Edited version of your written advice

Authorisation Number: 1012676750071

Ruling

Subject: Liquidators tax liability

Question 1:

Do the Liquidators (Rulees) meet the definition of Agents and Trustees for the purposes of section 254 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

Yes

Question 2:

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax on dividends, interest and any other income, profits and gains derived by the Trust, in relation to beneficiaries who are Australian Residents, during the income years ended 30 June 2010 to 30 June 2013, on the basis that sections 99 and 99A of ITAA 1936 applies to these amounts?

Answer:

Yes

Question 3:

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax on dividends, interest and any other income, profits and gains derived by the Trust, in relation to beneficiaries who are Australian Residents, during the income years ended 30 June 2014 and 30 June 2015, on the basis that sections 99 or 99A of ITAA 1936 applies to these amounts?

Answer:

No

Question 4:

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax on any gain derived on the sale of the shares on the basis that beneficiaries were not absolutely entitled to these shares for the purposes of section 106-50 of the ITAA 1997?

Answer:

Yes

Question 5:

Does section 254 of the ITAA apply to make the Rulees liable to tax on any capital gains derived by the Trust, in relation to beneficiaries who are Australian Residents, on the sale of the shares during the financial year ending 30 June 2013 on the basis that sections 99 or 99A of the ITAA 1936 apply to these amounts?

Answer:

Yes

Question 6:

Does section 254 of the ITAA apply to make the Rulees liable to tax on any capital gains derived by the Trust, in relation to beneficiaries that are Australian Residents, on the sale of shares during the financial years ending 30 June 2014, on the basis that sections 99 or 99A of the ITAA 1936 apply to these amounts?

Answer:

No

Question 7:

Can the Rulees treat all the beneficiaries with an overseas address as non-residents for the purposes of section 98 of the ITAA 1936?

Answer

No

Question 8

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax in relation to any net income derived by the Trust during the financial years ending 30 June 2010 to 30 June 2015, to which beneficiaries who are found to be non-residents are presently entitled, on the basis that section 98(3) of the ITAA 1936 applies to these amounts?

Answer

Yes

This ruling applies for the following periods:

• Year ended 30 June 2010

• Year ended 30 June 2011

• Year ended 30 June 2012

• Year ended 30 June 2013

• Year ended 30 June 2014

• Year ended 30 June 2015

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The Company had administrators appointed who subsequently become the Liquidators (Rulees) of the Company. This ruling was lodged by the Applicant on behalf of the Rulees.

Prior to going into administration the Company had provided a service to investors.

It was found by the Rulees that the Company had mixed the clients monies in the accounts they created to hold these payments to such an extent that it was impossible to now ascertain entitlements to particular accounts (named by the Rulees as tainted accounts).

The Rulees sought a court order to approve the pooling of the tainted accounts into a Client Fund and other issues including the methodology to be used in determining client entitlements. An order was provided by the court which included directions on the pooling, entitlement and disbursement of the Client Fund.

Pursuant to the orders of the Court, the Company is the Trustee of the Trust on behalf of all eligible investors (beneficiaries). The Trust holds the Client Fund. As the liquidators of Company, the Liquidators act as the Trustees of the Trust.

The Applicant has advised that the Rulees made a resolution to disburse income of the Client Fund in the year ended 30 June 2014.

The beneficiaries include both Australian residents and non-resident investors. No clients of the Company are under a legal disability.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Section 95AAA

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 98

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 254

Income Tax Assessment Act 1997 Subsection 102-5

Income Tax Assessment Act 1997 Subsection 106-50

Corporations Act 2001 Section 511

Corporations Act 2001 Section 544

Trustee Act 1958

Reasons for decision

Question 1

Do the Rulees meet the definition of Agents and Trustees for the purposes of section 254 of ITAA 1936?

Summary

The Rulees as joint and several liquidators of the Company satisfy the definition of Trustee. Accordingly the provisions of section 254 of ITAA 1936 apply to the Rulees.

Detailed reasoning

Section 254 of ITAA 1936 imposes a number of general obligations upon agents and trustees in respect of any income, profits or gains of a capital nature derived by the agent or trustee in their representative capacity, or derived by the principal by virtue of their agency. Broadly in respect of any such income, profits or gains, the agent or trustee:

• is responsible for the taxation consequences that flow from the derivation of those amounts

• is required to lodge returns, and

• is assessed in their representative capacity

ATO Interpretative Decision ATO ID 2003/506 Income tax: Taxation obligations of company administrators, clarifies the duties and obligations created by section 254 of ITAA 1936 stating:

Therefore, section 254 of the ITAA 1936 does not create a personal responsibility in the administrator for tax assessed to the company. However, it makes the administrator liable to pay tax on income, profits or gains of a capital nature derived by the administrator in their capacity as trustee (for tax purposes) of the company.

Section 6 Interpretation, of ITAA 1936 defines trustee as:

trustee in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes:

a) an executor or administrator, guardian, committee, receiver, or liquidator; and

b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.

The Rulees as joint and several liquidators of the Company satisfy the definition of Trustee. Accordingly the provisions of section 254 of ITAA 1936 apply to the Rulees.

Question 2

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax on dividends, interest and any other income, profits and gains derived by the Trust, in relation to beneficiaries that are Australian Residents, during the financial years ended 30 June 2010 to 30 June 2013, on the basis that sections 99 and/or 99A of ITAA 1936 applies to these amounts?

Summary

Present entitlement does not occur until the beneficiaries who are entitled to receive income are identified and it is established that there is income which these beneficiaries are presently entitled to receive, that is, until the identified beneficiaries have a legal right to receive an ascertainable amount of income which is available in the hands of the Trustees.

Therefore the Rulees, are liable to tax on dividends, interest and any other income, profits and gains derived prior to the necessary administration being concluded by which the income available for disbursement to the entitled beneficiaries is established and ascertained.

The Rulees have advised that it was only during the year ending 30 June 2014 that the administration of the Trust had progressed to a point where they established a present right in the beneficiaries to obtain payment of an ascertainable sum of income.

As it was not till the year ending 30 June 2014 that the beneficiaries became presently entitled to the income of the Trust it cannot be said that there is net income which any beneficiaries can be legally presently entitled to prior to this year.

Accordingly the Company as Trustee, and therefore the Rulees in their capacity of liquidators of the Company, will be liable for tax under section 254 of ITAA 1936, on the net income of the Trust in the years prior to the year ended 30 June 2014, being the years ending 30 June 2010 to 30 June 2013.

Detailed reasoning

Section 254 of ITAA 1936 provides that the Rulees as liquidators of the Company are answerable as taxpayer for doing all such things as required to be done in respect of the income, profits or gains of a capital nature, derived by them in their representative capacity and for the payment of tax therein.

Pt III of Division 6 sets out the basic income tax treatment of the net income of a trust estate with section 95AAA providing that generally:

a) it has the result of assessing beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate; and

b) it has the result of assessing the trustee directly on any residual net income; and

c) as a collection mechanism, it has the result of assessing the trustee in respect of some beneficiaries, such as non residents or those under a legal disability.

Net income is defined in TR 2012/D1 Income tax: meaning of 'income of the trust estate' in Division 6 of Part III of the Income tax Assessment Act 1936 and related provisions, as being:

net income means the net income of a trust estate calculated pursuant to subsection 95(1) as the total assessable income of the trust estate calculated as if the trustee were a resident taxpayer less all allowable deductions (except for certain deductions identified in the provision)

Broadly sections 97, 98, 99 and 99A of ITAA 1936 provide the rules for determining whether the trustee or beneficiary(s) are assessed on the net income of the trust.

Subsection 98(3) of ITAA 1936 provides that the trustee of the trust estate will be assessed and liable to pay tax under subsection 98(1) of ITAA 1936 where a beneficiary is under a legal disability or where the beneficiary is a non-resident, under subsection 98(2A) of ITAA 1936. The Applicant has advised that none of the beneficiaries are under a legal disability therefore subsection 98(1) does not apply.

Section 97 of ITAA 1936 broadly provides that where a beneficiary of a trust estate is an Australian resident at the end of the income year and is not under any legal disability and is presently entitled to a share of the income of the trust estate the beneficiary is assessable on that share of the net income of the trust estate.

Where a beneficiary is found not to be presently entitled to a share of the income of the trust estate in a year of income sections 99 and 99A of ITAA 1936 provide that the trustee shall be assessed and is liable to pay tax on the net income of the trust estate. Section 99 provides for the trustee to be taxed on the trust net income as if it were the income of an individual who was a resident and were not subject to any deduction. Section 99A provides for the trustee to be assessed at the rate declared by the Parliament for the purpose of this section. Section 99 applies only if section 99A is inapplicable.

The Applicant refers to dividends, interest or any other income, profit and gains, including revenue from the sale of shares. It is accepted that these form part of the net income of the Trust.

It therefore needs to be determined if and when the beneficiaries are presently entitled to the income of the Trust. Taxation Ruling IT 2680 Income tax: withholding tax liability of non-resident beneficiaries of Australian trusts provides an ATO view on the meaning of present entitlement to trust income stating:

24. The requirement of present entitlement to a share of the income of the trust estate refers to a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in the trustee's hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts.

In applying case law to the situation the following is noted. In Harmer & Ors v Federal Commissioner of Taxation 91 ATC 5000 (Harmer) the Judges considered a situation where the monies were paid into court for a determination by the court regarding four contending claimants. It had been ordered by a Judge in Chambers that the said monies be paid out to the claimants' solicitors - the appellants, to be invested in a Building Society pending the determination of the Proceedings. The interest which was earned during the tax years was payable to the appellants as trustees of a trust. The Judges determined that no claimant had an interest in the monies until an order in his or her favour was made by the Supreme Court and that therefore the appellants, as trustees, were assessable pursuant to section 99 of ITAA 1936 in respect of the interest earned during the tax years.

The concept of presently entitled was also discussed in the High Court case of The Federal Commissioner of Taxation v. Whiting 68 CLR 199 (Whiting Case). In this case Latham CJ and Williams J state:

Thus, in order to ascertain whether such a present right exists, it is necessary to look at the state of the administration of the trust estate.

Numerous authorities, many of which are collected in the recent decision of this Court in Robertson v Deputy Federal Commissioner of Land Tax ^F2, have established that until an estate has been fully administered by payment or provision for the payment of funeral and testamentary expenses, death duties, debts, annuities, and legacies and the amount of the residue thereby ascertained, the income of the residuary estate is the income of the executors and not of the residuary beneficiaries

Latham CJ and Williams J decision was supported by their fellow Starke J who stated;

My brother Rich thought it "reasonably plain that in the case of a beneficiary who is sui juris all that is necessary in order to attract liability to him and to divert it from his executor or trustee, is that he should be presently entitled to income of the estate. By this ... is meant entitled for an interest in possession as contrasted with an interest in expectancy. It is not necessary that he should have received his share of the income." The last-mentioned proposition is true enough, but a beneficiary is not, I think, presently entitled to income unless it can be established that there is income which he is presently entitled to receive: that he is entitled to obtain payment thereof from the trustee.

The sections do not look to the nature of the beneficiaries' title to shares of the income whether they be vested or contingent, but to the right to receive income which is available in the hands of trustees for payment to the beneficiaries. So far as cases throw any light upon the construction of the Act they are, I think, all in favour of this view, from Lord Sudeley v Attorney-General ^F6 down to the case in this Court of Robertson v Deputy Federal Commissioner of Land Tax ^F7. And if this view is right, it is clear that the beneficiaries are not so entitled in the present case.

The Judges statements in Harmer and Whiting support a conclusion that the aspects of 'entitled' and 'presently entitled' need to be established to determine the beneficiaries' right to receive income. To achieve this it needs to be determined on what date the beneficiaries who were entitled to the Client Fund were identified and then on what date these beneficiaries moved from being 'entitled' to 'presently entitled' as described by Latham CJ and Williams J above.

The beneficiaries who were entitled to the Client Fund were identified in the year ended 30 June 2013.

However, present entitlement does not occur until it is also established that there is some ascertainable sum of income which the beneficiaries are presently entitled to receive, that is, until the beneficiaries have a legal right to receive income which is available in the hands of the Trustees, as summarised in the following statement by Starke J in Whiting:

In my opinion, this contention cannot be sustained, for the beneficiaries are not entitled to obtain payment of any income from the executors and trustees until such time as the estate is cleared of debts and liabilities or at least cleared sufficiently to establish a present right in the beneficiaries to obtain payment of some ascertainable sum of income from the trustees in a due course of administration.

The Rulees have advised that it was only during the year ending 30 June 2014 that the administration of the Company and the Trust had progressed to a point where they could establish a present right in the beneficiaries to obtain payment of some ascertainable sum of income.

As it was the year ending 30 June 2014 that the beneficiaries became presently entitled to the income of the Trust it cannot be said that there is net income which any Client can be legally presently entitled prior to this year.

Accordingly the Company as trustee of the Trust, and therefore the Rulees in their role as liquidators of the Company, will be liable for tax under section 254 of ITAA 1936 on the net income of the Trust in the years prior to the year ending 30 June 2014, being the years ending 30 June 2010 to 30 June 2013.

Question 3

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax on dividends, interest and any other income, profits and gains derived by the Trust, in relation to the beneficiaries where they are Australian Residents, during the income years ended 30 June 2014 and 30 June 2015, on the basis that sections 99 or 99A of ITAA 1936 applies to these amounts?

Summary

The beneficiaries are presently entitled to the income of the Trust in the years ending 30 June 2014 and 30 June 2015 and assessed on their distributions under section 97 of ITAA 1936. Therefore the Rulees would not be liable to tax under section 254 of ITAA 1936 pursuant to sections 99 and/or 99A of ITAA 1936 on the net income of the Trust in the years ending 30 June 2014 and 30 June 2015.

Detailed reasoning

As concluded in question 2 above the beneficiaries became presently entitled to the income of the Trust in the income year ended 30 June 2014 and the Liquidators have advised they will make a final disbursement of corpus and income in the income year ended 30 June 2015.

Therefore, in relation to beneficiaries who are Australian Residents, the Rulees would not be liable to tax under section 254 of ITAA 1936 pursuant to sections 99 or 99A of ITAA 1936 on the Trust's net income in these years.

Question 4

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax on any gain derived on the sale of the shares on the basis that the beneficiaries were not absolutely entitled to these shares for the purposes of section 106-50 of the ITAA 1997?

Summary

No beneficiaries had the right to call for the assets (shares) to be transferred to them or to be transferred at their direction as required under paragraph 10 of TR 2004/D25. Therefore no beneficiary is absolutely entitled to the shares for the purposes of section 106-50 of the ITAA 1997. As the beneficiaries are not absolutely entitled to the shares, the Rulees, pursuant to section 254 of ITAA 1936, are liable for tax on any gain derived on the sale of the shares.

Detailed reasoning

Section 106-50 of ITAA 1997 states that:

If you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in parts 3-1 and 3-3 of the Income Tax Assessment Act 1997, states that:

1. This ruling explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee.

2. Broadly, an absolutely entitled beneficiary (rather than the trustee) is treated as the relevant taxpayer in respect of the asset for the purposes of the capital gains tax (CGT) provisions.

And further:

Core principle

10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v. Vautier applied in the context of the CGT provisions

Persons who cannot be absolutely entitled

13. The following persons cannot be absolutely entitled because they do not have an interest in the trust's assets:

• an object of a discretionary trust prior to any exercise of the trustee's discretion in their favour (see Explanation paragraph 71), and

• a beneficiary of a deceased estate prior to the completion of its administration (see Explanation paragraph 72).

14. Also, a beneficiary with an interest in the trust's assets cannot be absolutely entitled if that interest is contingent or defeasible (see Explanation paragraphs 73 to 75).

The Applicant advised that some of the shares were sold in the years ended 30 June 2013 and 30 June 2014. As directed by the Court the proceeds of the sale of the shares were to be pooled into the Client Fund.

Accordingly since the assets (shares) were by Order of the Court to be liquidated and the proceeds pooled to a common fund no beneficiaries had the right to call for the shares to be transferred to them or to be transferred at their direction as required under paragraph 10 of TR 2004/D25.

Therefore none of the beneficiaries were absolutely entitled to the shares for the purposes of section 106-50 of the ITAA 1997.

Question 5

Does section 254 of the ITAA apply to make the Rulees liable to tax on any capital gains derived by the Trust, to which beneficiaries who are Australian Residents are found to be entitled, on the sale of the Shares during the financial year ending 30 June 2013 on the basis that sections 99 or 99A of the ITAA 1936 applies to these amounts?

Summary

As established in Question 2 it is determined that the beneficiaries are not presently entitled to the income of the Trust in the year ending 30 June 2013. Therefore the Rulees are liable for tax under section 254 of ITAA 1936 pursuant to sections 99 or 99A of ITAA 1936 on the Trust's net income, which includes any capital gains generated on the sale of the shares during the income year ending 30 June 2013.

Detailed reasoning

In order to determine whether the Rulees will be liable to pay tax on the capital gains generated from the sale of the shares it is first necessary to establish if any beneficiaries were absolutely entitled to the assets in this year.

As determined in question 4 above it is considered that no beneficiary was absolutely entitled to the shares as against the Rulees as in the year ended 30 June 2013.

Subsection 102-5 of ITAA 1997 provides that assessable income includes net capital gain. Therefore as no beneficiary is absolutely entitled to the shares any net capital gain/loss from the sale of the shares will form part of the assessable income/net income of the Trust in the income year, being the year ended 30 June 2013.

As established in Question 2 it is determined that the beneficiaries are not presently entitled to the income of the trust in the year ended 30 June 2013. Therefore the Rulees are liable for tax under sections 99 or 99A of ITAA 1936 on the Trust's net income, which includes any capital gains generated on the sale of the shares during the income year ended 30 June 2013.

Question 6

Does section 254 of the ITAA apply to make the Rulees liable to tax on any capital gains derived by the Trust, where the beneficiaries are Australian Residents, on the sale of the shares during the financial years ending 30 June 2014, on the basis that sections 99 or 99A of the ITAA 1936 applies to these amounts?

Detailed reasoning

It is not considered that any of the beneficiaries are absolutely entitled to the shares. However for the reasons detailed in Questions 3 it is considered that the beneficiaries, not the Rulees, are liable for tax on the net income of the trust which will include any capital gains generated on the sale of the shares, during the income year ending 30 June 2014.

Question 7

Can the Rulees treat all the beneficiaries with an overseas address as non-residents for the purposes of section 98 of the ITAA 1936?

Summary

It is not possible to determine the residency of a person based on solely on their address. The beneficiaries with non-Australian addresses will need to have their 'residence' in each of the ruling years determined separately with relevance to the taxpayer's individual circumstances in those years.

Detailed Reasoning

The terms "resident" and "resident of Australia" are defined in subsection 6(1) of the ITAA 1936. So far as an individual is concerned, these terms are defined to mean:

(a) a person, other than a company, who resides in Australia and includes a person-

i) whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;

ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or

iii) who is an eligible employee for the purposes of the Superannuation Act 1976 or is the spouse or a child under 16 years of age of such a person;

Effectively, if a person does not reside in Australia, commonly referred to as 'residence according to ordinary concepts' that person may nevertheless be considered a resident of Australia if he or she satisfies any one of three additional statutory tests set out in paragraphs 6(1)(a)(i) to 6(1)(a) (iii) of the ITAA 1936. Simply stated, these tests are: (i) the domicile and permanent place of abode test; (ii) the 183 day test; and (iii) the superannuation fund test.

Taxation Ruling TR 98/17 Income tax: residency status of individuals entering Australia, provides the Commissioner's interpretation of the ordinary meaning of the word 'resides' within the definition of resident in subsection 6(1) of the ITAA 1936. Paragraph 9 of TR 98/17 states that:

Residency status for income tax purposes

9. Residency status is a question of fact and is one of the main criteria that determines an individual's liability to Australian income tax. Liability to tax is determined on a year by year basis…

Expanding on this, in Commissioners of Inland Revenue v. Lysaght [1928] A.C 234, it was held that a decision on a question of 'residence' was a finding of fact. i.e., it is essentially a question of fact whether a person does or does not comply with the meaning of that expression and that there is no technical or special meaning attached to the expression for the purposes of the Income Tax Act. Following this, the judgment by the High Court of Australia in Commissioner of Taxation v Miller [1946] HCA 23; 73 CLR 93 ('Miller') is considered as decisive in illustrating the way in which the question of "resident" or "not resident" has become a "question of degree and therefore of fact".

Accordingly it is not possible to determine the residency of a person based on solely on their address. Beneficiaries with non-Australian addresses will need to have their 'residence' in each of the ruling years determined separately with relevance to the taxpayer's individual circumstances in those years.

Question 8

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax in relation to any net income derived by the trust during the income years ended 30 June 2010 to 30 June 2014 to which the beneficiaries who are found to be non-residents are presently entitled on the basis that section 98(3) of the ITAA 1936 applies to these amounts?

Reasoning

Subsection 98(2A) of the ITAA 1936 provides that if a beneficiary who is a non-resident at the end of the year of income is presently entitled to a share of the income of the trust estate, the trustee is assessed and liable to pay tax under subsection 98(3) of the ITAA 1936.

Subsection 98(2A) further provides that the trustee will be liable to pay tax under subsection 98(3) in respect of:

(c) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(d) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

Therefore in respect of the beneficiaries who were presently entitled to a share of the income of the trust estate and who were non-residents at the end of the income year the Rulees will be liable to pay tax under section 254 of ITAA 1936 on the share of their net income that is covered by (c) and (d) above.

NOTE: Section 128A(3) provides that for the purposes of the withholding provisions in Division 11A any interest, dividends or royalties to which a beneficiary is presently entitled is deemed to have been derived by the beneficiary. Therefore the "tax liability" of the Rulees in relation to net income of the trust estate comprising unfranked dividends, interest or royalties to which non-resident beneficiaries are presently entitled, is more accurately described as a liability for withholding tax pursuant to s128B and s128C of the ITAA 1936.