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Edited version of your written advice
Authorisation Number: 1013023740619
Date of advice: 6 June 2016
Ruling
Subject: Section 254
Question 1
Do the trustees of the Trust have an obligation to retain an amount under paragraph 254(1)(d) of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the capital gains tax event that occurred in the 200X-0X financial year?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 200X
The scheme commences on:
1 July 200X
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
The Trust was created under the Will of the deceased who passed away during the relevant financial year.
The terms of the relevant Trust are as follows:
'AS to all my right title and interest in my freehold property situate in XXXX together with the improvements thereon and contents thereof for my child for life and upon their death for such of the children of my child and their spouse who live to attain the age of twenty-one (21) years and if more than one then as tenants in common in equal shares absolutely.'
The beneficiaries of the Trust are the deceased's child as a life tenant and the children of the life tenant as remaindermen.
The beneficiary is a resident beneficiary, not under any legal disability.
The relevant property was vacant land which had been acquired by the deceased prior to 20 September 1985.
The property was sold by contract during the 200X-0X financial year.
The sale occurred at the request of and was arranged and sourced by the beneficiary.
The beneficiary acted as solicitor for the trustees in respect of the sale and took most of the proceeds into the Trust Account operated by the law firm of which the beneficiary is the sole principal.
Until late 20XX the beneficiary did not disclose to the trustees how they had invested most of the sale proceeds. It emerged that most of the funds were placed in an interest bearing account.
The trustees only obtained control of the proceeds of the sale in late 20XX and were advised that they needed to lodge Trust Returns from and including 200X onwards and recognise a capital gain.
Trust tax returns for the trust were lodged for the relevant years on dd/mm/yyyy.
The 200X return recognised a capital gain on the property together with interest derived during that year and distributed all income to the life tenant.
The trustees have made no election for the purposes of 115-230(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to be assessed on the capital gain realised in the 200X-0X financial year.
The trustees have made no agreement in accordance with PSLA 2005/1.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 254.
Reasons for decision
The High Court recently considered the application of section 254 of the Income Tax Assessment Act 1936 (Federal Commissioner of Taxation v. Australian Building Systems Pty Ltd (In liq) [2015] HCA 48; (2015) 90 ALJR 151).
That case involved a liquidator selling an asset of a company in liquidation. The question arose regarding whether section 254 of ITAA 1936 obliged the liquidator 'to account' to the Commissioner for any capital gains tax liability out of the proceeds of sale of the asset. The court found that retention obligation only applies where an assessment has first issued in respect of the capital gain.
While a liquidator does not have a specific obligation to retain upon the mere happening of a CGT event (the sale of a property), a prudent trustee would be entitled to retain an amount until the income tax positon had become certain by way of an assessment being made: (Logan J at [31] 2014 ATC 20-444).
The court also noted the application of Corporations Law to this situation. Section 556 of the Corporations Act 2001 provides priority repayment for the costs, charges and expenses of a winding up, including the remuneration of a company liquidator and income tax assessed post-liquidation. Given this priority, it would be prudent of a liquidator to provide for an anticipated tax liability from any property sale proceeds.
The Commissioner has published a Decision Impact Statement on 6 January 2016 regarding the case.