Commissioner of Taxation v Australian Building Systems Pty Ltd (In Liquidation) etc [2015] HCA 48: Tax Liability to Retain Funds
Thursday 10 December 2015 @ 11.18 a.m. | Corporate & Regulatory | Taxation | Trade & Commerce
In Commissioner of Taxation v Australian Building Systems Pty Ltd (In Liquidation); Commissioner of Taxation v Muller and Dunn as Liquidators of Australian Building Systems Pty Ltd (In Liquidation) [2015] HCA 48 handed down today (10 December 2015) the High Court, in a majority decision, has dismissed appeals from the Full Court of the Federal Court of Australia (see Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133 (8 October 2014)).
In so doing the High Court has held that the retention obligation (see text of section 254(1)(d) below) imposed on agents and trustees only comes into effect or arises after the making of an assessment or deemed assessment in respect of the income, profits or gains.
Background
Administrators were appointed to Australian Building Systems Pty Ltd (ABS) under Part 5.3A of the Corporations Act 2001 (Cth) (the Corporations Act) on 2 March 2011, that Part deals with the administration of a company's affairs with a view to executing a deed of company arrangement. The creditors of ABS resolved on 6 April 2011, under section 439C of the Corporations Act, that ABS be wound up and Ms E Muller and Ms J Dunn were appointed as liquidators (the liquidators). The assets of ABS at this point included a property at Crestmead in Queensland with respect to which on 21 July 2011 the liquidators caused ABS to enter into and complete a contract of sale for. The Crestmead property made ABS a capital gain on the sale of $1,120,000 which entered into the calculation of ABS assessable income for that year.
The Points of Dispute
The appellant Commissioner of Taxation (the Commissioner) argued that section 254(1)(d) of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) required the liquidators to retain sufficient funds from the proceeds of the sale of the Crestmead property so as to pay the tax that would have become due in respect of the net capital gain arising from the sale and disposal of the property. Section 254(1)(d) provides:
(1) With respect to every agent and with respect also to every trustee, the following provisions shall apply:
. . .
(d) He or she is hereby authorized and 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.
In response to the Commissioners argument the liquidators counter argued that the requirement to withhold funds would only arise upon the issue of a valid assessment by the Commissioner.
At Trial
At first instance (see Australian Building Systems Pty Ltd v Commissioner of Taxation [2014] FCA 116 (21 February 2014)), Logan J held that section 254(1)(d) of the 1936 Act had no application to the liquidators as they were not, in the absence of any assessment, subject to any retention and payment obligation.
On Appeal
On appeal (see Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133 (8 October 2014)) the Full Court of the Federal Court of Australia (namely; Edmonds, Collier and Davies JJ) upheld the decision of Logan J that section 254(1)(d) of the 1936 Act only imposed an obligation of retention once a relevant assessment had been issued. His Honour Justice Davies agreed with the rest of the Court that the appeals should be dismissed, but dissented in part, taking the view at paragraph 33 that he respectfully agreed:
33 . . . save in one respect. I do not think that it is a complete answer to the Commissioner’s case that it was, apparently, common ground that any assessment would issue to the company.
Special Leave and Grounds for Appeal
Special leave to appeal to the High Court was granted on 17 April 2015 and in both matters, the grounds of appeal are noted to include:
That the Full Court (with Davies J dissenting in part) erred in the application of section 254(1) of the 1936 Act to the case of a trustee within the meaning of section 6 of the 1936 Act who is not the trustee of a trust estate (such as a liquidator or receiver) and who derives income profits or gains in a representative capacity by concluding that section 254(1) only operates in relation to income profits or gains on which the trustee (such as a liquidator or receiver) was assessable under Part III, Division 6 (Trust Income) of the 1936 Act (which cannot arise unless there is a trust estate).
In both matters a Notice of Contention was filed, the grounds of which include:
The Full Court of the Federal Court of Australia should have dismissed the appeal on the basis that the primary judge’s reasoning was correct and justified the orders made by the primary judge.
High Court’s Decision
In dismissing the Commissioner's appeals the High Court majority held that the retention obligation in section 254(1)(d), being similar to the retention obligation in section 255(1)(b), only arises after an assessment or deemed assessment has been made in respect of the relevant income, profits or gains.
Further, the High Court held that the majority of the Full Court (see [2014] FCAFC 133) had erred in finding that the liquidator was a "trustee of a trust estate" for the purposes of Part III, Division 6 (Trust Income) of the 1936 Act.
Finally, a majority of the High Court also held that the majority of the Full Court (see [2014] FCAFC 133) erred in construing section 254 as a collecting provision which only operates where the agent or trustee is otherwise assessable.
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Sources:
Commissioner of Taxation v Australian Building Systems Pty Ltd (In Liquidation); Commissioner of Taxation v Muller and Dunn as Liquidators of Australian Building Systems Pty Ltd (In Liquidation) [2015] HCA 48 (10 December 2015) and relevant transcript reports.
Australian Building Systems Pty Ltd v Commissioner of Taxation [2014] FCA 116 (21 February 2014)
Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133 (8 October 2014)
