Edited version of private advice

Authorisation Number: 1051952461503

Date of advice: 22 February 2022

Ruling

Subject: Bankrupt estate

Question 1

Do you have obligations under section 254 of the Income Tax Assessment Act 1936 (ITAA 1936), in your capacity as trustee of the bankrupt estate, in respect of any capital gain made on the sale of a property (the bankrupt's main residence)?

Answer

Yes

(a)          You are answerable as a taxpayer in respect of any capital gain made on the sale of the property and derived in your representative capacity (paragraph 254(1)(a)).

(b)          You do not have an obligation to pay income tax in respect of that capital gain until the Commissioner makes an assessment setting out the amount of income tax payable.

(c)          The obligation to retain under paragraph 254(1)(d) and the personal liability under paragraph 254(1)(e) do not arise until the Commissioner makes an assessment setting out the amount of income tax payable.

Question 2

Do you have obligations under section 254 of the Income Tax Assessment Act 1936 (ITAA 1936), in your capacity as trustee of the bankrupt estate, in respect of any capital gain made on the sale of other properties?

Answer

Yes.

(a)          You are answerable as the taxpayer in respect of the capital gain made on the sale of the properties and derived in your representative capacity (paragraph 254(1)(a)).

(b)          You do not have an obligation to pay income tax in respect of that capital gain until the Commissioner makes an assessment setting out the amount of income tax payable.

(c)          The obligation to retain under paragraph 254(1)(d) and the personal liability under paragraph 254(1)(e) do not arise until the Commissioner makes an assessment setting out the amount of income tax payable.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

XX Month 20XX

Relevant facts and circumstances

The taxpayer became bankrupt.

Federal Circuit Court of Australia ordered that the estate of the taxpayer be sequestrated under the Bankruptcy Act 1966.

The taxpayer filed his statement of affairs.

The taxpayer died.

A Trustee was appointed Trustee of the Bankrupt taxpayer by the Australian Financial Security Authority.

At the date of bankruptcy, the taxpayer jointly owned a property (Property1).

The taxpayer declared Property 1 as the main residence.

Property 1 was sold.

At the date of bankruptcy, the taxpayer jointly owned a property (Property 2).

At the date of bankruptcy, the taxpayer owned a property (Property 3).

Property 2 and Property 3 were sold.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 104-10

Income Tax Assessment Act 1936 section 106-30

Income Tax Assessment Act 1936 section 106-60

Income Tax Assessment Act 1936 section 254

Reasons for decision

Section 254 imposes obligations on every trustee in respect of any income or any profits or gains of a capital nature derived by him or her in his or her representative capacity.

A trustee in bankruptcy is a trustee for the purposes of section 254 in accordance with the definition of 'trustee' in section 6 of the ITAA 1936.

Section 254 is triggered at the moment the trustee derives the income, profit or gain in his or her representative capacity. The Commissioner is of the view that you derived the gain that arose from the disposal of the properties on the day the contract for disposal of the property was entered into.

In FCT v Australian Building Systems Pty Ltd (in Liq) & Ors [2015] HCA 48 (ABS), the High Court described section 254(1) as both a liability-imposing provision and a collecting provision. It imposes a tax liability on the trustee, which is ancillary to the primary tax liability. It also provides a means of collecting the liability from the trustee in certain circumstances.

When vested bankruptcy property is disposed of, whether by the trustee in bankruptcy or by a mortgagee exercising a power of sale, the primary tax liability for any capital gain made on the sale falls on the bankrupt. Paragraph 254(1)(a) makes a trustee in bankruptcy answerable as taxpayer for the payment of any capital gains tax liability in respect of the gain.

If the Commissioner requires a trustee in bankruptcy to lodge a return under paragraph 254(1)(b) the trustee in bankruptcy must do so, but in their representative capacity only. Similarly, if the trustee is assessed on the gain under paragraph s254(1)(b), they are assessed in their representative capacity only. Gordon J explained the purpose of s254(1)(b) in ABS (at paragraph 173):

What s254(1)(b) does is emphasise that in respect of the income or profits or gains referred to in sub-s(1)(a), the obligation of an agent or trustee to make a return and be assessed (as if the taxpayer) is in their representative capacity only. It is [an] ancillary liability. Its purpose is to ensure payment of the tax; tax which at least ordinarily will be primarily payable by another person or entity.

The 'collecting' aspect of s254(1) is addressed in paragraphs (d) and (e).

Paragraph 254(1)(d) authorises and requires you to retain, out of any money that comes to you, so much as is sufficient to pay the tax assessed in respect of the gain.

Paragraph 254(1)(e) makes you personally liable for the tax assessed under paragraph 254(1)(b) to the extent that you have or should have retained an amount under paragraph 254(1)(d).

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