Edited version of private advice

Authorisation Number: 1051844004514

Date of advice: 30 July 2021

Ruling

Subject: Liquidator's obligation

Question 1

Do you (the Liquidator) have an obligation under Section 254 of the Income Tax Assessment Act 1936 (ITAA 1936) to retain money out of the proceeds of the sale of a property (the Property)?

Answer

No

Question 2

Are you entitled but not obliged to retain an amount on account of any tax on the capital gain until liability for the Capital Gains Tax (CGT) has been established with absolute certainty?

Answer

Yes

Question 3

If you did not retain an amount on account of the CGT, will you as liquidator, be held personally liable for the CGT, under Paragraph 254(1)(e) of the ITAA 1936 for the income year ended 30 June 2017?

Answer

No

This ruling applies for the following period

Financial year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Background

On X XX 20XX, the Supreme Court of XX ordered that The Company be wound up pursuant to section 461(1)(k) of the Corporations Act 2001 on just and equitable grounds due to a dispute between the directors of the Company.

XX was appointed as Liquidator of the Company.

The Company is the trustee for the Trust. The Trust was created by a Trust Deed dated X XX 20XX (the Trust Deed). The Trust is a unit trust.

Pursuant to clause XX of the Trust Deed, the Company's appointment as trustee of the Trust terminated when the Company entered into liquidation. A resolution was passed on X XX 20XX to vary the Trust Deed to re-appoint the Company as trustee of the Trust.

The unit holders of the Trust (Unit Holders) and the units they hold are:

-        XX as trustee for XX Trust, 10 units

-        XX as trustee for XX Trust, 10 units

Prior to the Company being wound up, the main asset of the Trust was a property located at XX (the Property). The Property was acquired by the Company as trustee for the Trust, in which the purchase contract was entered on X XX 20XX.

In order to purchase the Property, the Company as trustee for the Trust was loaned funds from XX and a bank, to fund the purchase.

The Property was sold by the Liquidator under a contract of sale dated X XX 20XX, on behalf of the Company as trustee for the Trust. Settlement of property sale was completed on X XX 20XX.

The disposal of the Property resulted in a capital gain for the income year ended 30 June 20XX. The gross capital gain worked out to be $X. By applying a 50% capital gain discount, the net capital gain was calculated to be $X.

The Company and the Unit Holders have at all times been resident of Australia for tax purposes.

In the income year ended 30 June 20XX, the Trust had a XX loss, but did not have any capital loss or tax loss due to the capital gain from the disposal of the Property. It did not have any carried forward capital losses or tax losses from prior years. There was a delay in lodging the Trust tax returns caused by deficiencies in the books and records that were maintained prior to the appointment of the Liquidator. The 20XX - 20XX income years' Trust tax returns were lodged in XX 20XX, after an external accountant reconstructed the financial accounts based on the available information.

The Commissioner was notified the appointment of the Liquidator in accordance with Schedule 1 to Tax Administration Act 1953 (TAA 1953), subsection 260-45(2). The Liquidator was advised there was no debt owing to the Commissioner at appointment (due to non-lodgement of the Trust tax returns at that point).

Both Unit Holders (the beneficiaries) of the Trust were presently entitled to the income of the Trust (all income of the trust).

The lodged 20XX Trust tax return shows nil assessable amount to the Company as trustee for the Trust. It is expected that the Commissioner will issue a tax clearance in accordance with Schedule 1 to TAA 1953, subsection 260-45(3).

Distributions of trust income

Under the Trust Deed,

-        the XX section provides the 'Income of the trust fund' means, subject to XX, the net income of the trust as defined in section 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

-        Clause XX states the trustee may, instead of relying on the definition of 'income of the trust fund' set out in this deed, decide at any time prior to 30 June in a financial year to adopt, for the financial year, another definition of 'income of the trust fund'. A decision under this clause XX must be made by signing a minute to that effect.

-        Clause XX states during a financial year, the trustee may resolve to accumulate a part of the income for that financial year. The trustee may do so for any of the following purposes:

•         to recoup a loss in an earlier financial year;

•         as a reserve to meet contingencies, to provide for repairs and maintenance, for depreciation or for any other purpose.

The trustee may pay tax for an accumulated amount out of that amount or out of capital.

-        Clause XX states the Trustee must distribute the remaining income of the trust for a financial year to those who, immediately before the commencement of the next financial year, are unit holders. The trustee must do so in proportion to the number of units they hold.

-        Clause XX states if, before the commencement of the next financial year, the trustee fails to resolve to distribute remaining income from a financial year or to retain it, that income must be credited to a separate account in the books of the Trust in the names of the Unit Holders. The money will be a debt to the Unit Holders and will not bear interest.

In the income year ended 30 June 20XX, the Company as trustee for the trust, did not, prior to 30 June 20XX,

-        make any determination by way of minute to adopt another definition of 'income of the trust fund' other than the definition of 'income of the trust fund' set out in the Trust Deed.

-        resolve to accumulate any of the income of the Trust for that financial year.

The Company as trustee for the trust,

-        did not record the capital gain in the accounts or records of the Trust within 2 months after the end of the income year (i.e. by X XX 20XX)

-        has not made a cash distribution of the proceeds from the sale of the Property to the Unit Holders

-        still holds the proceeds

-        has created a separate account in the financial report for the year ended 30 June 20XX of the Trust in the names of the Unit Holders and credited the income of the Trust to that account as XX, in accordance with Clause XX of the Trust Deed

-        has made no election for the purposes of section 115-230(1) of the ITAA 1997 to be assessed on the capital gain in relation to the sale of the Property.

Relevant legislative provisions

Income Tax Assessment Act 1936, subsection 6(1)

Income Tax Assessment Act 1936, section 254

Income Tax Assessment Act 1997, Subdivision 115-C

Reasons for decision

Question 1

Summary

The Liquidator does not have an obligation under Section 254 of the ITAA 1936 to retain money out of the proceeds of the sale of the Property, as in relation to the tax assessment, the Company as trustee for the Trust had nil assessable amount and will not be liable to pay tax in respect of the net CGT.

Detailed reasoning

When the net income of the Trust includes a capital gain, the capital gain is subject to the rules under Subdivision 115-C of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 115-227 of the ITAA 1997 provides, a beneficiary's 'share' of the capital gain of a trust includes the amount to which the beneficiary is 'specifically entitled' and the share of the capital gain to which no beneficiary or trustee is specifically entitled, multiplied by the beneficiary's adjusted Division 6 percentage of the income of the trust.

Section 115-228 of the ITAA 1997 provides, a beneficiary is 'specifically entitled' to an amount of a capital gain made by the trust is calculated with the formula

Capital gain × Share of net financial benefit / Net financial benefit

Where

-        'net financial benefit' means an amount equal to the financial benefit that is referable to the capital gain, and

-        'share of the net financial benefit' means an amount equal to the financial benefit that, in accordance with the terms of the trust:

(a) the beneficiary has received, or can be reasonably expected to receive; and

(b) is referable to the capital gain (after application by the trustee of any losses, to the extent that the application is consistent with the application of capital losses against the capital gain in accordance with the method statement in subsection 102-5(1) of the ITAA 1997); and

(c) is recorded, in its character as referable to the capital gain, in the accounts or records of the trust no later than 2 months after the end of the income year.

Taxation Determination (TD) 2012/11, Income tax: capital gains: for the purposes of subsection 115-228(1) of the Income Tax Assessment Act 1997, can a beneficiary of a trust estate be reasonably expected to receive an amount of a financial benefit referable to a capital gain made by the trust estate in an income year if the fact that the capital gain was made is not established until after the end of the income year? at paragraph 30 states:

-        Likewise, if the terms of the trust deed require the amount of a capital gain made by the trust estate in respect of particular assets to be distributed to a specified beneficiary, without more, the beneficiary demonstrates a reasonable expectation of receiving the amount in the event that a capital gain is made. If other circumstances exist which suggest to the beneficiary that they will not receive that amount should it arise (such as, say, that the deed is likely to be varied to alter this entitlement), those circumstances may be such as to prevent the deed, in light of those circumstances, being sufficient to found a reasonable expectation of receiving that amount. However, the Commissioner expects that such circumstances would be unusual.

TD 2012/11, at paragraph 32 and 33 further states:

-        Note however that if the amount referable to a capital gain made by a trust estate forms part of the income of that trust, the 2-month recording period may have no practical relevance. This is because some deeds require all of the income of the trust to be distributed by the end of each income year or, failing distribution, to be held from that time for particular beneficiaries named in the deed.

-        In those circumstances, a beneficiary intended to be specifically entitled to a capital gain (by virtue of a trustee resolution made after the end of the income year) can have no reasonable expectation of receiving amounts referable to that gain if another beneficiary has already been made presently entitled to those amounts (by virtue of the deed itself).

In case FC of T v Prestige Motors Pty Ltd 94 ATC 4570, it was held that

-        (i) Where the trustee of a trust is assessed to pay tax the process of assessment and the notice must specify, not the taxable income, but so much of the net income of the trust estate as is net income in respect of which the trustee is liable to pay tax.

...

-        (iii) A notice addressed to a nominated trust purporting to state the tax payable is prima facie to be understood as a notice of tax to be met out of the trust estate, not as a notice of tax assessed to a beneficiary in the estate. Such a notice is therefore to be understood as directed to the trustee in whom the assets of the trust are vested and who is authorised and required to retain the money needed to pay the tax assessed out of any money which comes to him in his representative capacity.

In this case, the Trust Deed requires the trustee to distribute all of the income of the Trust to the Unit Holders or to credit it to a separate account in the books of the Trust in the names of the Unit Holders to recognise it as a debt owing to the Unit Holders.

It's been confirmed that the Liquidator has created a separate account in the financial report for the year ended 30 June 2017 of the Trust, in the names of the Unit Holders and credited the income of the Trust to that account as a XX, in accordance with the Trust Deed. It therefore can be accepted that the Unit Holders are entitled to 'share of the net financial benefit' of the capital gain in proportion of their units, and are 'specifically entitled' to the capital gain in proportion of their units based on the formula, despite the capital gain was not recorded in the accounts or records of the Trust within 2 months after the end of the income year.

While the Trustee made no election for the purposes of section 115-230(1) of the ITAA 1997 to be assessed on the capital gain in relation to the sale of the Property, it is reasonable to conclude that the Trustee is not to be assessed and will not have the obligation to pay tax in respect of the capital gain. Therefore, the obligation to retain money in relation to the capital gain under Paragraph 254(1)(d) of ITAA 1936 does not exist.

Question 2

Detailed reasoning

While a liquidator does not have a specific obligation to retain funds 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 position had become certain by way of an assessment being made: (Logan J at [31] 2014 ATC 20-444).

This applies to this case, where the Liquidator is entitled but not obliged to retain an amount on account of the Capital Gains Tax (CGT), until liability for the CGT has been established with absolute certainty.

Question 3

Detailed reasoning

Under Paragraph 254(1)(e) of the ITAA 1936, Liquidators could be made personally liable for the tax payable of an amount that they have retained, or should have retained, under Paragraph 254(1)(d) of the ITAA 1936.

However, as explained under Question 1, there is no obligation for the liquidator to retain such amount under Paragraph 254(1)(d), as the beneficiaries of the trust were either presently entitled or specifically entitled to all the income of the Trust and both beneficiaries were residents of Australia at all times. As there is no requirement under section 254(1)(d) of the ITAA 1936 for the liquidator to retain any funds, they will not be held personally liable under paragraph 254(1)(e) of the ITAA 1936 to retain any amounts for the income year ended 30 June 2017.