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Edited version of your written advice
Authorisation Number: 1013004556900
Date of advice: 10 March 2017
Ruling
Subject: Trustee of a bankrupt estate and capital gain tax as a result of the sale of property
Question
Do you have obligations under section 254 of the Income Tax Assessment Act 1936 (ITAA 1936), in your capacity as trustee of the Property of the Bankrupt, in respect of any gain made on the sale of the Property?
Answer
Yes.
(a) You are answerable as taxpayer in respect of the capital gain made as a result of the sale of the property (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) does not arise until the Commissioner makes an assessment setting out the amount of income tax payable.
This ruling applies for the following periods:
Year ending 30 June 2017
The scheme commences on:
1 July 2015
Relevant facts and circumstances
An individual became bankrupt (the Bankrupt) and you were appointed trustee of the bankrupt estate under the Bankruptcy Act 1966.
The Bankrupt owned a property over which a bank held a registered mortgage in respect of the Property.
The Bankrupt had separated from their spouse prior to the bankruptcy and proceedings were initiated through the Family Court.
The bank took possession of the Property to exercise its power of sale pursuant to the registered mortgage.
The Family Court made orders that upon the sale of the Property by the Bank the parties agree that the balance of the proceeds, after the bank has deducted amounts owing under the secured mortgage, be paid into a controlled monies account to be held by you pending discharge of any liability you have to pay the capital gains tax arising on the sale. You are required to distribute the surplus after any such tax liability is provided for in specified proportions between the spouse and the bankrupt estate.
The Bankrupt was discharged from Bankruptcy during the income year.
The contract for the disposal of the Property was entered into, and settlement occurred, during the income year. The Bankrupt remained the sole registered proprietor of the Property until it was transferred by the mortgagee under power of sale.
You have advised that a capital gain was made on the sale of the Property pursuant to Part 3-1 of the ITAA 1997.
Detailed Reasoning
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 Property on the day the contract for disposal of the property was entered into.
In FCT v Australian Building Systems Pty Ltd (in Liq) and 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 from time to time out of any money that comes to you so much as is sufficient to pay the tax assessed in respect of the gain This obligation extends to moneys you have received prior to the gain being assessed and so would extend to monies at the time of the income tax assessment in the controlled monies account pursuant to the Family Court order.
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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