Edited version of private advice

Authorisation Number: 1052102978269

Date of advice: 30 March 2023

Ruling

Subject: Bankrupt estate

Question 1

Will CGT event A1 apply to the proposed transfer of the Bankruptcy Trustee's equitable interest in the Property in favour of the discharged Bankrupt by entering into a transaction with the Bankrupt that provides for the transfer of the Trustee's interest in the Property and the subsequent annulment of the bankruptcy pursuant to subsection 153A(1) of the Bankruptcy Act 1966?

Answer

No.

Question 2

Will section 254 of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the Trustee of the former bankrupt estate as a result of entering into the proposed transaction?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

An individual who became bankrupt (the Bankrupt) owns a property (the Property).

Pursuant to section 58 of the Bankruptcy Act 1966 (Act), where a debtor becomes a bankrupt, the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A of the Act, in that registered trustee.

The Trustee of the estate of the Bankrupt has not lodged a transmission application with the relevant state land registry and as such the Trustee is not currently registered as the legal owner of the Property. However as provided for by subsection 58(2) of the Act, even though the Trustee is not registered as the legal owner of the property, the property vests in equity in the Trustee, and a caveat has been lodged to protect that interest.

In 20XX, the Bankrupt was discharged from bankruptcy at the end of the period of 3 years from the date on which they filed their statement of affairs, as per section 149 of the Act.

The Bankrupt now wishes to annul the bankruptcy as allowed for under section 153A of the Act. This is to be effected by borrowing money using the Property as security. However, the Bankrupt is not empowered to do so whilst the Property vests in the Trustee by reason of section 58 of the Act.

An option has been proposed to annul the bankruptcy pursuant to section 153A of the Act in the following way:

•         The Trustee and the Bankrupt will enter into a Deed pursuant to which the Trustee will transfer its equitable interest in the Property to the Bankrupt for consideration that will be in an amount to be determined, which will at a minimum be for the total value of the debts in the bankrupt estate together with the Trustee's costs and expenses;

•         An entity related to a creditor of the bankrupt will be the borrowing entity and the transfer of the Trustee's equitable interest will be to the discharged Bankrupt. The borrowing entity will lend funds to the Bankrupt sufficient to pay the creditors in full;

•         Once the equitable interest has been transferred to the discharged Bankrupt, they would then be the owner in fee simple of the property (with both legal and equitable title vesting in them) which would enable them to then grant the Property as security so as to borrow funds as contemplated above.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 254

Income Tax Assessment Act 1997 Section 106-30

Bankruptcy Act 1966

Reasons for decision

Question 1

Subsection 106-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that for the purposes of the capital gains tax provisions, the vesting of an individual's CGT assets in the trustee under the Bankruptcy Act 1966 is ignored.

Further, subsection 106-30(2) of the ITAA 1997 provides that the CGT provisions apply to an act done in relation to a CGT asset of an individual in the following circumstances as if the act had been done by the individual (instead of by the trustee):

a)      as a result of the bankruptcy of the individual by the Official Trustee in Bankruptcy or a registered trustee

b)      by a trustee under a personal insolvency agreement made under Part X of the Bankruptcy Act 1966

c)      by a trustee as a result of an arrangement with creditors under that Act.

Subsection 153A(1) of the Act provides that if the trustee is satisfied that all the bankrupt's debts have been paid in full, the bankruptcy is annulled on the date on which the last such payment was made.

Subsection 154(1) of the Act provides that where the bankruptcy of a person is annulled:

a)    all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment are taken to have been validly made or done; and

b)    the trustee may apply the property of the former bankrupt still vested in the trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee; and

c)    the remainder (if any) of the property of the former bankrupt still vested in the trustee reverts to the bankrupt (subject to certain specified exceptions).

In this case, the Trustee is proposing to enter into a Deed with the discharged Bankrupt pursuant to which the Trustee's equitable interest in the Property will be transferred to the Bankrupt for consideration that will at a minimum be for the total value of the remaining debts in the bankrupt estate together with the Trustee's costs and expenses.

The effect of the proposed arrangement will be that the discharged Bankrupt will pay all their remaining debts and the bankruptcy will be annulled pursuant to section 153A of the Act.

In this case, the individual was the legal and beneficial owner of the property and when the bankruptcy occurred, the Property vested in the Trustee as trustee of the estate of the bankrupt. As such, the bankruptcy did not alter the beneficial ownership of the Property by the Bankrupt.

Consequently, on entering into the proposed Deed to transfer the Trustee's equitable interest to the discharged Bankrupt, there will be no change in the beneficial ownership of the property and therefore, CGT event A1 will not happen to the Trustee.

Question 2

Where a trustee in bankruptcy has disposed of a CGT asset and has derived a net capital gain, section 254 of the ITAA 1936 provides that the trustee in bankruptcy is responsible for the payment of the tax.

Section 254 of the ITAA 1936 is to be read in conjunction with section 106-30 of the ITAA 1997. While section

106-30 of the ITAA 1997 makes a capital gain or loss that has been derived by a trustee in bankruptcy attributable to the bankrupt individual instead of the trustee for CGT purposes, section 254 of the ITAA 1936 makes a trustee answerable as the individual taxpayer.

This means that the trustee in bankruptcy will need to:

• report the net capital gain by lodging a return in their representative capacity and be assessed thereon;
• retain the requisite amount of CGT upon being issued a notice of assessment; and
• pay tax on the relevant capital gains.

In this case, the Trustee will not make a capital gain or loss when the proposed Deed is entered into. Therefore, section 254 of the ITAA 1936 will not apply.

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