Edited version of private ruling

Authorisation Number: 1011746423413

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Ruling

Subject: Capital gains tax implications for trustee and bankrupt taxpayer on sale of shares

Question 1

Will any capital gain on the sale of shares be assessable to the taxpayer under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and will the taxpayer be required to include this gain in their income tax return?

Answer

Yes

Question 2

Will any capital gain made on the sale of the shares, that are an asset that has vested in the trustee of the Bankrupt Estate, be assessable to the trustee?

Answer

No

Question 3

Is the trustee required to lodge an income tax return, or make any other report or disclosure to the ATO, in respect of any capital gain made on the sale of the shares?

Answer

No

Question 4

Is any capital gain arising from the sale of the shares after the date of bankruptcy a provable debt in the taxpayers bankruptcy?

Answer

This is an invalid question. However, we provide general information.

Question 5

Does the trustee of the bankrupt estate have an obligation to withhold or remit funds to the ATO on account of any CGT liability arising form the sale of the shares?

Answer

No

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The taxpayer held shares in a company.

The trustee is a registered bankruptcy trustee. The trustee was appointed the trustee of the taxpayers estate.

The taxpayers interest in the shares were vested in the trustee.

The trustee has sold the shares to a third party.

It is expected that the disposal of the shares will result in a capital gain after the date of the taxpayers bankruptcy.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1,
Income Tax Assessment Act 1997 Part 3-3,
Income Tax Assessment Act 1997 Section 104-10,
Income Tax Assessment Act 1997 Section 106-30,
Income Tax Assessment Act 1997 Subsection 106-30(2),
Income Tax Assessment Act 1936 Section 254,
Income Tax Assessment Act 1936 Paragraph 254(1)(d) and
Bankruptcy Act 1966 .

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

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 first 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 www.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-avoidance rule for income tax.

Reasons for decision

Question 1

Summary

The disposal of an asset by the trustee of a bankrupt estate is considered to be a disposal by the bankrupt individual and therefore assessable to that individual and not the trustee.

Detailed reasoning

Section 106-30 of the ITAA 1997 advises that the vesting of assets in a trustee under bankruptcy law is ignored for CGT purposes. The effect of this is that the asset is still considered to be owned by the insolvent person, even though the asset is vested in the trustee.

The acts of the trustee in relation to the vested asset are taken to be the bankrupt's acts under subsection 106-30(2) of the ITAA 1997.

When the bankruptcy trustee sold the shares CGT event A1 happened (section 104-10 of the ITAA 1997).

Consequently, no disposal takes place on the vesting of the asset the trustee, but a disposal of the asset by the trustee is considered to be a disposal by the insolvent person.

The liability for CGT on the capital gain on disposal of the shares is borne by the insolvent person in the year of income in which the disposal occurred.

Therefore, any capital gain on the sale of the shares is assessable to the taxpayer and they will be required to include this gain in their income tax return for the relevant year.

Question 2

As the bankrupt taxpayer is assessable on any capital gain made on the disposal of the shares, then the trustee will not also be assessable.

Question 3

As the bankrupt taxpayer is required to include any capital gain on the sale of the shares in their income tax return, the trustee is not also required to include this capital gain.

Question 4

Summary

As this question is in respect of the Bankruptcy Act 1966 (BA 1966), legislation not administered by the Commissioner, a ruling cannot be issued. Instead, the following information is provided.

Detailed reasoning

For the purposes of this matter only subsection 82(1) of the BA 1966 is relevant. The first limb of that subsection requires the bankrupt to be subject to a debt (contingent or otherwise) at the date of bankruptcy.

In this instance, at the date of bankruptcy, there had not been a CGT event that triggered the CGT provisions in the ITAA 1997. The vesting of the asset to the trustee is not a CGT event by virtue of sub-section 104-10(7) the ITAA 1997. The sale of the vested asset occurred after the date of bankruptcy. Accordingly as no debt (contingent or otherwise) existed at that date the first limb of subsection 82(1) is not satisfied.

Under the second limb of subsection 82(1) of the BA 1966 a debt will be provable in bankruptcy if a bankrupt may become subject to a debt before the bankrupt's discharge from bankruptcy by reason of an obligation that occurred before the date of bankruptcy (emphasis added).

The interaction between subsection 82(1) of the BA 1996 and the obligation to pay tax was examined by the Full Federal Court in DFC of T v. Jones 99 ATC 4373, 41 ATR 460. That case concerned the assessment of income tax during the tax year in which a bankrupt became bankrupt. Hill, Sackville and Hely JJ held that the Commissioner was required to make two assessments for that tax year. The first, being a tax assessment for the period up to the date of bankruptcy (and provable in bankruptcy under section 82 of the BA 1966). The second tax assessment was for income derived after the date of bankruptcy. The debt that arose as a result of second assessment was not provable in bankruptcy.

They found that a bankrupts obligation to income tax arose during course of the year, not at the end of the year or when an assessment was made. The crucial event was the commencement of bankruptcy and any income derived after that date could not be claimed in bankruptcy.

They stated :

Hence, for present purposes it can be said that as at the moment of bankruptcy there exists an obligation to pay income tax on the taxable income derived from the commencement of the year of income until the commencement of the bankruptcy, which only matures as a debt due and payable after assessment under s 168. In our opinion, her Honour was correct, therefore, in concluding that the Commissioner was entitled to prove in the bankruptcy

It therefore follows that in this instance that the debt that arose from the capital gain cannot be proved in bankruptcy. There was no capital gain derived from the beginning of the tax year to the commencement of bankruptcy. The capital gain arose after the date of bankruptcy. Therefore the obligation to tax on the capital gain was not incurred before bankruptcy. It follows that the tax debt that arose from the capital gain is not provable in bankruptcy under section 82(1) of the BA 1966.

Question 5

Summary

The trustee does not have an obligation to retain funds to pay the tax on any capital gain that may arise from the sale of the shares.

Detailed reasoning

Section 254(1) of the ITAA 1936 operates to impose an obligation on a trustee (amongst others) in relation to any tax liability it derives in its representative capacity, or in respect of its agency. This provision may require the trustee to retain a sufficient amount of funds on account of any tax liability on gains or profits derived in such capacity, and account to the Commissioner for this amount.

As the CGT provisions treat the acts of the Trustee (in relation to the shares in the Company vested in him, as acts of the bankrupt individual) we would consider that any capital gain is not derived by the Trustee in his representative capacity or as an agent of the bankrupt.

Accordingly, Section 254(1) does not operate to impose an obligation on the Trustee to retain and remit any amount in relation to a potential CGT liability arising on the sale of shares in the Company.

The Trustee of the bankrupt estate has no obligation to withhold or remit funds to the ATO on account of the CGT liability arising from the sale of the shares.