High Court finds in favour on Liquidators’ retention obligations
The question whether a liquidator or receiver, after deriving income, profits or a capital gain (‘IPG’), is required to retain moneys sufficient to pay tax before or only after the issue of an assessment has now been finally answered by the High Court. In a majority decision, the High Court has dismissed the Commissioner’s appeal saying that the retention obligation is only engaged after an assessment has issued. Thomson Geer acted for the liquidators.
At issue was the operation of section 254(1)(d) of the Income Tax Assessment Act 1936 (‘ITAA36’). It relevantly provides that an ‘agent’ or ‘trustee’ (the latter is defined to include both receivers and liquidators) is required to retain 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 IPG.
The liquidators have argued that the words ‘sufficient to pay the tax which is or will become due‘ requires the certainty of an assessment. They applied reasoning of the High Court in Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598 (Bluebottle). In Bluebottle the High Court had interpreted the same words in s255 of the ITAA36 (albeit a provision directed to persons having control of money belonging to a non-resident) as requiring the certainty of an assessment before the retention obligation was engaged. The liquidators also relied on the very wide class of people to whom section 254 of the ITAA36 was directed and the practical difficulty of requiring retention of moneys before the certainty of an assessment.
The Commissioner had argued those words, ‘sufficient to pay the tax which is or will become due‘, did not require precision, but marked the outer boundary of the retention obligation. The Commissioner further argued the trustee (who has an obligation to make the return under s254(1)(b)) would be able to estimate the tax liability and retain an amount sufficient to pay the tax when it is subsequently assessed. The Commissioner was concerned to ensure the revenue was protected because, on the Liquidators’ construction, trustees (in particular, receivers), would be free to deal with the IPG before an assessment was issued.
The primary Judge and Full Federal Court agreed with the liquidators (though on appeal to the High Court, neither party supported the reasoning on the Full Federal Court).
In a majority decision, the High Court agreed with the Liquidators’ position.
The majority (French CJ and Kiefel and Gageler JJ) accepted the view in Bluebottle that ‘tax which is or will become due‘ refers to an ascertained sum and that until such time as an assessment is made, it is not possible to say more than that there may be tax due.
The majority also noted that adoption of the Commissioner’s construction of the retention liability would impose a continuing burden on agents and trustees to retain sufficient money to pay an amount of tax payable on a notional assessment at any particular point in time. Their Honours observed that this would result in a continuing and variable personal liability for any difference between what the agent or trustee had retained and what would have been sufficient to pay the relevant tax at any particular point in time.
The decision means that the retention obligation in section 254(1)(d) of the ITAA36 only arises upon the issue of an assessment. Section 254(1)(e) of the ITAA36 imposes personal liability on trustees ‘for the tax payable in respect of the [IPG] to the extent of any amount that he or she has retained, or should have retained‘; but that personal liability is only engaged once the retention obligation is enlivened.
However, the decision does not resolve the question, in liquidations, of whether the tax liability (particularly a capital gain, which is a latent liability crystallised only upon sale) is an unsecured debt or is a priority expense of the liquidation (although in dissent Gordon J did make some passing comment on the issue); the primary judge refused to answer this question and it has not featured in argument on any of the appeals.
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