Edited version of private advice

Authorisation Number: 1012643416906

Ruling

Subject: Liquidator's obligations

Question

Did the Liquidators derive any capital gain from the disposal of the Property in their representative capacity for the purposes of section 254 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The Liquidators were appointed jointly and severally as liquidators of the company.

The Liquidators obtained the following information about the company after their appointment:

• Prior to the Liquidators' appointment, the company had entered into a contract for the disposal of the Property.

At the time of the Liquidators' appointment, the sale of the property had not settled.

Settlement occurred following their appointment, and the Liquidators received the balance of the proceeds.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 254

Income Tax Assessment Act 1997 Section 104-10

Reasons for decision

Section 254 of the ITAA 1936 sets out the obligations, liabilities and rights of agents and trustees.

Under paragraph 254(1)(a) of the ITAA 1936, an agent or trustee is answerable as taxpayer for things required to be done by the Act in respect of income, or any profits or gains of a capital nature, derived by the agent or trustee in his or her representative capacity or derived by the principal by virtue of the agency. This includes the payment of tax.

In respect of income, profits or gains referred to in paragraph 254(1)(a) of the ITAA 1936, the agent or trustee is required to furnish tax returns and to retain out of money which he or she receives as agent or trustee an amount sufficient to pay tax that is or will become due. He or she is personally liable for any tax payable to the extent of any amount that has been retained or should have retained.

A liquidator satisfies the definition of 'trustee' in subsection 6(1) of the ITAA 1936. Accordingly, a liquidator may have obligations under section 254 of the ITAA 1936.

Section 254 of the ITAA 1936 does not itself create a liability for tax. Rather, any liability to pay tax is created under the relevant substantive liability provisions of the income tax legislation. The effect of the section subjects the agent or trustee to certain obligations which have the effect of protecting the Commissioner's right to collect certain tax liabilities.

Section 254 of the ITAA 1936 provides the machinery provisions that set out when an agent is liable to pay tax. In considering the tax liabilities it is useful to distinguish between:

• tax liabilities that arise to a liquidator because income or a gain is derived through the liquidator's activity, or by the company because of the liquidator's activity, and

• tax liabilities on income or gains derived by the company prior to the appointment of a liquidator and that rank as debts alongside other debts of the company.

Paragraph 254(1)(d) of the ITAA 1936 obliges a liquidator to retain out of any money coming into its hands, an amount sufficient to pay the tax on income, or any profits or gains of a capital nature derived by the liquidator. It does not authorise the retention of money to pay tax on income, or any profits or gains of a capital nature derived by the company. For this reason, section 254 of the ITAA 1936 applies only to income, profits and gains derived by a liquidator. It does not apply to any income-producing activity or asset realisation attributable to the period before the liquidator's appointment.

In view of this, for the purposes of section 254 of the ITAA 1936, 'derived' has to have a meaning that is consistent with the ordinary operation of the legislation in relation to income, profits and gains of a capital nature.

When considering the sale of a capital gains tax (CGT) asset, the timing rules contained in section 104-10 if the Income Tax Assessment Act 1997 (ITAA 1997) must apply to determine when such amounts are included in assessable income.

In this case, the disposal of the Property is something that happened prior to the appointment of the Liquidators. The timing rule in subsection 104-10(3) of the ITAA 1997 provides that CGT event A1 occurred when the contract was entered into. That is when the capital gain was derived for the purposes of section 254 of the ITAA 1936.

Accordingly, in this case the Liquidators have not derived a capital gain from the disposal of the Property for the purposes of section 254 of the ITAA 1936 as the contract was entered into, and the gain derived, prior to their appointment.