Edited version of your written advice

Authorisation Number: 1051190904909

Date of advice: 15 February 2017

Ruling

Subject: Capital gains tax

Question 1

Does section 254(1)(d) of the Income Tax Assessment Act 1936 impose an obligation on the trustees to retain money sufficient to pay tax based on the capital gains events that occurred upon sale of the properties?

Answer 1

No

This ruling applies for the following period(s)

Financial year ending 30 June 20YY

Financial year ending 30 June 20ZZ

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You are the trustee of a bankrupt estate. At the time of your appointment, the bankrupt owned several properties.

One property was sold in financial year ending 30 June 20YY. The other properties were sold in financial year ending 30 June 20ZZ.

The bankrupt lodged their income tax return for the year ended 30 June 20YY which does not disclose a capital gains tax event for that year. The bankrupt's income tax return for year ended 30 June 20ZZ is unlodged.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 254

Reasons for decision

Paragraph 254(1)(d) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that, with respect to every agent and with respect to every trustee, he or she is authorized and required to retain from time to time out of any money which comes to him or her in his or her representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains.

The High Court recently considered the application of section 254 of the ITAA 1936 (Federal Commissioner of Taxation v. Australian Building Systems Pty Ltd (In liq) [2015] HCA 48; (2015) 90 ALJR 151). The Commissioner has also issued a Decision Impact Statement in respect of this case.

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).

Accordingly, as no assessment has been raised showing a capital gains tax liability of the bankrupt, you do not have an obligation to retain an amount upon the capital gains tax events happening in relation to the disposal of the properties.

Other issues for you to consider

Australia's income tax system is based on self-assessment. This means that the information a taxpayer provides to the ATO is initially accepted as being true and correct when the taxpayer lodges their tax return. Even though we may initially accept the tax return, the return may still be subject to further review. Where a self-amendment is made or audit action is taken, an assessment may be raised to include a capital gains tax liability. A prudent trustee, possessed of the knowledge of a capital gains tax event, would be entitled to retain an amount in respect of this event.