AUSTRALIAN BUILDING SYSTEMS PTY LTD (IN LIQ) & ORS v FC of T

Judges:
Logan J

Court:
Federal Court, Brisbane

MEDIA NEUTRAL CITATION: [2014] FCA 116

Judgment date: 21 February 2014

Logan J

1. On 6 April 2011 and as a sequel to the placing of Australian Building Systems Pty Ltd ACN 094 238 678 (In liquidation) (ABS) in administration under Pt 5.3A of the Corporations Act 2001 (Cth) (Corporations Act), its creditors resolved that the company be wound up. Mesdames Ginette Muller and Joanne Dunn were appointed as the liquidators of ABS. They had earlier held office as its administrators during the period of its voluntary administration. ABS was placed in voluntary administration and Mesdames Muller and Dunn were appointed administrators on 2 March 2011.

2. One of the assets of ABS at the time when it was placed in liquidation was real property at 118-128 Magnesium Drive, Crestmead (the Crestmead property). Crestmead is a suburb in Logan City, just to the south of Brisbane, Queensland. In the course of the winding up, the liquidators caused ABS to dispose of the Crestmead property. That disposal constituted a "CGT event" for the purposes of the Income Tax Assessment Act 1997 (Cth) (ITAA97). A controversy has emerged between the liquidators and the Commissioner of Taxation as to whether the liquidators are obliged by s 254 of the Income Tax Assessment Act 1936 (Cth) (ITAA36), prior to the issuing of a notice of assessment to ABS, to retain monies so as to meet what may be a taxation liability in respect of the income year when the CGT event occurred and to pay to the Commissioner the whole of any tax due by ABS in priority to other creditors of that company.

3. In January 2012, the accountants acting for ABS and its liquidators sought a private ruling from the Commissioner. In the private

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ruling application form, the "client" was specified as ABS. The Commissioner treated the application for a ruling by ABS. The questions posed for the ruling and the answers given in May 2012 by the Commissioner in his ruling were as follows:

Q1 - Is the liquidator required under s 254 of the Income Tax Assessment Act 1936 to account to the Commissioner out of the proceeds of sale, any capital gains tax liability that crystallises on the sale of an asset that belonged to the company before liquidation?

o Answer to Q1 - Yes [No]

Q2 - If the answer to Q1 is yes, are the monies to be retained once an assessment issues?

o Answer to Q2 - No [Yes]

Q3 - If the answer to Q2 is no, are the monies to be retained at crystallisation of any capital gains?

o Answer to Q3 - Yes [No]

These questions were derived from the question set out in Section C of the ruling application form lodged with the Commissioner. I have added parenthetically how ABS and the liquidators contend the questions ought to have been answered by the Commissioner.

4. The Commissioner addressed his ruling to ABS. Perhaps incongruously, the reasons which accompanied the ruling are couched in a way which makes it plain that the "you" mentioned in the reasons was not ABS but the liquidators. For example, the Commissioner stated in those reasons:

In your case therefore you are required to retain out of any money in the nature of income, profits or gains of a capital nature that is received in your representative capacity as liquidator , amount sufficient to pay any tax on that money.

[Emphasis added]

In the "Fact Sheet" attached to the private ruling it is stated that if "you" disagree with the ruling "you" may object to it.

5. The accountants responded to the private ruling by a letter dated 10 July 2012 sent to the Commissioner. The subject of the letter is expressed to be ABS and, in the body of the letter, it is stated, "we hereby object". The Commissioner treated this letter as an objection by ABS against the ruling. I consider that he was correct in so doing. By a letter dated 1 August 2012 the Commissioner advised the accountants that he had disallowed the company's objection. On 5 October 2012, ABS filed an appeal against that objection decision in the Court (QUD 540 of 2012).

6. It is not disputed that the taxation appeal (in law, an invocation of original jurisdiction) has been filed within time. The Commissioner did voice a reservation to the accountants for ABS and then to its solicitors as to whether the company could object, having regard to the answers given on the private ruling. This, with respect, was odd, as the applicant for the ruling was ABS and the Commissioner not only directed his ruling to the company but also treated the subsequent objection as one made by the company. In any event, the origins of the separate application for declaratory relief by the liquidators seem to lie in this reservation.

7. On 11 October 2012, the liquidators filed an originating application in which they sought declaratory relief against the Commissioner in respect of the obligations to which, in the private ruling, they were said by the Commissioner to be subject (QUD 555 of 2012). In substance, the declaratory relief sought by the liquidators corresponds with what would follow from the answers for which ABS contends in the taxation appeal. For this reason and at the sensible request of the parties, the taxation appeal and the application for declaratory relief were heard together.

8. Apart from challenging the correctness of the answers given by the Commissioner in his ruling, ABS and the liquidators also raised a constitutional issue, which was that s 254 of the ITAA36 was invalid, because it imposed an incontestable tax. Notices under s 78B of the Judiciary Act 1903 (Cth) were issued but attracted neither intervention nor removal of the proceedings. In my view, s 254 is not invalid. It imposes no tax at all. It is solely a provision in aid of tax collection. I elaborate upon these reasons later in this judgement.

9. The relevant facts are of short compass.

10. The Crestmead property was acquired by ABS on or about 15 September 2000 for a

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purchase price of $1,045,000. On or about 21 July 2011, the liquidators caused ABS to enter into a contract for the sale of the Crestmead property for $4,000,000. The date of entry by ABS into that contract of disposal will constitute the time when the "CGT event" namely, CGT event A1 constituted by the disposal of the Crestmead property occurred: s 104.10, ITAA97.

11. In the interval between acquisition and disposal, the value of capital improvements made by ABS to the Crestmead property was about $1,835,000.

12. The liquidators have received proofs of debt totalling about $5,292,229 from unsecured creditors. Another creditor held a security in respect of the Crestmead property. In the liquidators' opinion, there is likely to be a shortfall in the realisation of the other assets of ABS such that its creditors will not receive payment in full in the winding up.

13. On these facts, two particular questions are said by ABS and the liquidators to emerge:

14. The jurisdictional foundation for the taxation appeal is plain enough: s 14ZZ, Taxation Administration Act 1953 (Cth). As to the claim for declaratory relief, there are a number of sources of jurisdiction:

I am satisfied that the controversy which has arisen as between the liquidators and the Commissioner in relation to the construction and application of s 254 of the ITAA36 does not raise a hypothetical question. Whether it is necessary to consider the inter-relationship between that section and the Corporations Act will depend upon whether the liquidators are presently subject to any obligation under that section.

15. It is desirable to set out the material parts of the provisions of the Corporations Act and also to set out s 254 of the ITAA36. Within the Corporations Act:

16. By s 254 of the ITAA36 it is provided:

254 Agents and trustees

  • (1) With respect to every agent and with respect also to every trustee, the following provisions shall apply:
    • (a) He or she shall be answerable as taxpayer for the doing of all such things as are required to be done by virtue of this Act in respect of the income, or any profits or gains of a capital nature, derived by him or her in his or her representative capacity, or derived by the principal by virtue of his or her agency, and for the payment of tax thereon.
    • (b) He or she shall in respect of that income, or those profits or gains, make the returns and be assessed thereon, but in his or her representative capacity only, and each return and assessment shall, except as otherwise provided by this Act, be separate and distinct from any other.

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    • (c) If he or she is a trustee of the estate of a deceased person, the returns shall be the same as far as practicable as the deceased person, if living, would have been liable to make.
    • (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.
    • (e) He or she is hereby made personally liable for the tax payable in respect of the income, profits or gains to the extent of any amount that he or she has retained, or should have retained, under paragraph (d); but he or she shall not be otherwise personally liable for the tax.
    • (f) He or she is hereby indemnified for all payments which he or she makes in pursuance of this Act or of any requirement of the Commissioner.
    • (g) Where as one of 2 or more joint agents or trustees he or she pays any amount for which they are jointly liable, each other one is liable to pay him or her an equal share of the amount so paid.
    • (h) For the purpose of insuring the payment of tax the Commissioner shall have the same remedies against attachable property of any kind vested in or under the control or management or in the possession of any agent or trustee, as the Commissioner would have against the property of any other taxpayer in respect of tax.
  • (2) Subsection (1) applies to the following in the same way as it applies to tax:
    • (a) the general interest charge under:
      • (i) section 163AA, former section 170AA, former subsection 204(3), former subsection 221AZMAA(1), former subsection 221AZP(1), former subsection 221YD(3) or former section 221YDB of this Act;
      • (ii) section 5-15 of the Income Tax Assessment Act 1997;
    • (b) additional tax under former Part VII of this Act;
    • (c) shortfall interest charge.

    Note 1: The general interest charge is worked out under Part IIA of the Taxation Administration Act 1953 and shortfall interest charge is worked out under Division 280 in Schedule 1 to that Act.

    Note 2: Subsection 8AAB(4) of that Act lists the provisions that apply the general interest charge.

  • (3) In paragraphs (1)(d) and (e), and in its first occurrence in paragraph (1)(h), tax includes, in addition to the things mentioned in subsection (2):
    • (a) trustee beneficiary non-disclosure tax within the meaning of Division 6D of Part III; and
    • (b) general interest charge payable under section 102UP in respect of such tax.

17. For reasons which will become apparent, it is also desirable to set out s 255 of the ITAA36:

255 Person in receipt or control of money from non-resident

  • (1) With respect to every person having the receipt control or disposal of money belonging to a non-resident, who derives income, or profits or gains of a capital nature, from a source in Australia or who is a shareholder, debenture holder, or depositor in a company deriving income, or profits or gains of a capital nature, from a source in Australia, the following provisions shall, subject to this Act, apply:
    • (a) the person shall when required by the Commissioner pay the tax due and payable by the non-resident;
    • (b) the person is hereby authorized and required to retain from time to time out of any money which comes to the person on behalf of the non-resident so much as is sufficient to pay the tax which is or will become due by the non-resident;
    • (c) the person is hereby made personally liable for the tax payable by the person on behalf of the non-resident to the extent of any amount that the person has retained, or should have retained, under paragraph (b); but the person shall not be otherwise personally liable for the tax;

      ATC 15934

    • (d) the person is hereby indemnified for all payments which the person makes in pursuance of this Act or of any requirement of the Commissioner.
  • (2) Every person who is liable to pay money to a non-resident shall be deemed to be a person having the control of money belonging to the non-resident, and, subject to subsection (2A), all money due by the person to the non-resident shall be deemed to be money which comes to the person on behalf of the non-resident.
  • (2A) For the purposes of this section, money due by a person to a non-resident from which an amount must be withheld under section 12-325 in Schedule 1 to the Taxation Administration Act 1953 (about natural resource payments) or Subdivision 12-H in that Schedule (about distributions to foreign residents from managed investment trusts) shall be deemed not to be money which comes to the person on behalf of the non-resident.
  • (3) Where the Commonwealth, a State or an authority of the Commonwealth or a State has the receipt, control or disposal of money belonging to a non-resident, this section (other than paragraph (1)(c)) applies to and in relation to the Commonwealth, the State or the authority, as the case may be, in the same manner as it applies to and in relation to any other person.
  • (4) This section applies to the following in the same way as it applies to tax:
    • (a) the general interest charge under:
      • (i) section 163AA, former section 170AA, former subsection 204(3), former subsection 221AZMAA(1), former subsection 221AZP(1), former subsection 221YD(3) or former section 221YDB of this Act;
      • (ii) section 5-15 of the Income Tax Assessment Act 1997;
    • (b) additional tax under former Part VII of this Act;
    • (c) shortfall interest charge.

    Note 1: The general interest charge is worked out under Part IIA of the Taxation Administration Act 1953 and shortfall interest charge is worked out under Division 280 in Schedule 1 to that Act.

    Note 2: Subsection 8AAB(4) of that Act lists the provisions that apply the general interest charge.

  • (5) This section applies to an equity holder in the same way as it applies to a shareholder.

18. For the reason already given, the question as to whether, if at all, an obligation on the part of the liquidators, derived from s 254 of the ITAA36, has arisen should be considered first. A liquidator is, by definition, a "trustee" for the purposes of s 254 of the ITAA36: see the definition of "trustee" in s 6 of that Act.

19. The Commissioner's submission is that, in the circumstances of this case, the effect of s 254(1)(d) of the ITAA36 was that the liquidators became liable to retain from the proceeds of sale of the Crestmead property when those proceeds came into their hands an amount sufficient to pay the tax that will become due in respect of the net capital gain arising from the disposal of that property. It was not necessary, so the Commissioner submitted, for there to be a notice of assessment before the retention obligation could arise. ABS and the liquidators submitted that, in the absence of an assessment, there could be no obligation. In the present case, no assessment has yet issued.

20. In
Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598 (Bluebottle), it fell to the High Court to construe s 255 of the ITAA36. Each of the parties sought to gain assistance in relation to the construction and application of s 254 of the ITAA36 either by analogy or contrast from what was said in Bluebottle about s 255. It was held in that case that the payment and retention obligations found in s 255(1)(a) and 255(1)(b) respectively arose only upon the issuing of an assessment. The critical passages in the High Court's judgment in Bluebottle are at paras [97] and, in light of that, [72], [80], [81] and [82]:

21. The Commissioner pointed to the imposition by s 254(1)(a) of the ITAA36 of a liability on a trustee to be "answerable as taxpayer" as the source of a connection between the holding of office as a liquidator and the derivation by ABS (the "taxpayer") of a capital gain. The answer to the question as to whether the liquidators are presently subject to any obligation to retain and to pay is not supplied by regard to "answerable as taxpayer" in isolation. As with s 255, it would be wrong to approach the construction of s 254 piecemeal.

22. That the word "due", which also appears in s 254(1)(d), admits of ambiguity was accepted in Bluebottle at [81], referring to an earlier observation to like effect by Gibbs CJ in
Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at 8. Even so, the same "intersecting obligation" to which the High Court referred in Bluebottle is evident in s 254 of the ITAA36. The retention obligation falls on a liquidator pursuant to s 254(1)(d) and the payment obligation ("and for the payment of tax thereon") by virtue of being made "answerable as taxpayer" by s 254(1)(a). The whole section is predicated upon the subjection of the "trustee", here the liquidators, to a range

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of obligations, "as a taxpayer" but which materially include a limited but nonetheless intersecting retention and payment obligation. The payment obligation is the point of the indemnity for which s 254(1)(f) provides. By analogy with Bluebottle, content can be given to the obligation imposed by s 254(1)(d) only if an assessment has issued,

23. As it happens, that construction of s 254(1)(d) of the ITAA36 accords with a construction of s 254 favoured by Fraser JA, McMurdo P and Peter Lyons J agreeing, in
Deputy Commissioner of Taxation v Barkworth Olives Management Ltd [2011] 1 Qd R 326 at [29] (Barkworth Olives). Fraser JA there observes of the expression "tax which is or will become due" that it is "an expression that postulates a degree of certainty about the fact and amount of the tax liability which might not be present before a notice of assessment is served." I agree. Further, there is, with respect, quite some understatement in the observation made by Fraser JA. For example, that a net capital gain is included in a taxpayer's assessable income is certain: s 102-5, ITAA97. But assessable income and taxable income are not to be equated. The amount, if any, if the taxation liability will depend upon what amount, if any, proves, at the conclusion of a given year of tax to be the taxpayer's taxable income. That amount may be far from certain at the time when the CGT event occurs.

24. A case relied upon by the Commissioner when ruling that the liquidators were subject to an obligation under s 254 was
Fermanis v Chesire Holdings Pty Ltd [1990] 1 WAR 373 (Fermanis). The difficulty about the Commissioner's reliance upon Fermanis is that it arose against a background where the Commissioner had issued a notice of assessment. The conclusion reached in that case that the trustee was entitled to retain such monies as were necessary to satisfy the notice of assessment is in accordance with the construction of s 254 which I favour, as well as with Barkworth Olives in particular and, by analogy, Bluebottle.

25. It follows from the conclusion which I have reached that s 254 of the ITAA36 had no application to the liquidators. They were not, in the absence of any assessment, subject to any retention and payment obligation derived from that section. It further follows that Question 1 in the Commissioner's ruling ought to have been answered in the negative in the present absence of an assessment and that the remaining two questions, as a consequence, ought to have been answered, "Unnecessary to answer". Given its absence of present application, there can be no question of any need to reconcile s 254 of the ITAA36 with the application of the Corporations Act to the liquidators. The resolution of that question can and should await the issuing of an assessment.

26. That absence of application of s 254 also lends an academic quality to the question of whether the section is valid. That question was fully argued. I therefore make the following brief observations in amplification of the view expressed above that the section is valid. In respect of a close analogue of s 254, s 89 of the Income Tax Assessment Act 1922 (Cth) and s 31 of that Act, a predecessor of Div 6 of Pt III of the ITAA36, Rich and Dixon JJ made the following, tentative observation in
Howey v Commissioner of Taxation (1930) 44 CLR 289 at 294:

Section 89 enables the Commissioner to assess a trustee but it is not easy to say precisely in respect of what income. It is perhaps doubtful whether it operates to impose upon a trustee any liability for tax which is not provided for by s 31, and it is by no means clear what is the relation between s 89 and s 31. Possibly, so far as it affects trustees, s 89 should be regarded as a 'collecting section and not a taxing section,' to borrow the language used by Lord Parker in
Drummond v Collins Surveyor of Taxes (1915) AC at 1011 at 1019. If so it does no more in respect of trustees than provide machinery for carrying out the provisions of s 31. This view would mean that, unless the appellant could be assessed under s 31, he ought not to be assessed at all.

27. A more definite view that s 254 is a "collecting section" is evident from the following statement made by Murray J in Fermanis (at 376), referring to
Deputy Commissioner of Taxation (NSW) v Brown (1958) 100 CLR 32 at 42:

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What is clear about that provision is that it creates of itself no tax liability, which is to be otherwise derived from the provisions of the Act, so that if a tax liability is not otherwise to be drawn from the statute, none will be created by s 254 ….

28. A like view to that of Murray J of the operation of s 254 of the ITAA36 is also evident in
Commissioner of Taxation v Prestige Motors Pty Ltd (1994) 181 CLR 1 at 11:

By virtue of s 254(1)(b), the trustee was obliged to make a return in respect of any income derived by him in a representative capacity. Although s 254(1)(b) provides that the trustee is to be assessed on the return, the trustee is not liable to pay tax on any of that income save in respect of so much of the net income of the trust as is brought to tax by ss 98, 99 or s 99A. Where the trustee is liable to pay tax which is or will become due, the trustee is authorised and required to retain sufficient funds to meet that payment out of "any money which comes to him in his representative capacity" (s 254(1)(d)) and, to that extent but only to that extent, the trustee is personally liable for that tax (s 254(1)(e)). The trustee is not liable to be assessed to tax or to pay tax in respect of any share of the net income of a trust estate which is included in the assessable income of a beneficiary under s 97. But, where the trustee is liable to be assessed to tax, the assessment imposes a debt to be borne by the estate [
Deputy Commissioner of Taxation v Brown (1958) 100 CLR 32 at 42]. Section 254(1)(b) directs that "each return and assessment shall, except as otherwise provided by this Act, be separate and distinct from any other."

[Emphasis added]

29. Once it is accepted, and I do accept, having regard to the authorities just cited, that s 254 is but a collection provision and that the assessment of a taxation liability arising from what is the operation of other provisions of the ITAA36 or the ITAA97 is fully contestable under Pt IVC of the Taxation Administration Act 1953 (Cth), it follows 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) 158 CLR 622 at 639-640.

30. For these reasons and in respect of the taxation appeal, the objection decision must be quashed, the answers given in the ruling set aside and, in lieu thereof, answers given which give effect to these reasons for judgement. There is also advantage in the prevailing circumstances in making a declaration that the liquidators are not subject to any present retention and payment liability.

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 a 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.

32. As to costs, consideration of the question as to how s 254 of the ITAA36 and the provisions of the Corporations Act mentioned were to be reconciled proved unnecessary to answer in light of the conclusion reached that s 254 imposed no obligation on the liquidators in the present absence of an assessment. That does not, in my view, mean that either ABS or the liquidators should be denied costs in respect of so much of the proceedings that concerned that

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issue. It also proved unnecessary to consider in any detail the constitutional issue in light of the conclusion reached about s 254. The constitutional issue was one which ABS and the liquidators chose to raise beyond those which were at large as a result of the objection decision in respect of the private ruling. On that additional issue they failed. The case would more than likely have taken only one day to hear in my view had that issue not been raised. It also entailed the preparation and consideration of discrete written submissions. Before making any costs orders in respect of the two proceedings, it is desirable that the parties be afforded an opportunity to be heard as to how the lack of forensic success in respect of that issue ought to sound in costs. I propose therefore to reserve costs, pending the receipt of submissions from the parties on that subject.

 

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