Edited version of your written advice

Authorisation Number: 1012715804290

Ruling

Subject: Obligations under section 254 of the Income Tax Assessment Act 1936

Question 1

Pursuant to section 254 of the Income Tax Assessment Act 1936 (ITAA 1936), is the Joint Receiver answerable as taxpayer (in relation to Company X (Receivers and Managers Appointed) (Company X)) for the doing of all such things as are required to be done by virtue of the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997) in respect of any income, or any profits or gains of a capital nature derived from the assignment by the Security Trustee of the Contractual Rights and for the payment of tax thereon?

Answer

No

Question 2

Is the Joint Receiver required by section 254 of the ITAA 1936 to retain out of any money which comes to, or is held by, the joint receivers and managers of Company X in their representative capacity, so much as is sufficient to pay income tax which is or will become due in respect of any income, or any profits or gains referred to in Question 1 above?

Answer

No

Question 3

Is the Joint Receiver required by section 254 of the ITAA 1936 to retain out of any money which comes to, or is held by, the joint receivers and managers of Company X in their representative capacity, so much as is sufficient to pay income tax which is or will become due in respect of any income, or any profits or gains referred to in Question 1 above?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commenced on:

Year ended 30 June 2014

Relevant facts and circumstances

Company X (Receivers and Managers Appointed) (Company X)

1. Company X is an Australian resident company and a subsidiary of a company listed on the Australian Securities Exchange, but is not a member of any tax consolidated group.

Financing and security structure

2. Company X granted a registered fixed and floating charge (the "Charge") to Company D in respect of all Company X's "present and future assets and undertaking" to secure moneys owing by Company X from time to time.

3. The Security Trustee was appointed pursuant to a deed ("the Security Trust Deed"). The Security Trust Deed applies to the Security Trustee only in its capacity as trustee of the Company X Security Trust.

4. Company D's rights, title and interest in the property charged by Company X to Company D pursuant to the Charge were assigned to the Security Trustee as trustee for itself and any other Mortgagee, to secure repayment of the secured money.

5. Pursuant to the terms of the Security Trust Deed, the Security Trustee holds the benefit of the security interests created by the Security (including the Charge) on trust for the current Participants under a Credit Facility Agreement.

6. Pursuant to the terms of the Credit Facility Agreement, financial accommodation has been made available to Company X as the Borrower. The current Participants under the Credit Facility Agreement are owed monies.

7. The property the subject of the charge ("the Mortgaged Property") includes certain contracts that Company X is a party to (the "Project Agreements"):

8. The Mortgaged Property includes all of Company X's presently existing rights (the "Contractual Rights") under or in relation to the Project Agreements. The Contractual Rights have material market value.

9. The Security Trust Deed entitles the Security Trustee to exercise all powers under the securities (including those conferred by law) as if the Security Trustee were the sole beneficial owner of the securities and has absolute discretion as to the steps to take to enforce those securities, to recover money payable and to the manner of enforcement (including the terms of any sale under those securities and any controller appointed under those securities).

10. The Charge is a "Security" within the definition of that term in the Security Trust Deed.

11. The Security Trust Deed sets out the extent of the Security Trustee's discretion and ability to seek instructions from the Finance Parties (which include the Participants).

12. The Security Trust Deed requires the Security Trustee to enforce a Security as directed by the Majority Finance Parties and recover the Secured Moneys following an Event of Default.

13. The Charge allows the Security Trustee to exercise any Power of a Receiver at any time an Event of Default subsists in addition to any Power of the Mortgagees and without giving notice and it may exercise those Powers and its Powers without taking possession or being liable as mortgagee exercising a power of sale. The Powers are defined to include a power to sell any of the Mortgaged Property (whether or not the Security Trustee has taken possession).

Default and Appointment of Receivers and Managers

14. Company X was notified that a series of events of default had occurred on various dates under the Credit Facility Agreement and that such Events of Default were subsisting.

15. On the basis of these Events of Default, the Participants instructed the Security Trustee, to appoint the Joint Receiver and Individual B as joint and several receivers and managers ("the Receivers") of the Mortgaged Property.

16. The appointment of the Receivers was effected pursuant to a deed of appointment of receivers between the Receivers and the Security Trustee ("Deed of Appointment").

17. Pursuant to the Deed of Appointment, the Receivers are the agents of Company X, and Company X is responsible for the Receivers' acts, defaults and omissions and for the Receivers' remuneration.

Events occurring post appointment of Receivers and Managers

18. Subsequent to the appointment of the Receivers, certain parties commenced negotiations to acquire the Contractual Rights from the Security Trustee. That offer did not include the other assets of Company X or to acquire the business of Company X as a going concern.

19. Following commencement of the negotiations, the Participants requested the Receivers to undertake a sale process for the assets of Company X including, on a going concern basis, to comply with its duty under section 420A of the Corporations Act 2001.

20. The Receivers advertised the assets of Company X for sale and called for expressions of interest from third parties. A number of expressions of interest and indicative bids were received by the Receivers from a range of parties, most of whom offered to acquire the business of Company X as a going concern.

21. Following analysis by the Receivers and the Security Trustee of those offers, it was determined that the transaction which would result in the highest net sale proceeds and is consistent with the controller's duty of care, was in fact the proposal to assign the Contractual Rights.

22. The decision of the Security Trustee to exercise its statutory and contractual powers of sale in respect of the Contractual Rights, is the decision of the Security Trustee, in consultation with the Participants, upon its own advice and is not at the direction or advice of the Receivers.

23. As a consequence, the Security Trustee has determined not to proceed with a sale of the business as a going concern by the Receivers but rather to:

a. retire the Receivers from the Contractual Rights,

b. enter into the assignment of the Contractual Rights in its own name; and

c. leave the Receivers appointed over the balance of the assets.

Assignment of the Contractual Rights

24. The Participants will direct the Security Trustee to exercise its power of sale as mortgagee under the relevant State Conveyancing Act and the Charge by entering into assignment deeds ("Assignment Deeds") for the assignment of the Contractual Rights specified therein to respective purchasers (the "Assignees").

25. Pursuant to these Assignment Deeds, the Security Trustee will assign its right, title and interest in the Contractual Rights to each relevant Assignee in return for consideration.

26. Upon execution of the Assignment Deeds, certain conditions precedent contained therein are to be either satisfied or waived for the assignment of the Contractual Rights to be legally binding.

27. The assignment of the Contractual Rights will have no legal effect until the Stated Time on the Effective Date as specified in the Assignment Deeds (contingent on the conditions precedent being satisfied or waived).

28. The Receivers will not be parties to the Assignment Deeds.

29. The Security Trustee will receive and hold the proceeds of sale on trust for the Participants in accordance with the Security Trust Deed. The Security Trustee, will then distribute such proceeds, net of applicable fees and expenses and any required retentions, to the Participants shortly thereafter.

Retirement of Receivers and Managers

30. The Receivers will retire from their appointment as joint receivers and managers insofar as that appointment relates to the Contractual Rights.

31. The retirement of the Receivers is given effect upon execution of the Deed of Retirement of Receivers & Managers.

32. The Deed of Retirement of Receivers and Managers will be executed before the Effective Date under the Assignment Deeds but after the Assignment Deeds are executed.

33. The Receivers will not be appointed to the Contractual Rights at the time they are assigned.

34. The Security Trustee will require the Receivers to remain over the remaining assets of Company X. These assets are of little value.

35. The Security Trustee does not presently intend to, and does not have plans to exercise its power of sale in relation to the remaining assets of Company X.

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)(a)

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

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

Reasons for decision

Question 1

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

Subsection 254(1) of the ITAA 1936 sets out the responsibilities of agents and trustees. Relevantly, it states:

With respect to every agent and with respect also to every trustee, the following provisions shall apply:

(a) He or she 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 him or her in his or her representative capacity, or derived by the principal by virtue of his or her agency, and for the payment of tax thereon.

Trustee is defined in subsection 6(1) of the ITAA 1936 as follows:

... 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.

In FC of T v. Barnes 75 ATC 4262; (1975) 133 CLR 483 and FC of T v. Card (1963) 37 ALJR 239, the Court held that the receiver and manager of the assets of a company appointed by an equitable mortgagee entitled to a floating charge over the assets of a company was a trustee within the meaning of the definition of section 6 of the ITAA 1936.

In the present case the roles performed by the Receivers will satisfy the definition of 'trustee' for the purposes of section 254 of the ITAA 1936, and prima facie, will therefore be subject to the obligations imposed by subsection 254(1) of the ITAA 1936.

The Receivers are also agents of Company X, being expressly appointed as agents of Company X by the Deed of Appointment.

However, section 254 of the ITAA 1936 does not create a personal responsibility in the Receivers for tax assessed to Company X. Paragraph 254(1)(a) of the ITAA 1936 makes the Receivers answerable as taxpayer on income, profits or gains of a capital nature derived by the Receivers in their capacity as trustees (for tax purposes) of Company X or derived by Company X (as principal) by virtue of the Receivers' agency.

In Fermanis v. Cheshire Holdings Pty Ltd (1989) 20 ATR 1862; 90 ATC 4201, (Fermanis) Murray J held at ATR 1865; ATC 4203, in relation to section 254:

What is clear about that provision is that it creates of itself no tax liability, which is to be otherwise derived from the provisions of the Act, so that if a tax liability is not otherwise to be drawn from the statute, none will be created by sec. 254...

It is clear, I think, that the provision operates as a machinery provision to facilitate tax collection in relation to liable trust income when the liability is otherwise imposed than by sec 254.

The assignment of the Contractual Rights will not result in income, profits or gains of a capital nature being derived by the Receivers in their capacity as trustees. The Receivers will be retired from their appointment as joint Receivers and Managers with respect to the Contractual Rights by the execution of the Deed of Retirement of Receivers & Managers. The execution of the Deed of Retirement of Receivers & Managers will occur after the execution of the Assignment Deeds but before the assignment of the Contractual Rights becomes legally effective at the Stated Time on the Effective Date. The Receivers will not be parties to the Assignment Deeds nor will they be recipients of any of the proceeds.

Further, the assignment of the Contractual Rights will also not result in income, profits or gains of a capital nature being derived by Company X by virtue of the Receivers' agency.

In relation to the phrase "by virtue of", in Whelan v. Australian Securities Commission (1993) 12 ACSR 239, Beaumont J at 250 stated:

In the context of giving the meaning of ``virtue'', the Macquarie Dictionary, 2nd ed, offers the following definition of the phrase ``by virtue of'': by reason of: to act by virtue of authority conferred. The Macquarie gives this meaning to the phrase ``by reason of'': ``on account of; because of.

In Human Rights and Equal Opportunity Commn v. Mount Isa Mines Ltd (1993) 46 FCR 301 at 321-2; 118 ALR 80 at 99, the phrase "by reason of" was considered by Lockhart J to imply a relationship of cause and effect.

In Macabenta v. Minister for Immigration and Multicultural Affairs (1998) 90 FCR 202 at 213; 159 ALR 465 at 475, it was stated that the words "by reason of":

... require the practical application of causation principles explained in March v E & MH Stramare Pty Ltd (1991) 171 CLR 506 ; 99 ALR 423, while at the same time according due recognition to the beneficial purposes and objects of the [Act]

In March v. E & MH Stramare Pty Ltd (1991) 171 CLR 506 at 515 per Mason CJ, at 522-4 per Deane J causation was stated to be a factual issue.

Consideration has been given to the following facts:

• The Security Trustee was involved in negotiations with certain parties who sought to acquire the Contractual Rights from the Security Trustee, but not the other assets of Company X or to acquire the business as a going concern.

• To comply with section 420A of the Corporations Act 2001 the Participants requested that the Receivers advertise the assets of Company X for sale, including as a going concern. A number of expressions of interest and indicative bids were received, most offering to acquire the business of Company X as a going concern.

• The Security Trustee and Receivers analysed the offers received from this process and it was determined that the transaction that would result in the highest net sale proceeds and consistent with the controller's duty of care was the proposal to assign the Contractual Rights.

• The Security Trustee has determined not to proceed with a sale of the business as a going concern by the Receivers but rather to:

• retire the Receivers from the Contractual Rights (as set out in paragraphs 30 to 33 above)

• enter into the assignment of the Contractual Rights in its own name by exercising its power of sale as mortgagee under the relevant State Conveyancing Act and of the Charge (as set out in paragraphs 24 to 27 above); and

• require the Receivers to remain appointed over the remaining assets of Company X which have little value.

• The decision of the Security Trustee to exercise its statutory and contractual powers of sale in respect of the Contractual Rights, is the decision of the Security Trustee, in consultation with the Participants, upon its own advice and is not at the direction or advice of the Receivers.

• The Security Trustee has stated that it does not presently intend to, and does not have plans to exercise its power of sale in relation to the remaining assets of Company X

• The Receivers will not be parties to the Assignment Deeds.

Taking into consideration that section 254 of the ITAA 1936 is a provision aiding collection and not the imposition of tax liability (Fermanis) and the facts directly listed above, the Commissioner accepts that in the circumstances, the assignment of the Contractual Rights will not result in income, profits or gains of a capital nature being derived by Company X by virtue of the Receivers' agency. The Receivers in this case, have played an ancillary role in the process of realising the Contractual Rights of Company X to meet the amounts currently owed to the Participants under the Credit Facility Agreement.

The income, profits or gains of a capital nature derived by Company X as a result of the assignment of the Contractual Rights arose from the actions and decisions of the Security Trustee and not by virtue of the agency of the Receivers.

Consequently, the Joint Receiver as joint and several receivers and managers of Company X, will not be answerable pursuant to paragraph 254(1)(a) of the ITAA 1936 as Company X, for the doing of all such things as are required to be done by virtue of the ITAA 1936 or the ITAA 1997 in respect of any income, or any profits or gains of a capital nature derived from the assignment by the Security Trustee of the Contractual Rights.

Question 2

For the reasons stated above in response to Question 1, the Joint Receiver as joint and several receivers and managers of Company X is not answerable pursuant to section 254 as Company X, for the doing of all such things as are required to be done by virtue of the ITAA 1936 or the ITAA 1997 in respect of any income or any profits or gains of a capital nature derived from the assignment of the Contractual Rights.

Accordingly, the Joint Receiver will not be required by paragraph 254(1)(d) of the ITAA 1936 to retain out of any money which comes to, or is held by, the joint receivers and managers of Company X in their representative capacity, so much as is sufficient to pay income tax which is or will become due in respect of any income or any profits or gains of a capital nature arising from the assignment of the Contractual Rights.

Question 3

For the reasons stated above in response to Question 1, the Joint Receiver as joint and several receivers and managers of Company X is not answerable pursuant to section 254 as Company X, for the doing of all such things as are required to be done by virtue of the ITAA 1936 or the ITAA 1997 in respect of any income or any profits or gains of a capital nature derived from the assignment of the Contractual Rights.

Accordingly, the Joint Receiver will not be personally liable pursuant to paragraph 254(1)(e) of the ITAA 1936 for any tax payable in respect of any income, profits or gains arising from the assignment of the Contractual Rights.