The Federal Court portal shows that the Commissioner of Taxation has appealed to the Full Court of the Federal Court of Australia the decision of Logan J in Australian Building Systems Pty Ltd v Commissioner of Taxation [2014] FCA 116.

At first instance, the Federal Court allowed the liquidators’ objection to the Commissioner’s private ruling on the issue. It ordered that the private ruling be set aside and in lieu thereof, the first question in respect of which that ruling was made, was to be answered as follows (the other questions fell away as the answer to 1 became “no”):

Question 1:  Is the liquidator required under s 254 of the Income Tax Assessment Act 1936 (Cth) (the ITAA) to account to the Commissioner out of the proceeds of sale, any CGT liability that crystallises on the sale of an asset that belonged to the company before liquidation?

Answer:  No, given the [then] present absence of an assessment.

In that case, the company had been placed in voluntary administration on 2 March 2011, and entered a creditors voluntary liquidation on 6 April 2011. Subsequently, the liquidators caused the company to dispose of a property, which constituted a “CGT event” under the ITAA.

Logan J considered the interaction of s 254 of the ITAA with key provisions of the Corporations Act 2001 (Cth) including s 501 as to distribution of property of a company in liquidaiton, s 555 as to the pari passu rule, that except as otherwise provided by the Corporations Act, all debts and claims proved in a winding up rank equally and are paid proportionately, s 553 as to debts or claims that are provable in a winding up, and s 556 as to priority payments.

The Commmissioner’s submission was that, in the circumstances of that case, the effect of s 254(1)(d) of the ITAA was that the liquidators became liable to retain from the proceeds of sale of a particular property, when those proceeds came into their hands an amount sufficient to pay the tax that would become due in respect of the net capital gain arising from the disposal of that property. The Commissioner contended that it was not necessary for there to be a notice of assessment before the retention obligation could arise (see [19]).

The liquidators submitted that, in the absence of an assessment, there could be no obligation. In that case, no assessment had yet been issued.

His Honour agreed. He reviewed the authorities and accepted that s 254 is “but a collection provision” not one that itself triggers the taxation liability (which may arise by the operation of other provisions of the ITAA36 or ITAA97). It follows, his Honour observed, that s 254 does not provide for an “incontestable tax” in the sense described by Gibbs CJ, Wilson, Deane and Dawson JJ in MacCormick v Commissioner of Taxation [1984] HCA 20; (1984) 158 CLR 622 at 639-640.

His Honour held in favour of the liquidators, and noted at [30] that the liquidators were not subject to any present retention and payment liability, and that he would so declare.

However, his Honour then added the following remarks, perhaps sensible of the potential for this decision to be construed as applying more broadly than it ought, at [31]:

“I should also add the following. Even though, for the reasons given, s 254 does not require retention upon the mere happening of a CGT event, that does not mean that a liquidator is obliged immediately to distribute the resultant gain or part thereof as a dividend to creditors in the course of the winding up. A prudent liquidator, like the prudent trustee of a trust estate or executor of a will, would be entitled to retain the gain for a time against other expenses which might arise in the course of the administration. Further, in relation to income tax, the liquidator would at the very least be entitled to retain the gain until the income tax position in respect of the tax year in which the CGT event had occurred had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year. Yet further, in the event of a controversy after the issuing of an assessment as to whether the tax debt that was provable in the winding up, the liquidator would be entitled to retain the gain or some part thereof sufficient to meet the assessed tax until that controversy was resolved. Whether there proves to be such a controversy in the present case must await the course of future events. If it comes to pass, the liquidators would be entitled to seek declaratory relief from the Court to resolve it.”

Where does that leave liquidators?

Pending the appeal, caution would be wise. Clearly the prudent course is that while there may be no obligation on a liquidator to retain funds in anticipation of a potential CGT liability upon disposal of an asset, a liquidator ought bear in mind the judicial remarks that a liquidator is entitled to retain the gain until assessment.

Note too that the decision at first instance does not resolve the question of the extent to which s 254 does or does not disturb the distribution priority provisions of the Corporations Act referred to above.