Edited version of private advice

Authorisation Number: 1052294917092

Date of advice: 3 September 2024

Ruling

Subject: Trustee in bankruptcy

This ruling applies for the following periods:

30 June 20XX

30 June 20XX

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

During December XXXX, the Bankrupt and Taxpayer A purchased, as tenants in common, the Property.

On XX July 20XX, a court of a foreign jurisdiction declared the Bankrupt, bankrupt.

The Bankrupt is not an Australian citizen or permanent resident of Australia. The Bankrupt's nationality is of a foreign jurisdiction and they are a resident of a foreign jurisdiction. The Bankrupt used to travel to Australia on business visas.

On XX October 20XX, at a general meeting of creditors, Bankruptcy Trustees were appointed joint and several trustees of the bankrupt estate of the Bankrupt.

On XX December 20XX, the Bankruptcy Trustees lodged a Bankruptcy Application with the NSW Land and Registry Services for transmission of the Bankrupt's interest in the Property to them.

On XX January 20XX, the Bankruptcy Trustees became registered on the title of the Property in respect of the Bankrupt's interest in the Property and became the co-owners of the Property with Taxpayer A, as tenants in common, in equal shares.

By Summons, the Bankruptcy Trustees sought inter alia orders appointing Sale Trustees as statutory trustees of sale of the Property pursuant to the Conveyancing Act 1919 (NSW).

On XX November 20XX the Sale Trustees were appointed as statutory trustees of sale of the Property. An order was made that the Property be vested in the Sale Trustees on the statutory trust for sale under the Conveyancing Act 1919 (NSW) that the vesting order in the XX November 20XX Orders divested each of taxpayer A and the Bankruptcy Trustees/the Bankrupt of their beneficial interests in the Property; and following the making of the XX November 20XX orders neither Taxpayer A nor the Bankruptcy Trustees/the Bankrupt had a beneficial interest in the Property and that instead their rights were transformed into the right to see the statutory trust for sale performed and to a share of the net proceeds of sale in accordance with their beneficial interests and subject to an account in equity.

On XX May 20XX, the Sale Trustees became registered proprietors of the Property in accordance with the Real Property Act 1900 (NSW).

On XX April 20XX, the Sale Trustees, as vendors, and Taxpayer A, as purchaser, exchanged contracts for the sale of the Property for the sale price of $XX.

Settlement of the sale of the Property to Taxpayer A has been delayed to allow the parties to obtain private rulings from the Commissioner in respect of the Capital Gains Tax implications as a result of the appointment of the Sale Trustees and the Property vesting in them, and the subsequent sale of the Property by them to Taxpayer A.

Relevant legislative provisions

Section 6 of the Income Tax Assessment Act 1936

Section 254 of the Income Tax Assessment Act 1936

Section 104-10 of the Income Tax Assessment Act 1997

Section 104-55 of the Income Tax Assessment Act 1997

Section 106-30 of the Income Tax Assessment Act 1997

Section 110-25 of the Income Tax Assessment Act 1997

Section 110-55 of the Income Tax Assessment Act 1997

Section 115-210 of the Income Tax Assessment Act 1997

Section 116-20 of the Income Tax Assessment Act 1997

Section 14-200 of Schedule 1 to the Taxation Administration Act 1953

Section 14-215 of Schedule 1 to the Taxation Administration Act 1953

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Question 1

Pursuant to section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997), did a CGT event A1 occur on XX November 20XX when the Property vested in the Sale Trustees in accordance with the XX November 20XX Orders?

Answer

Yes.

Detailed reasoning

Section 104-10 of the ITAA 1997 provides:

(1) CGT event A1 happens if you * dispose of a • CGT asset.

(2) You dispose of a * CGT asset if 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.

(3) The time of the event is:

(a) when you enter into the contract for the * disposal; or

(b) if there is no contract--when the change of ownership occurs.

(4) You make a capital gain if the * capital proceeds from the disposal are more than the asset's * cost base. You make a capital loss if those capital proceeds are less than the asset's * reduced cost base.

The Sale Trustees were appointed consistent with the orders of a court on XX November 20XX. They were appointed in their capacity as Trustee for the sale of the Property because of the operation of law.

ATO ID 2009/129 Income Tax: Capital gains tax: land vested in a statutory trustee for sale, CGT event A1 or CGT event E1? (ATO ID 2009/129) states that the making of a court order effects a disposal of property from the previous owners to the trustees for sale by operation of the law.

The court orders resulted in CGT event A1 occurring to the Bankrupt and Taxpayer A. Accordingly, the Sale Trustees acquired the Property at the time CGT event A1 occurred.

Under the general cost base and reduced cost base rules covered by subsections 110-25(2) of the ITAA 1997 and 110-55(2) of the ITAA 1997, the first element of the cost base and reduced cost base of an asset is the sum of the amount paid (or required to be paid) and the market value of the property given (or required to be given) in respect of acquiring it.

ATO ID 2009/129 states that on the making of the court order each co-owner's interest in realty is converted to personalty. It is expected that the market value of this property will equate to the share of net proceeds received.

The total of the first, second and third elements of the cost base of the Property will equal the capital proceeds, being the money that the Sale Trustees received in respect of the sale of the Property. Given that the proceeds from the sale of the Property will equal the cost base for the Sale Trustees, they will realise neither a capital gain nor a capital loss on the sale of the Property.

Question 2

Pursuant to section 104-10 of the ITAA 1997, did a CGT event A1 occur on XX April 20XX when the Sale Trustees sold the property to Taxpayer A?

Answer

Yes.

Detailed reasoning

On XX April 20XX the ownership of the property changed from the Sale Trustees to Taxpayer A as the Purchaser. This was a change of ownership for the purposes of subsection 104-10(2) of the ITAA 1997.

ATO ID 2009/129 states that:

"A capital gain will be made as a result of CGT event A1 happening if the capital proceeds from the event are more than the asset's cost base. The capital proceeds for the event are the total of the money you receive or are entitled to receive in respect of the event happening and the market value of any other property you receive or are entitled to receive in respect of the event happening...

On the making of the court order each co-owner's interest in realty is converted to personalty. It is expected that the market value of this property will equate to the share of net proceeds received.

CGT event E1 did not happen when the trust was created over the property. That event happens if you create a trust over a CGT asset by declaration or settlement: subsection 104-55(1) of the ITAA 1997. It is considered that this event has no application where the trust is created by order of a court, rather than by the actions of the owners of the property. That is, given the court's role, it is impossible to cast the co-owners in the role of 'you' for the purpose of CGT event E1."

The sale of the Property by way of Trustee sale by order of a court does not amount to the creation of a Trust for the purposes of section 104-55 of the ITAA 1997. The capital proceeds received by the Sale Trustees will likely be nil as their first, second and third elements of the cost base will equal the capital proceeds for the event.

Question 3

Pursuant to section 104-10 of the ITAA 1997, will the capital proceeds of the CGT event A1 occurring on 5 April 2024 give rise to a capital gain to be taken into account in working out the net income of the Sale Trustee's for the income year ended 30 June 20XX?

Answer

No.

Detailed reasoning

Section 104-10 of the ITAA 1997 provides:

(1) CGT event A1 happens if you * dispose of a • CGT asset.

(2) You dispose of a * CGT asset if 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.

(3) The time of the event is:

(a) when you enter into the contract for the * disposal; or

(b) if there is no contract--when the change of ownership occurs.

(4) You make a capital gain if the * capital proceeds from the disposal are more than the asset's * cost base. You make a capital loss if those capital proceeds are less than the asset's * reduced cost base.

The Sale Trustees were appointed consistent with the orders of a court on XX November 20XX, they were appointed in their capacity as Trustee for the sale of the Property because of the operation of law.

Under the general cost base and reduced cost base rules covered by subsections 110-25(2) of the ITAA 1997 and 110-55(2) of the ITAA 1997, the first element of the cost base and reduced cost base of an asset is the sum of the amount paid (or required to be paid) and the market value of the property given (or required to be given) in respect of acquiring it.

ATO ID 2009/129 also states that on the making of the court order each co-owner's interest in realty is converted to personalty. It is expected that the market value of this property will equate to the share of net proceeds received.

Therefore, the total of the first, second and third elements of the cost base of the Property will equal the capital proceeds, being the money that the Sale Trustees received in respect of the sale of the Property. Given that the proceeds from the sale of the Property will equal the cost base for the Sale Trustee's, they will realise neither a capital gain nor a capital loss on the sale of the Property.

Question 4

In their capacity as Trustee for the sale of the Property, will the Sale Trustees be liable to include any amount in their assessable income under Subdivision 115-C of the ITAA 1997 or under Division 6 of the ITAA 1936?

Answer

No.

Detailed reasoning

Section 115-210 of the ITAA 1997 provides:

(1)             This Subdivision applies if a trust estate has a * net capital gain for an income year that is taken into account in working out the trust estate's net income (as defined in section 95 of the Income Tax Assessment Act 1936) for the income year.

In administering the sale of the property, the Sale Trustees were appointed by a court order on XX November 20XX to sell the Property on behalf of Taxpayer A and the Bankruptcy Trustees acting in their capacity as trustee for the Bankrupt to discharge the XX% previously held by the Bankrupt.

The sale of the Property by way of trustee sale by order of a court does not amount to the creation of a trust for the purposes of section 104-55 of the ITAA 1997. The capital proceeds of the Sale Trustees will likely be nil as their first, second and third elements of the cost base will equal the capital proceeds for the event. As such no capital gain will be recorded for the Sale Trustees and neither Subdivision 115-C of the ITAA 1997 or Division 6 of the ITAA 1936 will have application.

Question 5

In their capacity as Trustee for the sale of the Property, will the Sale Trustee's be liable to do any act or pay any tax liability in relation to section 254 of the ITAA 1936?

Answer

No.

Detailed reasoning

Subsection 254(1)(a) of the ITAA 1936 provides:

(1) With respect to every agent and with respect also to every trustee, the following provisions shall apply:

(a) He or she shall be 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 Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) (2015) HCA 48 (ABS) it was held by Kean J at 104:

"Section 254(1) is both a collecting provision and a liability-imposing provision in that, as an aid to the collection of tax, it imposes a personal liability to tax on the agent or trustee. Section 254(1)(a) expressly provides that an agent or trustee "shall be answerable as taxpayer ... for the payment of tax" on income, profits or gains derived by him or her in his or her representative capacity. This language creates a personal liability in an agent or trustee to pay tax albeit that this liability is ancillary to that of the principal or beneficiary."

Subsection 254(1) of the ITAA 1936 imposes obligations on every trustee in respect of any income or any profits or gains of a capital nature derived by them in their representative capacity, creating a secondary tax liability for agents and trustees, ancillary to the primary tax liability.

A trustee in bankruptcy is a trustee for the purposes of section 254 of the ITAA 1936 in accordance with the definition of 'trustee' in subsection 6(1) of the ITAA 1936. As such, section 106-30 of the ITAA 1997 does not negate a trustee in bankruptcy from their obligations under section 254 of the ITAA 1936.

The Sale Trustees are not trustees for the Bankrupt and instead are trustees only for the sale of the Property in accordance with the orders made on XX November 20XX. In accordance with Section 254 of the ITAA 1936 and the decision in ABS the Sale Trustee's are not trustees for the Bankrupt and not liable to do any act or pay any tax liability in connection with the obligations of the Bankrupt.

Question 6

Is the disposal of the Property in relation to this ruling an excluded transaction from the Foreign Resident Capital Gains Withholding Regime for the purposes of section 14-215 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

Yes.

Detailed reasoning

The foreign resident CGT withholding regime in Schedule 1 Subdivision 14-D of the TAA 1953 imposes an obligation on a purchaser who acquires from a foreign resident a CGT asset consisting of: (1) taxable Australian real property (TARP); (2) an indirect Australian real property interest; or (3) an option or right to acquire such property or interest.

While section 14-200 of Schedule 1 to the TAA 1953 imposes an obligation on the vendor to withhold 12.5% for the first element of the cost base and remit it to the Commissioner where the vendor is a foreign resident, there are excluded transactions in section 14-215 of Schedule 1 to the TAA 1953. Subsection 14-215(1)(g)(i) of Schedule 1 to the TAA 1953 provides:

(1) A transaction that results in the * acquisition of a * CGT asset is excluded under this section if:

(g) the transaction arises from any of the following:

(i) the administration of the estate of a bankrupt;

Note: This section is relevant to whether you must pay an amount to the Commissioner under section 14 - 200.

Where the foreign resident vendor is bankrupt and the sale is as a result of the administration of a bankrupt estate the withholding provisions will not apply. This will ensure that the withholding obligation will not disturb the priority of other creditors in the administration of the bankrupt estate. It is provided at 2.55 of the explanatory memorandum to the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015:

"Where the foreign resident is an individual, the amendments will not apply where the transaction arises from the administration of a bankruptcy estate, a composition or scheme of arrangement, a debt agreement, a personal insolvency agreement, or same or similar circumstances under a foreign law."

As the sale of the Property from Taxpayer A and the Bankruptcy trustees in their capacity as trustees of the Bankrupt to the Sale Trustees and then to Taxpayer A is in relation to the administration of the bankrupt estate of the Bankrupt, the transaction will be excluded from the withholding regime as indicated in section 14-200 of Schedule 1 to the TAA 1953.

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