Edited version of your private ruling

Authorisation Number: 1012579703690

Ruling

Subject: GST and the sale of proceeds of crime by the Official Trustee

Question

Will the disposal of restrained property by Entity A under the relevant legislation, prior to any court outcome be a taxable supply?

Answer

We consider Entity A when it acts under the relevant legislation to be a receiver and therefore a representative for the purposes of the GST Act. Division 58 of the GST Act is applicable and Entity A will be liable for GST that the owner of the property would, but for section 58-10 of the GST Act, be liable to pay on a taxable supply.

Relevant facts and circumstances

Entity A is a corporation sole and is registered for GST. As part of its duties it is required to sell property that has been restrained (pursuant to a Court Order). When making a restraining order the Court will order Entity A to take custody and control of the property under the relevant legislation.

You delegate these powers to an employee of Entity B to enable it to restrain and sell the property. Entity B is a Government department that is registered for GST. Entity B is an Agency whose functions include assisting Entity A in the exercise of its statutory powers and functions.

Pursuant to the relevant legislation, persons charged with or suspected of committing certain offences may have their property restrained by an order of the Court. A restraining order generally prevents the owner of the restrained property from dealing with the property until such time as the court orders otherwise. However the owner retains legal title during the period it is subject to the restraining order.

In some cases the Court will direct or give discretion to Entity A to dispose of the restrained property with the proceeds of sale of the restrained property being subject to restraint until the court case is decided.

Where the person charged with or suspected of committing, relevant offences is acquitted of the charges (or in the case where a suspect is not ultimately charged), the gross proceeds of any sale or restrained property are generally required to be returned by Entity A to the original owner of the property.

In contrast where the person is convicted, the proceeds of the sale of the restrained property are usually forfeited to the Commonwealth. This forfeiture may occur by operation of the law or by a further order of the court. In either case upon forfeiture Entity A is required to pay those proceeds (less your costs in relation to the restraint and disposal of the property into a special purpose account (the Account). In summary, property is restrained and disposed of in the following stepped process:

1. The Federal Police seek a court order to seize property of a suspected criminal.

2. When the court order is acquired it is forwarded to you.

3. Your powers are delegated to an employee of Entity B (the Delegate) who then restrains the property.

4. The Delegate then either:

· Sells it (pursuant to a Court Order) and hold on to the proceeds in trust until the case is decided at which time Entity A either returns the funds to the owner or transfer the funds to the Account, or

· Holds on to the property until the case is decided and then either arranges the return of the property to the owner or the forfeiture to the crown. If there is forfeiture then he/she arranges for the sale of the proceeds and transfers the funds to the Account.

The property can be:

· Property that belongs to a GST registered enterprise

· Property that belongs to an enterprise that is not registered for GST

· Private possessions of individuals

· Real property in any of the above categories

The sale is currently reported by Entity A as a taxable supply.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 9-5 and

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

Reasons for decision

Summary

We consider Entity A to be a receiver and therefore a representative for the purposes of the GST Act. Division 58 of the GST Act is applicable and you will be liable for GST that the owner of the property would, but for section 58-10 of the GST Act, be liable to pay on a taxable supply.

Detailed reasoning

The GST outcome of the disposal of the restrained asset under the relevant legislation depends on the capacity in which Entity A makes the disposal.

There are four possible capacities in which Entity A can dispose of the restrained assets under the legislation:

1 Make the supply as an agent of the Court, the Commonwealth or the owner.

2 Make the supply as a trustee of the property for two potential beneficiaries, namely the suspect and the Commonwealth.

3 Make a supply as a representative of an incapacitated entity pursuant to Division 58 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

4 Make the supply in its own right.

Not an agent

Paragraph 28 of the Goods and Services Tax Ruling GSTR 2000/37: agency relationships and the applications of the law provide indicators to determine whether there is an agency relationship. Two essential characteristics of agency relevant to this discussion are that it is (a) a consensual relationship between a principal and agent, and that (b) the agent has power to affect the principal's legal relations with third parties within the scope of the agent's authority.

On this basis, Entity A cannot be said to be an agent of the owner of the property, since it cannot be said that there is consent from the latter to authorise Entity A to act in such a capacity. Further, the ability to affect legal relations of the owner is a power conferred by the legislation, not by the owner. Lastly, it cannot be said that Entity A is acting as an "agent of necessity," because the requirements for that type of agency are not met.

Secondly, Entity cannot be said to be acting as an agent of the Commonwealth, since there does not appear to be anything in the legislation that gives Entity A any power to affect legal relations of the Commonwealth. Rather, the legislation provides that the Commonwealth must indemnify Entity A for any personal liability. This suggests that the Legislation intends for Entity A to act in its own right, rather than creating direct contractual relationships between the Commonwealth and a third party, as would normally be the case under agency principles.

Lastly, Entity A is not an agent of the court (in the legal sense of the word), as the court cannot be liable for its actions.

Therefore when Entity A restrains property it is not acting as an agent.

Not a trustee

One of the essential elements of a trust is that the trustee holds a legal or equitable interest in the trust property¹.

The Legislation does not contain any express provisions on the treatment of legal title over property that becomes subject to custody and control of the Entity A. In the private ruling application, the facts state that "the owner of the property retains legal title during the period it is subject to the restraining order". If you are then given custody and control over that property, legal title presumably remains with the owner and does not transfer to you. This is implied in the Legislation: Entity A must give notice to the "owner of the property" before destroying or disposing of any controlled property. Evidently, the "owner" (which implies legal title) would not be Entity A in this case.

As Entity A does not hold a legal or equitable interest in the restrained property under the Legislation, it could not be said that it is a trustee in respect of the retrained property.

In addition, under the Legislation, there is no express trust or implied trust since it cannot be said that the owner of the property had any intention to create such a trust. Furthermore, there is no constructive trust since it cannot be said that there is unconscionability in allowing the owner to retain beneficial ownership of the property, prior to the court making its decision.

Therefore, where property is under Entity A's custody and control under the Legislation, there is not a trust relationship that exists between you, the owner of the property or the Commonwealth.

Entity A under the Legislation is a representative

Section 195-1 of the GST Act defines a 'representative' as:

(a) a trustee in bankruptcy; or

(b) a *liquidator; or

(c) a receiver; or

(ca) a controller (within the meaning of section 9 of the Corporations Act 2001); or

(d) an administrator appointed to an entity under Division 2 of Part 5.3A of the Corporations Act 2001; or

(e) a person appointed, or authorised, under an *Australian law to manage the affairs of an entity because it is unable to pay all its debts as and when they become due and payable; or

(f) an administrator of a deed of company arrangement executed by the entity.

It is clear that Entity A under the Legislation does not fall within paragraphs (b), or (ca)-(f) above. Therefore we need to consider whether it is "a trustee in bankruptcy" or "a receiver" as listed in paragraphs (a) and (c) of the above definition.

The phrase "a trustee in bankruptcy" is not a defined term in both the GST Act and the Bankruptcy Act, but it is a commonly used phrase in bankruptcy proceedings. Therefore it will take on its ordinary meaning as understood by insolvency practitioners. Paragraph 2.120 of the book "Keay's Insolvency²" states:

The person who administers the estate of a bankrupt is known as the trustee in bankruptcy. This title can be attributed either to a private individual, who is referred to as a "private" or a "registered" trustee, or to the Official Trustee in Bankruptcy. In this book the term "trustee" will be used to encompass both registered trustees and the Official Trustee, unless otherwise specified.

Section 160 of the Bankruptcy Act states:

If at any time there is no registered trustee who is the trustee of the estate of a bankrupt, the Official Trustee shall, by force of this section, be the trustee of the estate.

The above comment indicates that the phrase "trustee in bankruptcy" means either a private or registered trustee or the Official Trustee in Bankruptcy who administers the estate of a bankrupt.

As Entity A is not administering the estate of a bankrupt³ we are of the view that it is not "a trustee in bankruptcy" under paragraph (a) of the definition of a "representative" in section 195-1 of the GST Act.

Under the GST Act, a representative is defined as, among other things, a receiver (s 195-1). The term "receiver" is not further defined in the GST Act. Therefore, subject to any contrary intention in the legislation, the term should be given its common law meaning⁴.

Receivers may be appointed under many circumstances; some are governed expressly by statute (for example Ch 5 Pt. 2 of the Corporations Act 2001), others may be appointed by private agreements and others may be appointed by a court.

It is acknowledged that Entity A is not a receiver appointed pursuant to Ch 5 Pt. 2 of the Corporations Act 2001, nor is it a receiver appointed by a private agreement. However the discussions below would indicate that there are sufficient similarities with a court appointed receiver to be considered as a receiver.

While there does not appear to be a fixed "definition" of receiver, several features of receivers can be identified from the general law.

(a) Jurisdiction to appoint a receiver

The appointment of a receiver is one of the oldest remedies of the Court of Chancery⁵. Today, all superior courts in Australia have jurisdiction given by statute to appoint a receiver, provided it is just and convenient to do so⁶. The power conferred by statute does not replace the court's inherent jurisdiction to appoint a receiver⁷.

Under the Legislation, Entity A can only take "custody and control" of property covered by a restraining order, if the court is satisfied that this is required (s 38 POCA).

There is a key similarity between appointing a receiver under the common law and appointing Entity A under the Legislation: that the authority, and discretion, to do so belongs to the court, not a party to the proceedings or an executive arm of the government.

(b) Purpose of appointment

Under the common law and within a litigation context, receivers were appointed in a range of situations, as an interim measure, to protect property and income from that property which is in dispute between the parties. The court preserves the status quo by appointing an independent person to hold it pending the hearing of the proceedings⁸. The receiver is to hold the property so that it may be preserved for the benefit of the party found entitled, or, ultimately, distributed among the parties in accordance with their entitlements⁹. In short, the object of the appointment of a receiver is to protect something which may turn out to belong to another¹⁰.

Entity A may be given custody and control over property already subject to a restraining order. The EM describes the purpose as follows:

This clause [now s 38] enables a court to order the Official Trustee (OT) to take custody and control of restrained property where the court considers it necessary to do so. For example, the court may order this if there is a risk that the property would otherwise be dealt with contrary to the restraining order; alternatively, the property may require the OT to manage it to ensure it does not lose value.

Therefore, it is apparent that appointing a receiver under common law and appointing Entity A under the Legislation serves similar purposes. Both are to preserve property that is under dispute between parties to the proceedings, serving as an interim measure, until the court can ultimately determine who is entitled to that property.

(c) Legal title of the property

Under common law, where a receiver is appointed over property, the property does not vest in them¹¹. Furthermore, the receiver does not gain a legal or equitable interest over that property¹². While the receiver may have an equitable lien over the property¹³, an equitable lien does not constitute an equitable interest¹⁴. Furthermore, money in a receiver's hands is in custodia legis (legal custody) for the party ultimately found to be entitled¹⁵.

The Legislation does not contain any express provisions on the treatment of legal title over property that becomes subject to custody and control of Entity A. In the private ruling application, the facts state that "the owner of the property retains legal title during the period it is subject to the restraining order". If Entity A is then given custody and control over that property, legal title presumably remains with the owner and does not transfer to Entity A. This is implied in the legislation: Entity A must give notice to the "owner of the property" before destroying or disposing of any controlled property. Evidently, the "owner" (which implies legal title) would not be Entity A in this case.

In both cases (receivers under common law and Entity A under the Legislation), legal title does not pass to the receiver or Entity A. Entity A may have custody and control over property, but legal title is presumably retained by the owner of the property. Therefore, in respect of legal title, Entity A takes on characteristics of a receiver.

Powers and duties

Under common law, when the court appoints a receiver it in effect assumes control of the assets over which the receiver is appointed¹⁶. The receiver, being appointed by the court, is an officer of the court. His/her duty is to act impartially, and in accordance with the directions of the court, in administering the property to which the receivership extended¹⁷.

A receiver takes possession of the property as the court's officer with the duty of dealing with it fairly in the interests of all the parties to the proceedings¹⁸. The receiver's responsibility is to the court. He or she is not the agent¹⁹ of or the trustee for any of the parties, nor subject to their control²⁰.

Under the Legislation, Entity A is appointed by the court and the powers that substantively deal with property and could adversely affect the rights of the owner or other interested parties, are still subject to court oversight. Therefore, it can be argued that the court maintains effective control over the controlled property, and Entity A ultimately acts in accordance with the directions of the court. In DPP v Chia, Warren CJ commented²¹:

Under POCA, the Official Trustee operates as a representative of the court and is the mechanism by which the Court takes the property under its own control.

This is similar to the position of a receiver under common law, as described above. In addition to the court maintaining effective control over the property, the powers and duties of Entity A under the Legislation also resemble those of receivers under common law.

Receivers and "receivers and managers"

In contemporary Australian law, the distinction between a receiver and a manager is of little significance, at least in the corporations' context²². In Re Surfside Palms Motel Pty Ltd, McLelland J in the NSWSC held that "receiver" under s 172(2) of the then Companies (NSW) Code includes a person who is a "receiver and manager"²³. More relevantly, his Honour stated that a receiver and manager is "simply a receiver who is also a manager", and the additional office of manager does not deprive the person of their status as receiver²⁴.

Under the Legislation, if any of the controlled property is a business, then Entity A has powers that include carrying on that business on a sound commercial basis and for the purpose of preserving the business. In this respect, Entity A has characteristics of both a receiver and a manager.

Remuneration, liability and indemnity

It has always been a basic principle of receivership that the receiver is entitled to be indemnified in respect of his/her costs and expenses, and his/her remuneration if he is entitled to be remunerated, out of the assets in his/her hands as receiver²⁵. The receiver is not the agent of the parties to the action in which he/she is appointed and nor are they liable for his/her costs. The court itself cannot indemnify the receiver but it will ensure that the receiver will have his/her costs and expenses paid out of the assets under his/her control, or out of assets over which he/she was appointed but that did not come under his/her actual control²⁶. It is generally recognised that the receiver has an equitable lien over the property²⁷, and furthermore, satisfaction of the lien takes priority over a secured creditor's debt²⁸.

Remuneration, costs and expenses of Entity A are provided for under the Legislation which allows the regulations²⁹ to make provisions relating to Entity A's costs, charges and expenses in performance of its duties under the act, as well as Entity A's remuneration. These amounts may be paid from any income generated by the controlled property, although this does not affect other ways in which Entity A may recover those amounts. The legislative regime thus reflects the receiver's position under common law: they are entitled to remuneration and reimbursement of costs and expenses; and that such remuneration, costs, expenses are deducted from assets over which they are appointed.

The express provisions in the legislation relating to personal liability and indemnity of Entity A reflect the common law principle that receivers should ultimately be indemnified of any personal liability in the course of their duties.

Summary & Conclusion

From the above analysis, the characteristics of Entity A under the Legislation are similar to those of a court-appointed receiver at common law in many respects. In both cases, the court is given jurisdiction to make such appointments. The purpose of appointing a receiver in a litigation context, and Entity A under the Legislation, is to preserve and protect assets pending the court deciding the ultimate entitlement of the parties. Similar to a receiver, legal title in the property under "custody and control" is not vested in Entity A, and (without anything suggesting the contrary) remains with the owner.

Given the many similar characteristics outlined above, Entity A can be regarded in substance to be a receiver at common law, and therefore fall within the definition of receiver (as determined by common law principles) under the GST Act. A representative includes a receiver, per s 195-1 of the GST Act. Therefore, when appointed and given custody and control over property under POCA, you are a representative of the owner of that property for GST purposes.

Division 58 of the GST Act applies to incapacitated entities and their representatives. The basic rule under Division 58 is that any supply or acquisition made by a representative of an incapacitated entity is treated the same as those made by the incapacitated entity. The representative is liable for any GST and entitled to any input tax credits in respect of those supplies or acquisitions, but only to the extent that the making of such supply or acquisition is within the scope of the representative's responsibility or authority (s 58-10(1)).

Therefore, Entity A, as a representative, in making a supply or acquisition in respect of property under its custody and control, is liable for GST or entitled to ITCs (if any) if the owner of that property would otherwise be liable for GST or entitled to ITCs had the owner themselves made the supply or acquisition.

¹ J D Heydon, M J Leeming Jacobs' Law of Trusts in Australia (7^th Ed) 2006 at Para [101]

²

³

⁴

Conway v The Queen (2002) 209 CLR 203 at 207; [2002] HCA 2 at [5]; Western Australia v Ward [2002] HCA 28 at [549] (McHugh J

⁵ )

National Australia Bank Ltd v Bond Brewing Holdings Ltd [1991] 1 VR 386 at 45

⁶ 6

See for e.g. s 57 Federal Court of Australia Act 1976 (Cth), s 67 Supreme Court Act 1970 (NSW), s 37(1) Supreme Court Act 1986 (Vic

⁷ )

See for e.g. Hall v Foster [2012] NSWSC 974 at [16-19

⁸ ]

Owen v Honan (1853) 4 HLC 997; 10 ER 752; see also Cummins v Perkins [1899] 1 Ch 1

⁹ 6

Meagher Gummow & Lehane's "Equity: Doctrines and Remedies" 4^th Edition at 908; cited by D'Souza v Aaronisle Pty Ltd [2003] WASC 111 at [45

¹⁰ ]

Clydesdale v McManus and Anor (1934) 36 WALR 89 per Northmore CJ at 90; cited by D'Souza v Aaronisle Pty Ltd [2003] WASC 111 at [45]

¹¹

ASIC v Takaran Pty Ltd (No 2) [2002] NSWSC 987 at [9

¹² ]

Shawyer v Amberday Pty Ltd (in liq) [2001] NSWSC 399 at [14

¹³ ]

Shirlaw v Taylor (1991) 31 FCR 222 at 230; Re Central Commodities Services Ptd Ltd [1984] 1 NSWLR 25 at 2

¹⁴ 7

Hewett v Court [1983] HCA 7; (1983) 149 CLR 639 at 664 [11] per Deane

¹⁵ J

Delaney v Mansfield (1825) 1 Hog 234 (Ir); McMechan v Aitken (1895) 21 VLR 65 at 69-70 (FC

¹⁶ )

Gardner v London Chatham & Dover Railway Co (No 1) [1867] 2 Ch App 201 at 211; Burt, Boulton & Hayward v Bull [1895] 1 QB 276 at 279-280; cited by 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144 [22

¹⁷ ]

Capewell v Revenue and Customs Commissioners [2007] 1 WLR 386 at 392; 2 All ER 370 at 378 [19] (HL). See also Re Newdigate Colliery Ltd [1912] 1 Ch 468 at 47

¹⁸ 8

Re Newdigate Colliery Ltd [1912] 1 Ch 468 at 478; cited by D'Souza v Aaronisle Pty Ltd [2003] WASC 111 at [46

¹⁹ ]

13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144 at [22

²⁰ ]

Co-operative Farmers' & Graziers' Direct Meat Supply Ltd v Smart [1977] VicRp 47; [1977] VR 386 at 391; cited by D'Souza v Aaronisle Pty Ltd [2003] WASC 111 at [46

²¹ ]

DPP (Cth) v Chia [2004] VSC 184 at [27

²² ]

See s 420 Corporations Act 2001 (Cth), which relevantly provides that receivers have power to carry on any business of the corporation

²³ .

Re Surfside Palms Motel Pty Ltd (1984) 9 ACLR 179 at 18

²⁴ 1

Ibi

²⁵ d

Capewell v Revenue and Customs Commissioners [2007] 1 WLR 386 at 393; [2007] UKHL 2 at [21

²⁶ ]

13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144 [22]; see also Boehm v Goodall [1911] 1 Ch 155 at 16

²⁷ 1

Shirlaw v Taylor (1991) 31 FCR 222 at 230; Re Central Commodities Services Ptd Ltd [1984] 1 NSWLR 25 at 2

²⁸ 7

Moodemere Pty Ltd (in liq) v Waters [1988] VR 215 at 221; Dean-Willcocks v Nothintoohard Pty Ltd (in liq) (2005) 53 ACSR 587 (NSWSC) aff'd [2006] NSWCA 31

²⁹ 1

See r 14 and r 15 of the regulation