Edited version of private advice

Authorisation Number: 1052340930025

Date of advice: 6 December 2024

Ruling

Subject: Tax characteristics of debts in the hands of receivers

Question 1

Do the Debts retain their character for tax purposes when subsequently imposed on the Receivers under section 419 of the Corporations Act 2001?

Answer

Yes.

Question 2

If the response to Question 1 is 'No', are the Receivers entitled to an income tax deduction for the Debts as a loss or outgoing under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

As the answer to Question 1 was 'Yes', no ruling will be provided for this question.

Question 3

If the response to Question 2 is 'Yes', are the Debts 'incurred' when it becomes apparent that funds will not be available from the recovery of the companies' assets nor from the appointor under the indemnity given to the Receivers?

Answer

A ruling will not be provided for this question.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

X/XX/20XX

Relevant facts and circumstances

1.             Receiver A and Receiver B (collectively, the Receivers) are partners in Firm X, an insolvency and business advisory firm.

2.             Firm X is an Australian Partnership for tax purposes. Receiver A and Receiver B are also Australian residents for tax purposes. They are not residents of any other country.

3.             The Receivers were appointed as receivers of the following entities, collectively, the Company Group, on the XX/XX/20XX:

(a)          Company 1

(b)          Company 2

(c)           Company 3

4.             The Receivers were appointed as receivers of Company 1, Company 2 and Company 3 by Creditor X who provided secured lending to Company 1. Under a lending agreement, Company 1 granted Creditor X a right to appoint a receiver or manager to Company 1 in the event of a default under the lending agreement. In addition, the lending agreement included securitisation of Company 2, and Company 3 provided Creditor X with an additional right to appoint a receiver and manager over those entities. The security provided was a lien over all company assets.

5.             As is common practice, Creditor X provided the Receivers with an indemnity in respect of debts or liabilities they incurred in the course of their receivership.

6.             On their appointment, the Receivers provided written notice to the Commissioner that they were appointed Receivers and they had taken possession of the Company Group assets in accordance with Subdivision 260-C of Schedule 1 to the Tax Administration Act 1953 (TAA).

7.             Company 2 acted as a franchisor for a number of franchised stores. It also operated a number of stores in its own capacity.

8.             Company 1 operated a production facility in Australia. The production facility manufactured and sold products to its franchise network.

9.             Company 3 held intellectual property (IP) rights in Australia and throughout the Asia region. Company 3 received royalties from an overseas country which operated the Company group in that overseas country. When the Receivers were appointed, they undertook the following key tasks:

(a)          closed down all the stores owned and operated by Company 1

(b)          maintained the franchise network to the maximum extent possible

(c)           continued to trade the production facility under their supervision, and sought and signed new customers for its use

(d)          prepared an information memorandum for the sale of the businesses carried on by the Company Group as a going concern. At this time, Creditor X requested that the Receivers trade the business for X months to demonstrate it could be traded profitably following changes implemented by the Receivers.

10.          The Company Group business was offered for sale in or around X/XX/20XX, with a Heads of Agreement (HOA-1) being entered into with Entity A on 1 April 20XX. Under the HOA-1, Entity A would acquire the IP and the franchise network but would not acquire the production facility. A key term was that the Receivers must continue operating the production facility for XX weeks for a consideration of $XXX,XXX, to be paid out of the purchase price.

11.          On XX/XX/20XX, formal agreements were entered into to give effect to the HOA-1. For clarity, the

12.          HOA-1 did not include the sale of Company 1 which operated the production facility (as either a share or asset sale).

13.          The Receivers continued to trade the production facility in accordance with the terms of the HOA-1. As anticipated at the time of agreeing to trade the production facility and despite the Receivers' best efforts, the production facility operated at a loss.

14.          On or around X/XX/20XX, an information memorandum was prepared for the sale of the production facility.

15.          On XX/XX/20XX, and with Creditor X's approval, a Heads of Agreement (HOA-2) was entered into with Entity B to acquire the production facility. A key term of the HOA-2 was that the production facility business and assets were licensed to Entity B for use until the formal sale agreement was executed and the transaction settled (the Licensing Agreement) while the Receivers retained the lease of the production facility premises and the employees. The license fees under the agreement were intended to equal to the gross costs incurred by the Receivers in maintaining the lease and providing the services of the employees to Entity B.

16.          The HOA-2 contained a provision that Company 1 would receive a commission if Entity A entered into a guaranteed supply agreement with Entity B for XX months. Notably, Company 1 was the entity which would be retained by the Receivers. The expected value of this commission stream was $XXX,XXX.

17.          It was expected that the proceeds from the sale would be sufficient to discharge post appointment debts, including the amounts owed to the Australian Taxation Office (ATO), and also provide a return to Creditor X.

18.          On or around XX/XX/20XX, Entity A advised it would not enter into a guaranteed supply agreement with Entity B.

19.          As a result of Entity A 's decision not to enter into a guaranteed supply agreement, the potential commission stream of $XXX,XXX would not be realised by the Receivers (and subsequently, Creditor X). Creditor X instructed the Receivers not to settle the transaction with Entity B whilst Creditor X renegotiated terms with both Entity B and Entity A.

20.          At this stage, Entity B was still licensing the production facility from the Receivers, and Entity A had taken control of the franchising business.

21.          Entity B's payments to the Receivers under the Licensing Agreement for use of the production facility diminished (i.e. the payments were not made in accordance with the terms of the Licensing Agreement). In XX 20XX, Entity B ceased making payments. Creditor X instructed the Receivers to continue paying the costs of the production facility and to not enforce payment of the significant debts owed by Entity B whilst it continued to negotiate terms with both Entity B and Entity A. The Receivers advised Creditor X that this effectively amounted to a revocation of the HOA-2. The Receivers sought and obtained clear instruction from Creditor X on how to proceed despite the mounting debts associated with Creditor X's action to renegotiate the deal directly.

22.          The Receivers had no reason to believe that Creditor X would not indemnify the Receivers for costs incurred in running the production facility or associated with the revocation.

23.          In XX 20XX, the ATO contacted the Receiver in respect of outstanding tax lodgements. On instruction of Creditor X, the Business Activities steps had not been lodged pending settlement of the sale of the assets, the reason being that lodgement would then crystallise the debts.

24.          No agreement was reached between the three parties (Creditor X, Entity B and Entity A). In XX 20XX, the Licensing Agreement was terminated, the production facility was shut down, and the lease between Company 1 and the landlord was terminated, surrendering the premises. Plant and equipment used in the production facility was left onsite and assumed by the landlord.

25.          In XX 20XX, the Receivers found out that Entity A had entered into a lease with the landlord and assumed control of the production facility and all the plant and equipment left onsite.

26.          The amount owed by Entity B to the Company Group under the Licensing Agreement was calculated to be in excess of $X,XXX,XXX. Creditor X instructed the Receivers not to pursue recovery.

27.          There were multiple attempts made by the Receivers to communicate to Creditor X and confirm that it would honour its obligations pursuant to the Deed of Indemnity. However, no response was received.

28.          On X/XX/20XX, an email was sent to Creditor X advising receipt of assessments from the ATO for amounts totalling $X,XXX,XXX. Creditor X was also advised of a further debt of about $XXX,XXX relating to superannuation liabilities. A request was made for Creditor X to transfer sufficient funds to discharge the assessed debts by the due dates.

29.          On X/XX/20XX, an Australian solicitor was engaged by Creditor X to negotiate with the ATO in respect of the debts outstanding to the ATO by Company Group, which at the time, exceeded $X,XXX,XXX.

30.          These negotiations never actually occurred.

31.          The amounts owed to the ATO by Company Group included:

(a)                 goods and services tax (GST)

(b)                 pay as you go withholding tax (PAYGW)

(c)                 general interest charges (GIC)

(d)                 superannuation (Super), and

(e)                 superannuation guarantee and administration charge (SGC).

Collectively, the abovementioned amounts are referred to as 'the Debts'.

32.          On X/XX/20XX, a foreign regulator filed a complaint (the Complaint) in the foreign jurisdiction against certain entities within the Creditor X group.

33.          Consequently, a receiver was appointed to the Creditor X group.

34.          On X/XX/20XX, Receiver A received a copy of the 'Receiver's Motion to Approve Distribution Plan and First Interim Distribution' (Creditor X Distribution Plan) which was filed on X/XX/20XX. This document outlines Creditor X's receiver's proposed initial distribution to eligible investors and subscribers. Receiver A received this document from Creditor X's receiver. In summary, the Creditor X Distribution plan makes it clear that trade creditors would be treated equally with investors into Creditor X and therefore Firm X would not be paid in full pursuant to the Indemnity.

35.          On X/XX/20XX, Firm X's lawyers contacted a foreign lawyer seeking to represent the Receiver's in objecting to the Creditor X Distribution Plan. The basis of the objection was that genuine creditors ought to be paid in priority to the provision of a return to the investors in Creditor X. It transpired that Firm X did not instruct solicitors as it was considered likely the distribution plan would be approved.

36.          On or about X/XX/20XX, a foreign court approved the distribution plan under which admitted investors and creditors would receive an interim dividend of $0.XX cents in the dollar.

37.          On X/XX/20XX, the Receivers prepared a 'Statement in Support of Proof of Debt' outlining the following amounts of debt claimed by the Company Group:

Table 1: On X/XX/20XX, the Receivers prepared a "Statement in Support of Proof of Debt' outlining the following amounts of debts claimed by the Company Group:

38.          The Receivers have written off $X,XXX,XXX of remuneration for which they will not be compensated from Company 1 or Creditor X.

39.          On X/XX/20XX, the Receivers became aware the amount claimed in the proof of debt would not be admitted in full, as the ATO had not commenced formal enforcement activity against the Receivers for the shortfall in liabilities incurred by them in acting on behalf of Creditor X and that this debt was therefore considered contingent and of lesser priority to other creditors' claims.

40.          On X/XX/20XX, Firm X instructed the foreign lawyers to object to the Receiver's adjudication of their proof of debt.

41.          On or about X/XX/20XX, the foreign lawyers filed an Objection to the Receiver's Denial of Receivership Claim by Firm X. Thereafter, Firm X had 30 days to attempt to resolve the matter with the Receiver. In the objection, the foreign court was:

(a)  requested to deem the claim allowable in the first distribution which would enable a return of $XXX,XXX, or

(b)  in the alternative, the Court should order the Receiver to hold the said amount in escrow until a final distribution occurs so as to enable the ATO to either sue or settle with Receiver A and Receiver B. On X/XX/20XX, the foreign lawyers confirmed the Receiver had agreed to admit the claim but would hold the monies in escrow on the basis of the preceding.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 58

A New Tax System (Goods and Services Tax) Act 1999 section 58-65

Income Tax Assessment Act 1936 section 254

Income Tax Assessment Act 1936 subsection 254(1)

Income Tax Assessment Act 1936 paragraph 254(1)(a)

Income Tax Assessment Act 1936 paragraph 254(1)(b)

Income Tax Assessment Act 1936 paragraph 254(1)(d)

Income Tax Assessment Act 1936 paragraph 254(1)(e)

Income Tax Assessment Act 1936 subsection 254(1)

Income Tax Assessment Act 1936 subsection 254(2)

Income Tax Assessment Act 1997 subsection 995-1(1)

Tax Administration Act 1953 section 250-10

Tax Administration Act 1953 subsection 255-1(1)

Tax Administration Act 1953 Schedule 1 Subdivision 260-B

Tax Administration Act 1953 Schedule 1 Subdivision 260-C

Tax Administration Act 1953 Schedule 1 subsection 260-75(7)

Tax Administration Act 1953 Schedule 1 subsection 260-75(8)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise stated.

Question 1

Do the Debts retain their character for tax purposes when subsequently imposed on the Receivers under section 419 of the Corporations Act 2001?

Summary

Yes, as the Receivers were personally liable for the Debts (only to the extent of their representative capacity) at all times during the receivership.

Detailed reasoning

1.             Section 254 outlines the obligations of agents and trustees. In accordance with subsection 6(1), a trustee includes amongst other persons, a receiver.

2.             Furthermore, as noted at paragraphs 95 to 97 of Law Administration Practice Statement PS LA 2011/16 Insolvency - collection, recovery and enforcement issues for entities under external administration, a representative of an incapacitated entity (such as entity in receivership) includes a receiver.

3.             Paragraph 254(1)(a) makes every agent and trustee answerable as taxpayer '... for the doing of all such things as are required...' by the tax laws for the income or any profits or gains of a capital nature derived by them in their representative capacity or derived by the taxpayer 'by virtue of' their agency. We consider 'through' means the same as 'by virtue of' in this provision of subsection 254(1).

4.             If the Commissioner requires a trustee in bankruptcy to lodge a return or be assessed on profits or withhold tax (to be remitted to the ATO) under paragraph 254(1)(b) the trustee in bankruptcy must do so, but in their representative capacity only.

5.             What paragraph 254(1)(b) does is emphasise that in respect of the income or profits or gains referred to in paragraph 254(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 whose purpose is to ensure payment of the tax; tax which at least ordinarily will be primarily payable by another person or entity.

6.             Pursuant to paragraph 254(1)(d), agents and trustees are authorised and required to retain funds received in their representative capacity in order to pay tax 'which is or will become due' in respect of the income, profits or gains realised in that capacity. Paragraph 254(1)(e) makes such representatives personally liable for tax payable to the extent of any amount that her or she has retained, or should have retained under paragraph (d) of the same section (however they shall not be otherwise personally liable for the tax.

7.             As noted in Taxation Determination TD 2021/5 Income tax: a receiver's obligation to retain money for post-appointment tax liabilities under section 254 of the Income Tax Assessment Act 1936:

2.            At times, income, profits or gains of a capital nature are derived by an entity through the actions of a receiver acting as the entity's agent. When this happens, the receiver must retain enough money to pay the tax that has been assessed on the income, profits or gains.

3.            This obligation to retain only applies to money that has come to the receiver in their capacity as agent for the entity.

4.            Once an assessment has been made, the obligation to retain remains ongoing. The money does not have to come to the receiver in a lump sum. The amount that the receiver must retain does not exceed the amount of the liability that the Commissioner can legally recover from the entity.

8.             Per subsection 254(2), subsection 254(1) applies to general interest charge in section 5-15 of the Income Tax Assessment Act 1997 (ITAA 1997) in the same way as it applies to tax.

9.             Subdivision 260-C of Schedule 1 to the Tax Administration Act 1953 (TAA) outlines the special rules about collection and recovery from a receiver.

10.          Subsections 260-75(7) of the TAA requires the receiver to, in his or her capacity as receiver, to discharge the outstanding tax-related liabilities, to the extent of the value of the assets that the receiver is required to set aside.

11.          Pursuant to subsection 260-75(8) of the TAA, the receiver is personally liable to discharge the liabilities, to the extent of that value, if the receiver contravenes this section.

12.          Per subsection 995-1(1) of the ITAA 1997, an:

outstanding tax-related liability of an entity at a particular time means a ^* tax-related liability of the entity:

(a)          that has arisen at or before that time (whether or not it is due and payable at that time); and

(b)          an amount of which has not been paid before that time.

13.          Per subsection 255-1(1) of the TAA, a tax-related liability arising directly under a taxation law. Section 250-10 of the TAA provides a list of the relevant tax-related liabilities, including but not limited to:

(a)           GST

(b)          PAYG withholding

(c)           superannuation guarantee charge

(d)          additional superannuation guarantee charge

(e)          general interest charge (on GST and PAYG withholding amounts)

14.          Division 58 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act), for instance lists special rules in respect of the representative of incapacitated entities. The explanatory memorandum which introduced this provision - Tax Laws Amendment (2009 Measures No. 5) Bill 2009, states:

1.26       New section 58-10 sets out the circumstances in which a representative of an incapacitated entity will be liable for GST on a taxable supply or a taxable importation, entitled to an input tax credit for a creditable acquisition or creditable importation and have any adjustments . [Schedule 1, item 8]

1.27       However, this only applies to the extent that the making of the supply, acquisition or importation to which the amount of GST, input tax credit, or adjustment relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs. [Schedule 1, item 8]

15.          Section 58-65 of the GST Act in respect of GST liabilities, is equivalent to paragraph 254(1)(d).

16.          The substantive obligations and liabilities of receivers under the ITAA 1936 and GST Act are substantially the same. As noted in PS LA 2011/16:

111. Representatives of incapacitated entities are required to lodge GST returns and fuel tax returns for tax periods during which they are registered in that capacity and are personally liable to pay any GST and fuel tax law debts they incur during that period.

Application to your circumstances

17.          You contend that the amounts of GST, PAYGW, GIC, Super and SGC have been incurred by companies within the Company 1 Group and that these amounts have been 'incurred in that character by those companies.

18.          You further contend that as these debts have been subsequently imposed on the Receivers under section 419 of the Corporations Act 2001, the debts are not the same as those incurred by the company, nor are they of the same character. Rather, the debts imposed are separate debts created under statute and do not retain their character for tax purposes as between the ATO and the relevant company.

19.          The above contentions are not accepted. As noted in ATO Interpretative Decision ATO ID 2003/506 Income Tax Taxation Obligations of company administrators, a company administrator such as a Receiver is:

An administrator is a trustee of the company for the purposes of section 254 of the ITAA 1936. An administrator is personally liable under paragraph 254(1)(e) for the tax payable in respect of income, or profits or gains of a capital nature derived by virtue of that representative capacity. However, the administrator is only liable to the extent of the amount of money that the administrator has retained or should have retained under the authority and requirement to do so in paragraph 254(1)(d) of the ITAA 1936.

20.          Paragraph 254(1)(a) makes a trustee in bankruptcy answerable as taxpayer for the payment of tax on any income, profits or gains they derive in their representative capacity.

21.          In your case, section 254 was triggered when as trustee (or Receiver) you derived income, profits or gains in your representative capacity or agency for the Company Group. In your representative capacity, you stepped into the shoes of the principal being Company Group, and in that capacity alone became answerable under paragraph 254(1)(a) for these gains, as well as to lodge a return pursuant to paragraph 254(1)(b).

22.          In Federal Commissioner of Taxation v Australian Building Systems Pty Ltd (in Liq) & 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:

173. It will be necessary to say more about this paragraph later in these reasons. For present purposes, it is sufficient to note that, first, the liability it imposes on an agent or trustee is " as taxpayer ", and second, the liability is in respect of the income or any profits or gains of a capital nature derived by them in their representative capacity or by virtue of their agency, and includes a liability for the payment of tax on that income or those profits or gains.

174. Section 254(1)(b) then provides that the agent or trustee shall, in respect of that income or those profits or gains, make the returns and be assessed but in their representative capacity only. What s 254(1)(b) does is emphasise that in respect of the income or the 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 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. Adapting what Viscount Cave said in Williams v Singer ^[183] when considering similar provisions in the United Kingdom, "[t]he object of the Acts is to secure for the State a proportion of the profits chargeable, and this end is attained (speaking generally) by the simple and effective expedient of taxing the profits where they are found ".

177. On the proper construction of s 254, there is no need to find another specific section in the revenue law rendering the agent or trustee liable for tax in respect of the "income, or any profits or gains of a capital nature" referred to in s 254(1)(a). If an agent or trustee has a liability under s 254(1)(e) because they failed to satisfy the retention obligation in s 254(1)(d), that liability is in addition to, and not in substitution for, any assessment of the beneficiary, principal or company (although of course only one amount of tax could ultimately be recovered).^[186]The contrary view adopted by the majority of the Full Court should be rejected.

23.          In ABS, the liquidator's obligations were outlined at Subdivision 260-B of the TAA, particularly in respect of outstanding tax-related liabilities. In the case of the Receivers, the equivalent receiver's obligations are outlined at Subdivision 260-C of the TAA.

24.          At all times, the Receivers were personally liable for the Debts (but only to the extent of their representative capacity). It is incorrect to say the Debts were held in the hands of Company Group at one point and then subsequently imposed on the Receivers. The liability for Debts were first imposed on the Receivers primarily as 'agent or trustee' for the taxpayer, along with the further ancillary liability, which is to ensure the payment of tax.

25.          Paragraph 254(1)(d) authorised and required the Receivers to retain, out of any money that comes to them, so much as is sufficient to pay the tax assessed in respect of the income, profits or gains.

26.          In the context of TD 2021/5 makes it explicit (rather than implicit) that a receiver will generally be entitled to pay secured creditors before retaining an amount for payment of tax. The High Court in ABS also affirmed that the obligation to retain monies under paragraph 254(1)(d) is not enlivened until a notice of assessment has been issued in respect of the relevant income, profits or gains.

27.          Paragraph 254(1)(e) made the Receivers personally liable for the tax assessed under paragraph 254(1)(b) to the extent that they had or should have retained an amount under paragraph 254(1)(d).

28.          As such, a trustee will not be made personally liable under paragraph 254(1)(e) prior to the issue of a notice of assessment. Conversely, a trustee will be made personally liable under paragraph 254(1)(e) to the extent of an amount that they should have retained under paragraph 254(1)(d), post the issue of a notice of assessment and prior to and after the assessed liability becoming due and payable.

29.          The analysis outlined in respect of ABS in confirming the personal liabilities of the relevant trustees, similarly applies to confirm the Receiver's being personally liable in respect of its outstanding tax-related liabilities, being the Debts.

Conclusion

30.          There has been no change in the character of the Debts, as at all times during the receivership, the Receivers incurred the Debts and were liable to retain amounts to the extent of their representative capacity for Company Group.

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