Edited version of private advice

Authorisation Number: 1012652801679

Ruling

Subject: CGT - receiver obligations

Question 1

Does section 106-30 of the Income Tax Assessment Act 1997 (ITAA 1997) negate the Receiver's obligations under section 254 of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to any capital gain made from the disposal of the property?

Answer

No

Question 2

Is the capital gain assessed as if it were derived by the individual, thereby allowing the general discount to apply?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

X had ownership interests in the property.

X was made bankrupt by order of the court.

The Trustee in Bankruptcy was appointed as the trustee in bankruptcy of X pursuant to the Bankruptcy Act 1966 (BA 1966).

The Trustee in Bankruptcy registered its interest in X's share of the property.

The Receiver was then appointed as receiver and manager of the property pursuant to the Deed. The Deed was between the mortgagee who held a registered mortgage over the property (the mortgage), and the Receiver.

The Deed explicitly provides that the Receiver acts as agent for X.

The Receiver was appointed by the mortgagee to sell the property as agent for the mortgagor, pursuant to the mortgage.

The property was transferred at the direction of the Receiver to a third party.

The property was previously used by X as a rental property. The Receiver does not have access to, or the ability to access, documentation to substantiate any expenses incurred in relation to the property.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 254

Income Tax Assessment Act 1936 Subsection 254(1)

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

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

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(2)

Income Tax Assessment Act 1997 Subsection 104-10(3)

Income Tax Assessment Act 1997 Section 106-30

Income Tax Assessment Act 1997 Subdivision 115-A

Income Tax Assessment Act 1997 Paragraph 115-100(a)(i)

Bankruptcy Act 1966 (Cth) Subsection 5(1)

Bankruptcy Act 1966 (Cth) Subsection 43(2)

Bankruptcy Act 1966 (Cth) Section 58

Bankruptcy Act 1966 (Cth) Subsection 58(1)

Bankruptcy Act 1966 (Cth) Paragraph 58(1)(a)

Bankruptcy Act 1966 (Cth) Paragraph 58(1)(b)

Bankruptcy Act 1966 (Cth) Subsection 58(2)

Bankruptcy Act 1966 (Cth) Subsection 58(5)

Bankruptcy Act 1966 (Cth) Subsection 116(1)

Bankruptcy Act 1966 (Cth) Subsection 116(2)

Reasons for decision

Subsection 254(1) of the ITAA 1936 sets out the taxation obligations, responsibilities and rights of persons who act as agents and trustees of taxpayers.

The relevant paragraphs relating to the obligations of trustees and agents state that:

(a) They shall be answerable as taxpayer for the doing of all such things as are required to be done by virtue of this Act in respect of the income, or any profits or gains of a capital nature, derived by them in their representative capacity, or derived by the principal by virtue of his agency, and for the payment of tax thereon.

…..

(d) They are hereby authorized and required to retain from time to time out of any money which comes 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, profits or gains.

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

Bankruptcy

Part IV, Division 4 of the BA 1966 sets out the effect bankruptcy has on the debtor's property and proceedings. In particular, section 58 of the BA 1966 sets out the general rules regarding the vesting of the debtor's property upon bankruptcy. It relevantly provides:

58 Vesting of property upon bankruptcy-general rule

(1) Subject to this Act, where a debtor becomes a bankrupt:

(a) the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and

(b) after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee .

……

(2) Where a law of the Commonwealth or of a State or Territory of the Commonwealth requires the transmission of property to be registered and enables the trustee of the estate of a bankrupt to be registered as the owner of any such property that is part of the property of the bankrupt, that property, notwithstanding that it vests in equity in the trustee by virtue of this section, does not so vest at law until the requirements of that law have been complied with …

In this case, the Trustee in Bankruptcy is a registered trustee (as defined in subsection 5(1) of the BA 1966) and trustee of the estate of the bankrupt, X. Additionally, the property is real property situated in Australia and falls within the definition of 'property' for the purposes of section 58 of the BA 1966 (subsection 5(1) of the BA 1966). The property also belonged to X at the time of the bankruptcy. It follows that the property will vest in the Trustee in Bankruptcy, as the registered trustee, under paragraph 58(1)(a) subject to subsection 58(2) of the BA 1966.

The relevant state legislation requires the transmission in bankruptcy to be registered enabling the Trustee in Bankruptcy to be registered as the legal owner of the property. The historical title search records the registration of the transmission in bankruptcy. The property remained subject to the mortgage to the mortgagee which was registered well prior to the date of X's bankruptcy.

Does a CGT event occur upon the registration of the transmission in bankruptcy?

Section 104-10 of the ITAA 1997 provides that CGT Event A1 happens to a taxpayer on the disposal of a CGT asset where there is a change of ownership from the taxpayer to another entity. This change of ownership is taken to have occurred either upon entering a contract for the disposal of the asset, or if there is no contract, when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997). Prima facie, therefore, CGT Event A1 would occur when X's property vested in the Trustee in Bankruptcy pursuant to registration of the transmission in bankruptcy.

However, section 104-10 of the ITAA 1997 appears in Part 3-1 of the ITAA 1997. Section 106-30 of the ITAA 1997 sets out the effect of bankruptcy on the CGT rules in Part 3-1 and 3-3 of the ITAA 1997. As a result, section 104-10 of the ITAA 1997 needs to be read subject to section 106-30 of the ITAA 1997.

Subsection 106-30(1) of the ITAA 1997 states that for the purposes of Part 3-1 and Part 3-3 of the ITAA 1997, the vesting of an individual's CGT assets in a trustee under the BA 1966 is ignored.

Section 106-30 was enacted into the ITAA 1997 as part of the Tax Law Improvement Project. Chapter 2.5 of the Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998, which inserted section 106-30, states as follows:

Bankruptcy

The vesting of a persons CGT assets in a trustee under a bankruptcy law does not trigger any immediate CGT consequences. The CGT provisions apply as if acts done in relation to the bankrupts assets by the trustee are acts of the bankrupt. [section 106-30]

…..

Section 106-30 Effect of Bankruptcy

This section deals with where an individuals assets are vested in a trustee under a bankruptcy law.

Change

State expressly that the act of vesting assets in a trustee under a bankruptcy law is ignored for CGT purposes.

Explanation

It is implicit in the 1936 Act that the vesting of assets in a trustee in bankruptcy does not, of itself, have CGT consequences. In the rewritten law, it is expressly stated that any acts of the trustee in relation to vested CGT assets are taken to be the bankrupts acts.

Accordingly, it is clear that the effect of section 106-30 of the ITAA 1997 is that the vesting of an individual's CGT assets in a trustee under the BA 1966 is ignored. As a result, in such circumstances, the CGT provisions apply to an act done by a trustee in relation to an individual's CGT assets as if the act had been done by the individual (instead of the trustee). In this case, this ensures that the ownership of the property does not transfer to the Trustee in Bankruptcy for the purposes of applying Parts 3-1 and 3-3 of the ITAA 1997. Accordingly, no CGT event happens to the bankrupt X when the property is vested in the Trustee in Bankruptcy by registration of the transmission in bankruptcy.

Receiver

The Receiver was appointed under the mortgage and pursuant to the Deed.

Is the Receiver acting as agent for the Trustee in Bankruptcy or as agent for the debtor, X?

You contend that the Receiver is acting as agent for the Trustee in Bankruptcy and not as agent for the debtor, X.

The nature of the relationship between a receiver and a debtor is governed by the terms of the deed under which the receiver is appointed, and by relevant State and Commonwealth legislation.

The instrument under which the receiver is appointed will usually expressly provide that the receiver is the agent of the debtor, and even if it does not, it can usually be inferred from construction of the instrument (Dal Pont, G E, Law of Agency, 2001, Butterworths, Australia at 36; Gosling v Gaskell [1897] AC 575 at 595 per Lord Davey and TD 2012/D7, footnote 1).

In this case, the instruments under which the Receiver is appointed explicitly imply the Receiver acts as agent for X.

Subsection 58(5) of the BA 1966 provides that bankruptcy does not interfere with the rights of secured creditors to realise or otherwise deal with their security. Whatever property vests in the trustee under subsection 58(1) and (2) of the BA 1966, it vests subject to the rights of secured creditors (Murray. M and Harris. J, Keay's Insolvency, Seventh Edition, 2011, Lawbook Co., Australia at 190).

In this case, that means that notwithstanding that the Trustee in Bankruptcy has been registered as the legal owner of the property, the vesting of the property remains subject to the rights of the mortgagee, as the secured creditor to sell the property pursuant to the powers conferred on the Receiver by the Deed and the mortgage.

The Receiver acts as agent for the debtor, X when it sells the property and any sale proceeds from the disposal of the property are also received by the Receiver as agent for the debtor, X. The fact that the Receiver is bound to apply the money received in meeting secured debts does not constitute the Receiver as trustee for the mortgagee (as secured creditor) in respect of the receipt of those monies, nor as agent for the mortgagee (Buckeridge and others v Mercantile Credits Ltd (1981) 147 CLR 654 and paragraph 17 of TD 2012/D7).

In addition, based on the Deed, the mortgage and the lack of any evidence provided to the contrary, the Commissioner's view is that the Receiver cannot have acted as agent for the Trustee in Bankruptcy when it sold the property.

In this case, the Receiver has sold the property to a third party and is entitled to deduct the debt owing to the mortgagee from the sale proceeds along with any associated costs and expenses. All the Receiver is obliged to do is pay any surplus monies from the sale proceeds to the Trustee in Bankruptcy. This surplus represents the bankrupt's equity in the property which vested in the Trustee in Bankruptcy on the date of bankruptcy under subsection 58(1) of the BA 1966.

Disposal of the property by the Receiver

As noted above, the effect of section 106-30 of the ITAA 1997 is that the vesting of an individual's CGT assets in the Trustee in Bankruptcy under the BA 1966 is ignored. As such, no CGT event happens to the bankrupt X when the property is vested in the Trustee in Bankruptcy by registration of the transmission in bankruptcy.

CGT Event A1 will happen to the debtor X, when the Receiver, as agent for the debtor X, directs the disposal of the property to the third party (section 104-10 of the ITAA 1997). The CGT event occurs when there is a change in ownership. The change in ownership is taken to have occurred upon the Receiver, as agent for the debtor X, entering into a contract for the disposal of the property to the third party.

Section 254 of the ITAA 1936 imposes an obligation to withhold in respect of agents or trustees acting for entities with tax liabilities.

As noted above, it is the Commissioner's view based on the facts and terms of the Deed and mortgage, that the Receiver sells the property as agent for the debtor, X. As such, section 106-30 of the ITAA 1997 will not operate to negate the obligations that exist under section 254 of the ITAA 1936 for the Receiver as 'agent … answerable as taxpayer' for any obligations resulting from a capital gain made by X during the agent's representation.

General discount

The general discount for CGT is contained in subdivision 115-A of the ITAA 1997. This general discount will apply where

• you are an individual, a trust or a complying superannuation entity

• a CGT event happens to an asset you own

• the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999

• you acquired the asset at least 12 months before the CGT event, and

• you did not choose to use the indexation method.

The discount percentage is the percentage by which you reduce your capital gain. You can reduce the capital gain only after you have applied all the capital losses for the income year and any unapplied net capital losses from earlier years. The discount percentage is 50% for resident individuals (paragraph 115-100(a)(i) of the ITAA 1997).

As discussed above, section 106-30 of the ITAA 1997 deems no disposal of the property has occurred when the property vested in the Trustee in Bankruptcy. Accordingly, X is taken to have disposed of the property and CGT event A1 occurred, when the Receiver entered into a contract for the disposal of the property to a third party.

X, an individual, acquired their interests in the property more than 12 months before the Receiver entered into a contract for the disposal of the property. A CGT event (A1) occurred in relation to the property after 21 September 1999. Accordingly, the general discount will apply to any capital gain that arose from the disposal of the property.