Edited version of private advice

Authorisation Number: 1052337410456

Date of advice: 23 December 2024

Ruling

Subject: Trustee in bankruptcy

Question 1

Are the individuals in their capacity under section 66G of the Conveyancing Act 1919 (NSW), required to withhold Capital Gains Tax (CGT) for both the co -owner and the bankrupt estate?

Answer 1

No.

Question 2

Does the individual, in their capacity as the Bankruptcy Trustee of the bankrupt estate, required to withhold CGT on behalf of the estate?

Answer 2

Yes.

This ruling applies for the following period:

DD MM YY

The scheme commenced on:

DD MM YY

Relevant facts and circumstances

On the specified date the Bankrupt and their spouse (the Co-Owner), purchased as joint tenants the property.

On the specified date the Court of Australia made a sequestration order (the order) against the Bankrupt. The order is operated by section 58 (1), 116 (1) and 129AA of the Bankruptcy Act 1966 andon this date the following was applied:

•                     The equitable interest in the property was vested in the Bankruptcy Trustee in their capacity as trustee of the Bankrupt Estate of the bankrupt.

•                     The order operates to severer the joint tenancy between the Bankrupt and the Co-Owner. This allows the bankrupt trustee to sell the bankrupts interest in the property.

On the specified date, the Court of Australia ordered the bankrupt trustee and liquidator (together as the s66G Trustees) to be appointed as trustees for sale under section 66G of the Conveyancing Act 1919 (NSW). This order was due to the inability of the Bankruptcy Trustee and the Co-Owner to agree on how to sell the property.

On the specified date, the property was sold at auction to a third party for the specified amount. Settlement occurred the specified date.

Settlement of expenses for the property by the s 66G Trustees as instructed in the court orders:

•                     Deduction of associated expenses.

•                     The specified amount was remitted to the mortgagee.

•                     Net surplus divided equally between the bankrupt estate and co-owner.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 section 254

Income tax Assessment Act 1997 Division 50

Income tax Assessment Act 1997 section 104-10

Income tax Assessment Act 1997 section 106-30

Income tax Assessment Act 1997 section 110-25

Income tax Assessment Act 1997 section 112-20

Income tax Assessment Act 1997 section 118-110

Income tax Assessment Act 1997 section 118-14

Reason for decision

Question 1 Obligations of the Trustees for sale

Detailed reasoning

Appointments under section 66G of the Conveyancing Act 1919 (NSW), Section 66G of the Conveyancing Act 1919 (NSW) permits the court to appoint statutory trustees for sale or partition of property held in co-ownership:

(1)           Where any property (other than chattels) is held in co-ownership the court may, on the application of any one or more of the co-owners, appoint trustees of the property and vest the same in such trustees, subject to incumbrances affecting the entirety, but free from incumbrances affecting any undivided shares, to be held by them on the statutory trust for sale or on the statutory trust for partition.

(2)           Where the entirety of the property is vested in trustees or personal representatives, those trustees or personal representatives shall, unless the court otherwise determines, be appointed trustees on either of such statutory trusts, but subject, in the case of personal representatives, to their rights and powers for the purposes of administration.

(7)           Where property becomes subject to such statutory trust for sale--

(a)           in the case of joint tenancy, a sale under the trust shall not of itself effect a severance of that tenancy,

(b)           in any case land shall be deemed to be converted upon the appointment of trustees for sale unless the court otherwise directs.

On the specified date, the court ordered the individuals ('you' collectively) to be appointed as Trustees for sale. Upon appointment under the Conveyancing Act you now had the rights and powers to dispose of the property and administer the Bankrupt Estate as stated within the court orders.

The timing of CGT event A1

Subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides CGT event A1 happens if you dispose of a CGT asset.

Subsection 106-30(1) of the ITAA 1997 provides that for the purposes of the CGT provisions, the vesting of an individual's CGT assets in the trustee under the Bankruptcy Act 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):

•                     as a result of bankruptcy by the Official Trustee in Bankruptcy or a registered trustee, or the holder of a similar office under a foreign law;

•                     by a trustee under a personal insolvency agreement made under Pt X of the Bankruptcy Act, or under a similar instrument under a foreign law;

•                     by a trustee as a result of an arrangement with creditors under the Bankruptcy Act or a foreign law.

ATO ID 2009/129 Capital gains tax: land vested in a statutory trustee for sale, CGT event A1 or CGT event E1? Provides guidance in respect to the situation where a court appoints statutory trustees for the sale of co-owned property and the relevant state Conveyancing Act specifies that the property is 'converted' on appointment.

The ATO ID explains that on the making of the court order, the whole of the co-owners' interests in the property vest in the trustees for the sale of the property, and the co-owners' interests are converted into personalty that is, into a right to compel due performance of the trust and to share in the proceeds of sale in accordance with their interests.

Requirement to withhold amounts under section 254 of the ITAA 1936

Section 254(1) of the Income Tax Assessment Act 1936 (ITAA 1936) applies obligations to all agents and trustees:

(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.

(b)           He or she shall in respect of that income, or those profits or gains, make the returns and be assessed thereon, but in his or her representative capacity only, and each return and assessment shall, except as otherwise provided by this Act, be separate and distinct from any other.

(c)           If he or she is a trustee of the estate of a deceased person, the returns shall be the same as far as practicable as the deceased person, if living, would have been liable to make.

(d)           He or she is hereby authorized and required to retain from time to time out of any money which comes to him or her in his or her representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains.

(e)           He or she is hereby made personally liable for the tax payable in respect of the income, profits or gains to the extent of any amount that he or she has retained, or should have retained, under paragraph (d); but he or she shall not be otherwise personally liable for the tax.

(f)           He or she is hereby indemnified for all payments which he or she makes in pursuance of this Act or of any requirement of the Commissioner.

(g)           Where as one of 2 or more joint agents or trustees he or she pays any amount for which they are jointly liable, each other one is liable to pay him or her an equal share of the amount so paid.

(h)           For the purpose of insuring the payment of tax the Commissioner shall have the same remedies against attachable property of any kind vested in or under the control or management or in the possession of any agent or trustee, as the Commissioner would have against the property of any other taxpayer in respect of tax.

In FCT v Australian Building Systems Pty Ltd (in Liq) & Ors [2015] HCA 48 (ABS), the High Court described subsection 254(1) of the ITAA 1936 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.

Application to your circumstances in capacity as trustee for sale

CGT event A1 occurred when the property was sold. Because you, as Trustees, undertook an obligation to pay the net proceeds of the sale to the previous owners of the Property, your payment of the net proceeds to them will be your cost of acquisition ('the money you are required to pay') for the purposes of subsections 110-25(2) and 110-55(2) of the ITAA 1997.

The second and third elements of the cost base are provided by subsections 110-25(3) and 110-25(4) of the ITAA 1997 respectively. Clause 3 of the Court Order relates to outgoings by the Trustees that will form the second and third elements of the cost base of the Property.

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 Trustees in sale receive in respect of the sale of the Property. Given that the proceeds from the sale of the Property will equal your cost base of the Property on acquisition, you will realise neither a capital gain nor a capital loss on the sale of the Property.

You will have no obligation to withhold under section 254 of the ITAA 1997 in your capacity as Trustee for Sale, you will not realise a capital gain or loss on the sale of the property, the CGT event that triggers a capital gain for the taxpayer, arises in relation to the earlier CGT event A1, when the court order is made and the co-owners' interest converted to personalty. Therefore, the obligation to withhold pursuant to section 254 attaches to the Trustee in Bankruptcy, as discussed below.

Question 2 - Obligations of the Bankrupt trustee

Detailed reasoning

Bankruptcy Act 1966

Subsection 58(1) of the Bankruptcy Act 1966 (Bankruptcy Act) provides that where a debtor becomes bankrupt:

(a)           the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and

(b)           after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.

Subsection 106-30(1) of the ITAA 1997 provides that for the purposes of the CGT provisions, the vesting of an individual's CGT assets in the trustee under the Bankruptcy Act 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 bankruptcy by the Official Trustee in Bankruptcy or a registered trustee, or the holder of a similar office under a foreign law;

(b)           by a trustee under a personal insolvency agreement made under Pt X of the Bankruptcy Act, or under a similar instrument under a foreign law;

(c)           by a trustee as a result of an arrangement with creditors under the Bankruptcy Act or a foreign law.

For example, a CGT asset of an individual vests in a trustee because of the bankruptcy of the individual. No CGT event happens as a result of the vesting. When the trustee later disposes of the CGT asset, any capital gain or loss is made by the individual, not the trustee. However, paragraph 254(1)(a) of the ITAA 1936 makes a trustee answerable as taxpayer for the payment of tax on any income, profits or gains they derive in their representative capacity.

As mentioned above, the making of the court order effects a disposal of the property from the co-owners to the trustees for sale by operation of law. Therefore, CGT disposal event A1 in section 104-10 of the ITAA 1997 will happen in these circumstances.

Agents and trustees have obligations under section 254 of the Income Tax Assessment Act 1936. When the provision applies, the trustee or agent must make returns, be assessed, and retain money to pay the tax on any income, profit or capital gains made in a representative capacity.

Section 254 of the ITAA 1936 is triggered at the moment a trustee derives income, profits or gains in their representative capacity. In Robson ATF Bankrupt Estate of Lanning v FC of T 2024 ATC FCA 720 the High Court noted neither section 106-30 nor the fact that the primary liability fell on the bankrupt prevented section 254 from imposing an ancillary liability on the trustee in bankruptcy.

Application to your circumstances in capacity as Bankruptcy Trustee

In relation to CGT event A1 occurring when the property vested in the trustee for sale, any capital gain or loss is made by the individual, not the Bankruptcy Trustee.

However, section 254 of the ITAA 1936 will apply to you as the Bankruptcy Trustee, your obligations as trustee includes the requirement to retain amounts to cover the payment of CGT arising from the disposal of the property.

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