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Authorisation Number: 1012746657754

Ruling

Subject: Trustee and agent obligations

Question 1

Has X, in their capacity of agent for the trustee for the Y Trust, derived a gain of a capital nature in respect of the disposal of the Properties for the purposes of section 254 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Bankrupt remains an undischarged bankrupt.

X was appointed as the trustee in bankruptcy.

The Bankrupt is also the trustee of the Y Trust.

The Y Trust held the Properties.

The Properties do not vest in the bankrupt estate within the meaning of subsection 116(1) of the Bankruptcy Act 1966.

The Bankrupt has authorised X to act as his agent in respect of their role as the trustee of the Y Trust in order to dispose of the Properties and deal with the proceeds from the sale.

The Properties were sold. X currently holds the net proceeds from the sale of the Properties. There are a number of entities that have claimed an interest in the proceeds.

The trustee of the Y Trust has resolved to distribute all of the trust's net income to the Bankrupt in the year ended 30 June 20YY.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 254

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-1

Reasons for decision

Subsection 254(1) of the ITAA 1936 provides that if a trustee or agent derives income, profits or gains of a capital nature in their representative capacity, then the trustee or agent has various obligations and responsibilities to meet under section 254 of the ITAA 1936.

The gateway to the operation of subsection 254(1) of the ITAA 1936 is paragraph 254(1)(a) of the ITAA 1936. Paragraph 254(1)(a) of the ITAA 1936 provides that every agent or trustee is:

… 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.

In respect of income, profits or gains referred to in paragraph 254(1)(a) of the ITAA 1936, the agent or trustee is required to retain out of money which he or she receives as agent or trustee an amount sufficient to pay tax that is or will become due. He or she is personally liable for any tax payable to the extent of any amount that has been retained or should have retained.

Section 254 of the ITAA 1936 does not of itself create a liability for the substantive tax (Fermanis v. Cheshire Holdings Pty Ltd (1990) 1 WAR 373; 90 ATC 4201 at 4203; (1990) 20 ATR 1862 at 1865, per Murray J). Rather any liability on the trustee or agent under section 254 of the ITAA 1936 arises by reference to the substantive liability arising under other provisions of the tax acts. Its purpose and object is to provide the machinery provisions to ensure that the reporting, collection and other obligations under subsection 254(1) of the ITAA 1936 are carried out by the agent or trustee, who has undertaken the relevant action; and is not to be read as an assessing provision.

Draft Taxation Determination TD 2012/D6 explains the scheme of section 254 of the ITAA 1936 as follows:

'… the provision contemplates: income, profits or gains are derived or made; funds representing that income, profits or gains are received by an agent or trustee; the agent or trustee retains a sufficient amount from these funds to cover the income tax consequences arising from the derivation of the relevant income, profits or gains, or risks personal liability'.

This suggests that section 254 of the ITAA 1936 attempts to impose the obligations on the person who both acts in such a way that income, profits or gains are derived, and who receives that money such that they are in a position to pay the tax liability.

Gains of a capital nature

Section 254 of the ITAA 1936 as originally enacted, only referred to 'income derived by him in his representative capacity' (emphasis added).

When the capital gains tax (CGT) regime was introduced in 1986, section 254 of the ITAA 1936 was amended as follows:

Section 254 of the Principal Act is amended -

(a) by inserting ", or any profit or gains of a capital nature," after "income" in paragraph (1)(a);

(b) by inserting ", or those profits or gains," after "income" in paragraph (1)(b); and

(c) by inserting ", profits or gains" after "income" in paragraphs (1)(d) and (e).

The Explanatory Memorandum to the Income Tax Assessment Amendment (Capital Gains) Bill 1986, which introduced the above amendments, states at clause 33:

Sub-clause 33(a) proposes to amend paragraph 254(1)(a) by ensuring that agents and trustees are also answerable for things required to be done by virtue of the Act in respect of any profits or gains of a capital nature as well as in respect of income derived.

Where a legislature could have used the same word but chose to use a different word, it is presumed that the intention was to change the meaning (Pearce DC and Geddes RS, Statutory Interpretation in Australia 6th Edition, Butterworths, Australia 2006, at page 118). Even though there was a consequential amendment to section 254 of the ITAA 1936 when the CGT provisions were introduced in 1986, the words used in section 254 of the ITAA 1936 are not the same as the words used in the CGT provisions. Section 254 of the ITAA 1936 was amended to include 'gains of a capital nature' and did not refer to 'capital gains' or 'net capital gains' as used in Part 3-1 and Part 3-3 of the ITAA 1997. Therefore, the presumption is that the legislature intended that the words would have a different meaning.

There is no context to suggest that 'gains of a capital nature' means the same thing as 'capital gains' or 'net capital gains' for the purposes of section 254 of the ITAA 1936.

As such, it is considered that 'gains of a capital nature' in the context of section 254 of the ITAA 1936, is a wide concept, that will include, but is also distinct from, making 'capital gains' and 'net capital gains'.

Are the gains of a capital nature 'derived' by X in his representative capacity?

The term 'derived' is not defined in the ITAA 1936 or the ITAA 1997. It therefore takes its ordinary meaning in the context in which it appears.

In SCCASP Holdings Ptd Ltd as Trustee for the H&R Super Fund v. Commissioner of Taxation 2013 ATC 20-390, at [61], Lander, Siopis and Gilmour JJ said:

It is not possible, in our opinion, to discern from the ITAA 36 or ITAA 97 a technical meaning of the word "derived". It must bear whatever meaning is relevant, having regard to the context in which is appears in the Acts and by reference to the purpose for which the provision in which it is included is designed.

In Commissioner of Taxation v. Clarke (1927) 40 CLR 246 at 261, Isaacs ACJ said:

"Derived" only means "obtained" or "got" or "acquired". All income is derived from something and by someone … Paragraph (a) of s 52 of the Act 1915-1918 shows that income may be "derived" by an "agent" in his representative capacity.

In FCT v. Thorogood (1927) 40 CLR 454 at 458, Isaacs J added that 'derived' does not necessarily mean actually received, although receipt is the ordinary mode of derivation. An extension of this idea appears in IRC (NZ) v. NV Phillips' Gloeilampenfavrieken [1955] NZLR 868 at 884 per Gresson J:

The word "derived" means more than received; it connotes the source of origin, rather than the fund or place, from which the income is taken. It means flowing, springing, emanating from, or arising from or accruing.

In Commissioner of Taxes (SA) v. Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108, it was said that essentially, income is derived when it 'comes in' or 'comes home', in whatever sense is most appropriate in the particular circumstances.

These passages demonstrate that the meaning of the word 'derived' is extremely wide and must be applied with consideration of the particular context in which it is used.

In section 254 of the ITAA 1936, derived is used in the context of 'gains of a capital nature', which, as concluded above, is a wide concept which is different to 'capital gains' and 'net capital gains'.

The CGT provisions in Part 3-1 and Part 3-3 of the ITAA 1997 do not use the term 'derived' to describe the making of a 'capital gain'. Rather, the CGT regime is premised on CGT events happening and the calculation of a capital gain or capital loss which a taxpayer makes from the event, such that a person 'makes' a capital gain. As the meaning of 'gains of a capital nature' is broader than the meaning of 'capital gain' or 'net capital gain', it follows that the concept 'derives' a gain of a capital nature will be different and broader than the concept of 'making' a capital gain for the purposes of Part 3-1 and Part 3-3 of the ITAA 1997.

As discussed above, the context and purpose of section 254 of the ITAA 1936 suggests that it is intended to work in situations where the primary means of reporting and collection (such as payment by the entity that is liable) may not work.

The Commissioner is of the view that deriving a gain of a capital nature for the purposes of section 254 of the ITAA 1936 means that the trustee or agent 'obtains', 'gets' or 'receives' the proceeds from the disposal of a capital asset in a general law, rather than tax law sense. As such, for the purposes of section 254 of the ITAA 1936, X has derived 'gains of a capital nature' in his representative capacity as a result of 'obtaining' or 'receiving' the proceeds from the sale of the Properties even though the CGT liability may arise with another entity.

Accordingly, the obligations under section 254 of the ITAA 1936 will apply to X, in their capacity of agent for the trustee of the Y Trust, in respect of the gain derived from the disposal of the Properties.

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