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Ruling

Subject: Administrator's liability and active asset consideration

Issue 1

Question 1

Pursuant to section 254(1)(d) of the Income Tax Assessment Act 1936 (ITAA 1936) will the Administrators be required to retain money that has come to them in their representative capacity, so much as is sufficient to pay tax which is or will become due in respect of the income, profit or gain from the potential future sale of the property and associated assets?

Answer

Yes

Question 2

Will the Administrators be personally liable under section 254(1)(e) of the ITAA 1936 for income tax payable on the sale of the property, notwithstanding the sale proceeds (aside from those received in respect of Question 1) will be received directly by the company's secured creditor and will not have 'come to' the Administrators?

Answer

Yes

Issue 2

Question 1

Are the complex and other assets of the company separate CGT assets?

Answer

Yes

Question 2

Are the complex and other assets of the company an active asset for the purposes of Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2012

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The company was incorporated after 19 September 1985.

After incorporation, the company acquired land and commenced construction of a complex on that land for the purposes of its business.

The company has now had Joint and Several Administrators and Joint and Several Provisional Liquidators appointed pursuant to a court order.

The Administrators continued to trade the business following their appointment for the purpose of enabling the company to be restructured, or the complex to be sold, within the framework of a Deed of Company Arrangement.

The Administrators are in the process of selling the assets of the company.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 254(1) and

Income Tax Assessment Act 1997 Division 152.

Reasons for decision

Issue 1

Summary

Pursuant to section 254(1)(d) of the ITAA 1936 the Administrators will be required to retain money that has come to them in their representative capacity, so much as is sufficient to pay tax which is or will become due in respect of the income, profit or gain from the potential future sale of the complex.

The administrators are personally liable under paragraph 254(1)(e) of the ITAA 1936 to the extent of the amount that has been retained, or should have been retained, under paragraph 254(1)(d) of the ITAA 1936.

Detailed reasoning

Section 254 of the ITAA 1936 applies to an entity that is an agent or trustee for the purposes of the ITAA 1936 and 1997. Section 254 of the ITAA 1936 contains provisions which describe the duties and obligations of persons who act as the agents or trustees of taxpayers.

You have advised that the court has appointed the administrators as agents of the company. Therefore, for the purposes of section 254 of the ITAA 1936 the administrators are agents for the company.

A capital gain will be made on the sale of the complex. Therefore, the company will derive that gain by virtue of the administrators' agency.

You have advised that the company will have an income tax liability in respect of that capital gain.

The administrator will have money come to them in their representative capacity as a result of the sale of the complex.

Paragraph 254(1)(d) of the ITAA 1936 authorises and requires the administrators to withhold from that money, so much as is sufficient to pay the tax which is or will become due in respect of that income, profit or gain. It is not necessary that the company's tax liability has been assessed.

The administrators will need to determine the expected tax liability of the company on a reasonable basis, and retain sufficient funds to satisfy this expected liability.

The administrators are personally liable under paragraph 254(1)(e) of the ITAA 1936 to the extent of the amount that has been retained, or should have been retained, under paragraph 254(1)(d) of the ITAA 1936.

Issue 2

Question 1

Summary

The complex and other assets are separate CGT assets.

Detailed reasoning

The complex

For CGT purposes, there are exceptions to the rule that what is attached to the land is part of the land. In certain circumstances (specified in section 108-55 of the ITAA 1997), a building or structure is considered to be a CGT asset separate from the land.

Subsection 108-55(1) states that any buildings or structures on land acquired on or after 20 September 1985 will be a separate CGT asset if the balancing adjustment provisions specified in Subdivision 40-D of the ITAA 1997 apply to the building or structure.

In the case of the company, the costs of construction of the complex will be capital expenditure and deductible under the provisions in Division 43.

Accordingly, subsection 108-55(1) of the ITAA 1997 will not deem the buildings to be separate CGT assets to the land.

Other assets

The other assets are amounts that will be payable to the company in the future.

One example of a CGT asset listed in note 1 to subsection 108-5(2) of the ITAA 1997 (which provides examples of CGT assets) is 'debts owed to you'. Therefore the other assets will be a CGT asset under section 108-5 of the ITAA 1997.

Question 2

Summary

The complex and the other assets are not active assets for the purposes of Division 152 of the ITAA 1997.

Detailed reasoning

Active Asset

One of the conditions for the small business concessions in Division 152 of the ITAA 1997 to apply to reduce or disregard a capital gain is that the relevant CGT asset must satisfy the active asset test in section 152-35 of the ITAA 1997. The active asset test requires the relevant CGT asset to be an active asset, both at a particular time and for half of a particular period.

The meaning of 'active asset' is defined in subsection 152-40(1) as:

152-40(1) A CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; or

(b) if the asset is an intangible asset ......

Paragraph 152-40(4)(e) however excludes, among other things, assets whose main use is to derive rent (unless such use was only temporary).

The meaning of the term 'rent' is discussed in Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent?

In particular, paragraphs 22 and 23 of TD 2006/78 state:

22. Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. The term 'rent has been described as follows:

§ the amount payable by a tenant to a landlord for the use of the leased premises (C.H.Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003 at 2010, United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62 at 76,86,93,99);

§ a tenant's periodical payment to an owner or landlord for the use of land or premises (The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne); and

§ recompense paid by the tenant to the landlord for the exclusive possession of corporeal hereditaments .... The modern conception of rent is a payment which a tenant is bound by contract to make to his landlord for the use of the property let (Halsbury's Laws of England 4^th Edition Reissue, Butterworths, London 1997 Vol 27(1) 'Landlord and Tenant', paragraph 212).

23. A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209). If, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.

In addition, paragraph 26 of TD 2006/78 states:

Where an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact as to whether the main use of the asset at that time is to derive rent. In determining this, it will be necessary to give consideration to a range of factors such as:

§ the comparative areas of use of the premises (between deriving rent and other uses); and

§ the comparative levels of income derived from the different uses of the asset.

In the current case it is accepted that the complex is used in the company's business.

However, based on the particular facts of this case, paragraph 152-40(4)(e) of the ITAA 1997 will exclude the complex and other assets from being active assets of the company because their main purpose is the derivation of rent.