Edited version of private ruling

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Ruling

Subject: Section 254 - Receivers Duties

Question 1

Are you required under section 254 of the Income Tax Assessment Act 1936 to lodge any returns for the years of income ended 30 June 2008 and 30 June 2009 in respect of any income, profits or gains arising in connection with your appointment to the Charged Property?

Answer

No.

Question 2

Are you liable to pay tax under section 254 of the Income Tax Assessment Act 1936 in respect of any income, profits or gains arising in connection with your appointment to the Charged Property?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2008

Year ended 30 June 2009

The scheme commenced on:

1 July 2007

Relevant facts:

You act as receivers and managers of certain property of Company A.

Pursuant to a Trust Deed, Company B was appointed as the debenture trustee of behalf of holders of debentures to be issued by Company A.

Pursuant to a Prospectus, Company A issued debentures to various investors.

The payment of moneys owed to the debenture holders was secured by a floating charge granted by Company A over the investments in favour of Company B as debenture trustee.

The charge became enforceable; Company B appointed you as receivers and managers of the property charged under the charge.

You have only been appointed to the charged property. You have not been appointed to any other assets of Company A and do not have possession of Company A's financial records.

Under the charge, and the terms of your appointment, you act as Company A's agent. You are also a 'trustee' for the purposes of subsection 254(1) of the Income Tax Assessment Act 1936. Acting as agent for Company A, you have commenced realising the charged property. You have also received income (i.e. interest) from this property.

In the 2008-09 income year, a liquidator was appointed to Company A.

The directors of Company A have advised you that Company A became part of a consolidated group with effect in the 2007-08 income year. The head company is Company C. This is prior to your appointment or the liquidator's appointment.

Relevant legislative provisions:

Section 254 of the Income Tax Assessment Act 1936

Subsection 6(1) of the Income Tax Assessment Act 1936

Section 701-1 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Section 254 of the Income Tax Assessment Act 1936 (ITAA 1936) applies to an entity that is an agent or trustee for the purposes of the ITAA 1936 and Income Tax Assessment Act 1997 (ITAA 1997).

The use of the term agent in section 254 of the ITAA 1936 is governed by the definition provided in subsection 6(1) of the ITAA 1936. Subsection 6(1) of the ITAA 1936 defines the term agent as follows:

Agent includes:

(a) every person who in Australia, for or on behalf of any person out of Australia holds or has the control, receipt or disposal of any money belonging to that person; and

(b) every person declared by the Commissioner to be an agent or the sole agent of any person for any of the purposes of this Act.

The use of the word "includes" in this definition indicates that paragraphs (a) and (b) merely expand the usual technical legal meaning of the term agent.

However in the present case, it is not necessary to determine whether or not a Receiver or Administrator is an agent within the legal technical meaning of that term and therefore an agent to which section 254 of the ITAA 1936 applies. This follows from the view that a receiver manager or administrator is a trustee as defined in subsection 6(1) of the ITAA 1936 for the purposes of the ITAA 1936.

Trustee is defined in subsection 6(1) of the ITAA 1936 as follows:

in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes:

(a) an executor or administrator, guardian, committee, receiver, or liquidator; and

(b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.

It is a point of agreement in the present case that the roles performed by the Receiver, will satisfy the definition of 'trustee' for the purposes of section 254 of the ITAA 1936, and prima facie, will therefore be subject to the obligations imposed by subsection 254(1) of the ITAA 1936.

Paragraph 254(1)(a) of the ITAA 1936 provides that an agent or trustee is answerable as taxpayer for the payment of tax on the income, or any profits or gains of a capital nature, derived by him in his representative capacity. Paragraph 254(1)(b), provides that an agent or trustee is assessed on that income or those profits or gains but in his representative capacity only. In Fermanis v. Cheshire Holdings Pty Ltd, 90 ATC 4201 Murray J held at 4203 in relation to section 254 of the ITAA 1936:

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 sec 254 . . . .

It is clear, I think, that the provision operates as a machinery provision to facilitate tax collection in relation to liable trust income when the liability is otherwise imposed than by sec. 254.

Therefore section 254 of the ITAA 1936 does not create a personal responsibility in the Receiver for tax assessed to the company. However, it makes them liable to pay tax on income, profits or gains of a capital nature derived by the receiver and administrator in their capacity as trustee (for tax purposes) of the company.

Taxation Determination TD 94/68 provides the Commissioner's view on the application of section 254 of the ITAA 1936.

The Commissioner determined that in cases where two parties - a receiver/manager and a liquidator - can both be legally responsible for lodging the return under paragraphs 254(1)(a) and (b) of the ITAA 1936, the Commissioner would look to the party who has control of the financial records.

Similarly in ATO Interpretative Decision ATO ID 2005/257, Income tax: who is responsible for lodgement of a company return when a liquidator has been appointed?, the Commissioner has adopted the position that, in cases where there are conflicting duties regarding lodgment (the duty of a public officer under section 252 of the ITAA 1936 and the liquidator under section 254 of the ITAA 1936), the Commissioner will look to the person who has control of the financial records to lodge a return for the whole of the income year.

TD 94/68 concerns the factual situation where the persons with the potential liability to lodge are both trustees (and hence both fall under the operation of section 254 of the ITAA 1936) whilst ATO ID 2005/257 concerns a situation where the relevant persons are the liquidator and a public officer. Nevertheless we believe the reasoning in those publications can be utilised in cases such as the one at hand where it is not clear who has the obligation to lodge and where one of the potential persons is a trustee under section 254 of the ITAA 1936.

Accordingly, in cases where there are two potential persons with an obligation to lodge and one of them is a trustee under section 254 of the ITAA 1936 the Commissioner will look to the person who has access and control of the records of the relevant entity. As stated in ATO ID 2005/257, not all persons who are obligated to lodge returns have control of the financial records necessary to do so.

Furthermore, both the TD 94/68 and ATO ID 2005/257 support the view that, in circumstances where there is successive or overlapping control of an entity, only one return is required to be lodged.

In this case, Company A became part of a consolidated group with effect from the 2007-08 income year with Company C as head company. The Single Entity Rule (SER) in section 701-1 of the ITAA 1997 provides that a consolidated group will be treated as if it is a single entity.

Section C9-1-110 of the Consolidation Reference Manual provides guidance on the operation of the SER, it states:

When a consolidated group is formed, the group is treated as a single entity for income tax purposes. Broadly, this means that on joining a consolidated group the subsidiary members lose their individual income tax identities and are treated as parts of the head company of the consolidated group (rather than as separate entities) for the purposes of determining the head company's income tax liability.

In effect, the consolidated group is treated as if it were a single divisional company. Intragroup assets and liabilities and intragroup transactions have no income tax consequences. The head company is the only entity the income tax law recognises for the purposes of working out the group's income tax liability.

As head company, Company C, is the only entity responsible for determining the tax liability of the entire group, and as it is not possible for you to properly determine any liability for the company since you do not control the financial records of the company, you will not be expected to lodge a tax return for the respective income years on behalf of the company. Only one return is required to be lodged, and as Company A is a subsidiary member of the consolidated group headed by Company C, the return would be handled by Company C.

Question 2

Paragraph 254(1)(a) of the ITAA 1936 provides that an agent or trustee is answerable as taxpayer for the payment of tax on the income, or any profits or gains of a capital nature, derived by him in his representative capacity. Paragraph 254(1)(b), provides that an agent or trustee is assessed on that income or those profits or gains but in his representative capacity only. In Fermanis v. Cheshire Holdings Pty Ltd, 90 ATC 4201 Murray J held at 4203 in relation to section 254 of the ITAA 1936:

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 sec 254 . . . .

It is clear, I think, that the provision operates as a machinery provision to facilitate tax collection in relation to liable trust income when the liability is otherwise imposed than by sec. 254.

Therefore section 254 of the ITAA 1936 does not create a personal responsibility in the Receiver for tax assessed to the company. However, it makes them liable to pay tax on income, profits or gains of a capital nature derived by the receiver and administrator in their capacity as trustee (for tax purposes) of the company. This is consistent with Taxation Ruling IT 2544 which discusses the Commissioners view in relation to the application of sections 254 and 255.

Paragraph 254(1)(d) of the ITAA 1936, to that end, authorises and requires a trustee to retain out of any money that is received in that representative capacity, an amount sufficient to pay that tax. The receivers are then under paragraph 254(1)(e) of the ITAA 1936 made personally liable for the tax assessed in respect of the income, profits or gains resulting from the receivership to the extent that money has been retained or should have been retained.

Consequently, you will only have a personal liability to pay income tax as receivers of the Charged Property for amounts that came to you in your representative capacity as trustee; and to which you as receivers have been authorised and required to retain, and which has been retained or should have been retained for the purpose of paying the income tax.

Accordingly, the personal liability for tax imposed by paragraph 254(1)(e) of the ITAA 1936 applies only to the extent that you; as the trustee, should have retained an amount to meet a tax liability imposed upon the trustee in the trustee's representative capacity.

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