Edited version of your written advice

Authorisation Number: 1012718400889

Ruling

Subject: CGT and FBT - Treatment of a residential property in a company under liquidation

Issue 1

Capital gains tax event

Question 1

Does a vesting order in real property by the Supreme Court made pursuant to subsection 474(2) of the Corporations Act 2001 constitute a CGT Event?

Answer

No

Question 1(a)

If the answer is yes, what type of CGT event?

Answer

N/A

Question 1(b)

What is the method of calculating the taxable capital gain given the real property has not yet been sold (i.e. how is its disposable value determined)?

Answer

N/A

Question 1(c)

Is the resulting CGT a personal liability of the liquidator pursuant to subsection 254(1) of the Income Tax Assessment Act 1936?

Answer

N/A

Question 2

If the vesting order is a CGT event, and if that order were to be later set aside by the court (if for example an application was filed to set the winding up aside), would the effect of such an order be to negate or to reverse the disposal arising under the vesting order?

Answer

N/A

Question 3

Would the settling aside of the original vesting order represent a second CGT event?

Answer

N/A

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

The scheme has commenced

Issue 2

Fringe benefits tax

Question 1

Will the provision of rent-free accommodation to a director and his spouse give rise to a housing fringe benefit?

Answer

No

Question 2

If the answer is yes, are the directors liable for fringe benefits tax?

Answer

N/A

This ruling applies for the following periods:

Year ended 31 March 2014

The scheme commences on:

1 April 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The company is in liquidation. Upon incorporation, the company issued X per cent shares each to two directors, director 1 and director 2.

The company purchased a residential property. The vendor of the property does not appear to have any relationship with the directors.

The applicant is the liquidator. The applicant is unaware of the source of funds used to purchase the property. The property is now believed to be worth approximately ten times its purchase price, and the company has owned the property for approximately X years.

Director 2 resigned as director several years later leaving director 1 as the sole director. The director restructured the company's shares, allocated to other family members equally.

These parties remain the current shareholders although the shareholding of the director presently vests with a trustee.

The director was removed from the company as director.

The company was wound up by the Supreme Court and the applicant was appointed Official Liquidator. At present, there is no appointed director of the company.

The property is occupied by the company's former director and family members.

Due to the failure by the former director to cooperate with the applicant as the liquidator, the applicant sought an order from the Supreme Court vesting the property to the applicant as liquidator, pursuant to subsection 474(2) of the CA 2001. The order was made.

As liquidator, the applicant is registered on the title as the proprietor of the property. The effect of the vesting order is to pass legal title of the property from the company to the applicant (as liquidator), albeit the applicant holds the property as trustee for the company's creditors and shareholders.

The applicant obtained an Order from the Supreme Court granting possession of the property. Prior to the eviction taking place, the applicant agreed to temporarily stay the proceedings on the basis of, amongst other things that a payment was paid into the applicant's solicitor's trust account. It was further agreed that the funds would be treated as an unsecured loan to the company to be applied in accordance with the Act. That is, it would be a provable debt in any return to creditors should the application to have the winding up set aside not be filed in a timely manner. A relative of the former director made the payment.

Facts relevant to issue 1

It is unclear to the applicant whether the vesting order gives rise to a disposal, and thus, represents a CGT event. Although there has been a transmission of legal title under the vesting order, there has arguably been no change in the underlying beneficial ownership of the property, as there has been no change in the shareholding of the company.

The former director and occupant of the property, together with other family members of the director, have stated through their solicitor that they intend to file an application under section 482 of the CA 2001, seeking to have the winding up of the company set aside on the grounds that it is solvent. This application, if it proceeds, will also necessarily involve an application to have the vesting order set aside. The shareholders of the company are anxious that capital gains tax not be triggered, as the potential liability is extremely material.

The applicant is concerned that as Official Liquidator, may be personally liable under subsection 254(1) of the Income Tax Assessment Act 1936 for the capital gains on the property; or if the tax liabilities will be ordinary unsecured debts of the company but will nevertheless be likely paid in full from the winding up, given the significant surplus of assets in the company's balance sheet (there is no mortgage against the property, only unpaid statutory liabilities and hence a substantial surplus, even if CGT is payable).

A CGT event will certainly take place when the property is sold by the applicant. Clarification is required as to whether a disposal has already occurred as a result of the vesting order.

Facts relevant to issue 2

The former director and family occupied the property as their residence since its purchase. The company appears to have acted merely as a property holding company. It has not, to the applicant's knowledge, conducted any other form of business or trading activity since incorporation, and therefore there does not appear to be any type of employer/employee relationship between the former director and the company. However, due to the lack of co-operation and failure to deliver the company's books and records to the applicant, the applicant cannot be certain as to its past activities (if any).

In order to ensure that all of the company's taxation liabilities are brought to account during the winding up, the applicant is seeking a ruling as to whether the provision of free accommodation by the company to the director (over a period of almost X years) gives rise to a fringe benefits tax liability.

The applicant does not know whether there were any other benefits, aside from the provision of rent free accommodation, provided to the company directors or family members in their capacity as employees of the company

Relevant legislative provisions

Corporations Act 2001 subsection 474(2)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 subsection 137(1)

Income Tax Assessment Act 1936 subsection 254(1)

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 106-35(2)

Taxation Administration Act 1953 section 12-35

Taxation Administration Act 1953 section 12-40

Reasons for decision

Issue 1

Question 1

Summary

A vesting order in real property to the liquidator by the Supreme Court does not trigger a CGT event as there is no change in beneficial ownership.

Detailed reasoning

Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that CGT event A1 is triggered when a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

Subsection 474(2) of the Corporations Act 2001 (CA 2001) states:

The Court may, on the application of the liquidator, by order direct that all or any part of the property of the company vests in the liquidator and thereupon the property to which the order relates vests accordingly and the liquidator may, after giving such indemnity (if any) as the Court directs, bring, or may defend, any action or other legal proceeding that relates to that property or that it is necessary to bring or defend for the purpose of effectually winding up the company and recovering its property.

The property in question was vested to the liquidator pursuant to section 474(2) of the CA 2001.

The vesting order, being a change in the control of the real property, does not change the beneficial ownership. The legal control has transferred to the liquidator but the benefit of the property is still in the hands of the company which, in this case, is the liquidator.

Section 104-5 of the ITAA 1997 lists CGT events. In the event of winding up an insolvent company, and disposing real property held by the company, CGT event A1 will trigger when the disposal contract is entered into or, if none, when entity stops being asset's owner.

A vesting order issued by court over real property does not legally transfer ownership of the real property to the liquidator; it is a transfer of control of the property.

This Part, Part 3-3 and Subdivision 328-C apply to an act done by a liquidator of a company, or the holder of a similar office under a *foreign law, as if the act had been done by the company (instead of by the liquidator etc.)

Example:

Ben, a liquidator of a company, sells a CGT asset of the company. Any capital gain or loss is made by the company, not by Ben.

Further context is provided in the CCH Federal Income Tax Reporter:

The effect of s 106-35(1) is that vesting of the CGT assets in a liquidator is ignored, ensuring that a company under liquidation continues to be treated as the owner of the asset, for the purposes of the CGT (under Pt 3-1 and 3-3) and Subdiv 328-C (what is a small business entity, including the connected entity provisions).

Section 106-35(2) provides that the CGT provisions in Pt 3-1 and 3-3 and Subdiv 328-C apply to an act done by a company's liquidator (or the holder of a similar office under foreign law) as if the act had been done by the company (instead of by the liquidator etc).

The effect of s 106-35 is that everything that happens to or in respect of that asset is taken into account in working out any CGT consequences in respect of that asset in the hands of the company. It also ensures that the connected entity and stakeholder tests are determined by reference to the company.

It is concluded that the vesting order by the Supreme Court of vesting the property at to the liquidator does not trigger a CGT event.

Issue 1 Question 1(a)

Summary

Not applicable

Detailed reasoning

As there is no CGT event, the answer to this question is not applicable.

Issue 1 Question 1(b)

Summary

Not applicable

Detailed reasoning

As there has been no CGT event triggered, the answer to this question is not applicable.

Issue 1 Question 1(c)

Summary

Not applicable

Detailed reasoning

As the answer to question 1 is No, the answer to this question is not applicable.

Issue 1 Question 2

Summary

Not applicable

Detailed reasoning

As the answer to question 1 is No, the answer to this question is not applicable.

Issue 1 Question 3

Summary

Not applicable

Detailed reasoning

As the answer to question 1 is No, the answer to this question is not applicable.

Issue 2 Question 1

Summary

The director is considered an employee of the company for the purposes of subsection 136(1) of the FBTAA 1986.

Detailed reasoning

In considering whether the director is an employee of the company, it is necessary to consider several factors to identify whether the company was the director's employer.

Subsection 136(1) of the FBTAA defines an employer as:

(a)  a current employer;

(b)  a future employer; or

(c)  a former employer;

Current employer is defined in subsection 136(1) to mean a person (including a government body) who pays, or is liable to pay, salary or wages, while future employer is defined to mean a person who will become a current employer.

Salary or wages is defined under subsection 136(1) to mean:

(a) a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income; and

(b) The withholding payments covered by this definition include:

• section 12-35 for a payment to an employee, and

• section 12-40 for a payment to a company director.

Section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA) states

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

Section 12-40 of Schedule 1 of the TAA states:

A company must withhold an amount from a payment of remuneration it makes to an individual:

(a)  if the company is incorporated as a director of the company, or as a person who performs the duties of a director of the company;

Although both of these sections involve a payment being made, subsection 137(1) of the FBTAA extends the definition of salary or wages to include a person who does not receive a cash payment but receives a benefit which would have been salary or wages if it had been a cash payment. It states:

For the purpose only of ascertaining whether a person is an employee or an employer within the meaning of this Act, where:

(a)  a benefit is provided by a person (in this subsection referred to as the first person) to, or to an associate of, another person (in this subsection referred to as the second person);

(b)  but for this subsection, the benefit would not be regarded as having been provided in respect of the employment of the second person; and

(c)  either of the following conditions is satisfied:

(i)  if the benefit were provided by the first person by way of a cash payment to the second person, the payment would constitute salary or wages paid by the first person to the second person;

(ii)  all of the following conditions are satisfied:

(A)  subparagraph (i) does not apply in relation to the benefit;

(B)  the first person is an associate of a third person or the benefit is provided under an arrangement between the first person and a third person;

(C)  if the benefit were provided by the third person by way of a cash payment to the second person, the payment would constitute salary or wages paid by the third person to the second person;

a definition in subsection 136(1) applies as if the benefit were salary or wages paid to the second person by:

(d)  in a case to which subparagraph (c)(i) applies the first person; or

(e)  in a case to which subparagraph (c)(ii) applies the third person.

The above discussion into the definition of employer, as a result of subsection 137(1) of the FBTAA, indicates that the director is treated as an employee of the company.

Issue 2 Question 2

Summary

The provision of accommodation the director and family is not in respect of employment as director of the company and is not a fringe benefit, and thus, no FBT is payable.

Detailed reasoning

The provision of rent free accommodation to the director and family will be a fringe benefit and subject to fringe benefits tax if provided in respect of employment. However, if provided for another reason, the benefits will not be subject to fringe benefits tax.

From the facts provided with your ruling request, the provision of a non cash benefit to the director may have been provided to them in several capacities:

1. As a deemed employee of the company (being a director);

2. As a shareholder of the corporate trustee;

Subsection 136(1) of the FBTAA 1986 defines a fringe benefit, and requires, among other things, that a benefit must be provided to an employee (or to an associate of an employee such as a family member) in respect of employment of that employee.

The primary factor in this case is determining if the benefit is provided to the director in respect of employment.

The term 'in respect of employment' has been considered by the courts on numerous occasions. In J and G Knowles and Associates Pty Ltd v. Commissioner of Taxation the full Federal Court examined the definition of fringe benefit and noted that:

...Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment...

Miscellaneous tax ruling MT 2019 provides guidance for fringe benefit tax purposes, in deciding whether a non cash benefit is provided in one's capacity as a shareholder, director/employee, or beneficiary of a family trust.

Paragraphs 8-19 of MT 2019 provides guidance specifically on whether benefits provided are in connection to one's capacity as a shareholder or an employee. Specifically, paragraph 9 states:

In relation to benefits that are not expressly linked to the carrying out of the employee's duties, it is necessary to examine all the facts and circumstances of the case to establish whether the benefit is fairly to be regarded as having been granted to the shareholder/employee in his or her capacity as an employee or as a shareholder. Factors such as the nature of the benefit, any cash remuneration paid, the nature and extent of any trading activities of the company, the extent of any services rendered by the shareholder/employee and the extent of his or her shareholding may be relevant in concluding whether a non-cash benefit was provided as remuneration for services or in the capacity of shareholder.

Furthermore, paragraph 12 states:

The true position may be, however, that a family company permits shareholder/employees to occupy a dwelling owned by the company in their capacity as shareholders. For example, where a family home is owned by a company which has not carried on a business and the dwelling is occupied rent-free by shareholder directors who have performed only nominal duties for the company, the strong inference would be that the benefit was granted because of something other than employment. If, in these circumstances, the company has not claimed deductions relating to the dwelling, it would be accepted that the free occupancy was not provided in respect of employment.

Despite the director having been deemed an employee as a consequence of subsection 137(1) of the FBTAA, the factors which will influence the decision are the following facts:

• The company is a holding company only and there is no evidence of trading activity;

• No income tax was paid nor deductions claimed;

• There is no evidence or indication of the director rendering any services to the company;

• The director held X per cent of the shares from company inception till in the first few years; and then Y per cent of the shares of the company from the resignation of director 2 onwards. The other shareholders are the director's family.

The application of these facts to the guidelines in paragraphs 9 and 12 of MT 2019 show a clear separation of the provision of rent free accommodation to the director and family to not be in capacity as director/employee and thus, the company is not liable for fringe benefits tax on these benefits. There is no material connection or relationship between the benefit and the employment.

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