taxation [2014] FCA 116, Justice Logan of the Federal Court of
Australia found that liquidators are not obliged to retain funds pursuant to section 254 until they receive a tax assessment
from the ATO. That decision is considered in our earlier Insight “CGT liability for receivers and liquidators”.
The Commissioner of Taxation lodged an appeal on 13 March 2014. On 8 October 2014, the Federal Court of Australia
dismissed the appeal in a unanimous decision.
From an administrative perspective, Justice Logan’s judgment remains problematic in that it:
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renders section 254 ineffective if the section is intended to operate as a mechanism for the Commissioner to collect tax
revenue from an insolvent entity
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creates very different outcomes for creditors depending on the timing of when insolvency proceedings start. An
insolvency that spans 2 separate financial years may result in an assessment being issued by the Commissioner that
results in the funds available for distribution being diminished. On the other hand, an insolvency that occurs and
completes within the space of 1 financial year may result in a distribution to creditors being possible without an
assessment occurring
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does not address whether section 254 creates a priority in favour of the Commissioner. On appeal, the Court did not
address the priority issue.
Nonetheless, the appeal judgment confirmed the correctness of Justice Logan’s findings and arguably provided even
greater clarity in relation to the operation of section 254. As detailed in our earlier Insight, while Justice Logan concluded
that the obligation to retain funds sufficient to discharge a potential capital gains tax liability does not arise until a tax
assessment is issued, he considered that a prudent practitioner may wish to retain those funds even though not legally
required to do so. Such ‘prudence’ is fundamentally inconsistent with the clarity of his Honour’s findings. The appeal
judgment avoids such inconsistent commentary.
Section 254 continues to give rise to the potential that the Commissioner is entitled to a priority for unremitted capital
gains tax. This issue will no doubt be the subject of future judicial review and determination.
Henry Davis York’s Restructuring and Insolvency team
Scott Atkins
Jason Opperman
61 2 9947 6059
scott.atkins@hdy.com.au
61 2 9947 6303
jason.opperman@hdy.com.au
Philip Crawford
Greg Reinhardt
61 2 9947 6310
philip.crawford@hdy.com.au
61 2 9947 6452
greg.reinhardt@hdy.com.au
Craig Ensor
Claudine Salameh
61 2 9947 6445
craig.ensor@hdy.com.au
61 2 9947 6489
claudine.salameh@hdy.com.au
Mark Hilton
Mark Schneider
61 2 9947 6305
mark.hilton@hdy.com.au
61 7 3087 5004
mark.schneider@hdy.com.au
John Martin
Sarah Worsfield
61 2 9947 6318
john.martin@hdy.com.au
61 2 9947 6723
sarah.worsfield@hdy.com.au
Leonard McCarthy
Mark Thomas
61 2 9947 6190
leonard.mccarthy@hdy.com.au
61 2 9947 6212
mark.thomas@hdy.com.au
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