Edited version of private advice

Authorisation Number: 1052050531325

Date of advice: 28 October 2022

Ruling

Subject: Trustee in bankruptcy

Question 1

In respect of the capital gains tax payable on the gain made from the sale of the Properties, are you liable for the payment of tax in your capacity as trustee in bankruptcy, having regard to the operation of section 106-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, to the extent of your obligations under section 254 of the Income Tax Assessment Act 1936 (ITAA 1936).

Question 2

In your capacity as trustee in bankruptcy:

(a)  are you answerable by operation of subsection 254(1) of the Income Tax Assessment Act 1936 (ITAA 1936) or otherwise, in respect of the income, or capital gains made from the sale of the Properties?

(b)  are you subject to the retention obligations under paragraph 254(1)(d) of the ITAA 1936?

(c)   will you be made personally liable under paragraph 254(1)(e) of the ITAA 1936 in respect of any tax payable on the gains made from the sale of the Properties, prior to the issue of a Notice of Assessment, if you fail to retain monies or you pay away monies that have been retained, in respect of the tax liability?

(d)  will you be made personally liable under paragraph 254(1)(e) of the ITAA 1936 in respect of any tax payable on the gains made from the sale of the Properties, post the issue of a Notice of Assessment but prior to the assessed liability becoming due and payable, if you fail to retain monies or you pay away monies that have been retained, in respect of the tax liability?

Answer 2(a)

Yes.

Answer 2(b)

Yes.

Answer 2(c)

No.

Answer 2(d)

Yes.

This ruling applies for the following period:

The year ended 30 June 20XX

The year ended 30 June 20XX

The year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The bankrupt individual purchased Property 1 and Property 2 after 20 September 1985.

You were appointed by court order as trustee in bankruptcy in respect of the bankrupt individual (the Trustee in Bankruptcy).

The individual bankrupt had unsecured creditors at the time of your appointment as Trustee in Bankruptcy.

The Trustee in Bankruptcy arranged for the sale of Property 1 and Property 2.

Contracts for the sale of Property 1 and Property 2 were entered into separately.

These contracts subsequently settled.

As a result of the sale of the Properties, the Trustee in Bankruptcy held a certain amount of cash at bank.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 254

Income Tax Assessment Act 1997 section 106-30

Reasons for decision

Detailed Reasoning

Question 1

Under section 106-30 of the ITAA 1997, the vesting of an individual's capital gains tax (CGT) assets in a trustee under the Bankruptcy Act 1966 or under a similar foreign law is ignored.

Section 106-30 of the ITAA 1997 operates such that when vested bankruptcy property is disposed of, whether by the trustee in bankruptcy or by a mortgagee exercising a power of sale, the primary tax liability for any capital gain made on the sale falls on the bankrupt individual.

Section 254 of the ITAA 1936 imposes obligations on every trustee in respect of any income or any profits or gains of a capital nature derived by them in their representative capacity, creating a secondary tax liability for agents and trustees, ancillary to the primary tax liability.

A trustee in bankruptcy is a trustee for the purposes of section 254 in accordance with the definition of 'trustee' in subsection 6(1) of the ITAA 1936. As such, section 106-30 of the ITAA 1997 does not negate a trustee in bankruptcy from their obligations under section 254 of the ITAA 1936.

Question 2

Section 254 of the ITAA 1936 is triggered at the moment a trustee derives income, profits or gains in his or her representative capacity. In FCT v Australian Building Systems Pty Ltd (in Liq) & Ors [2015] HCA 48 (ABS), the High Court described subsection 254(1) of the ITAA 1936 as both a liability-imposing provision and a collecting provision. It imposes a tax liability on the trustee, which is ancillary to the primary tax liability. It also provides a means of collecting the liability from the trustee in certain circumstances.

Paragraph 254(1)(a) of the ITAA 1936 makes a trustee in bankruptcy answerable as taxpayer for the payment of tax on any income, profits or gains they derive in their representative capacity. The Commissioner is of the view that you derived gains from the disposal of the properties on the day each contract for sale was entered into. As such, you are answerable under paragraph 254(1)(a) for these gains.

If the Commissioner requires a trustee in bankruptcy to lodge a return under paragraph 254(1)(b) of the ITAA 1936 the trustee in bankruptcy must do so, but in their representative capacity only. Similarly, if the trustee is assessed on the gain under paragraph 254(1)(b), they are assessed in their representative capacity only. Gordon J explained the purpose of paragraph 254(1)(b) in ABS (at paragraph 174):

What s 254(1)(b) does is emphasise that in respect of the income or profits or gains referred to in sub-s(1)(a), the obligation of an agent or trustee to make a return and be assessed (as if the taxpayer) is in their representative capacity only. It is [an] ancillary liability. Its purpose is to ensure payment of the tax; tax which at least ordinarily will be primarily payable by another person or entity.

The 'collecting' aspect of subsection 254(1) of the ITAA 1936 is addressed in paragraphs (d) and (e).

Paragraph 254(1)(d) authorises and requires you to retain, out of any money that comes to you, so much as is sufficient to pay the tax assessed in respect of the income, profits or gains.

Paragraph 254(1)(e) makes you personally liable for the tax assessed under paragraph 254(1)(b) to the extent that you have or should have retained an amount under paragraph 254(1)(d).

The High Court in ABS affirmed that the obligation to retain monies under paragraph 254(1)(d) of the ITAA 1936 is not enlivened until a notice of assessment has been issued in respect of the relevant income, profits or gains.

As such, a trustee will not be made personally liable under paragraph 254(1)(e) of the ITAA 1936 prior to the issue of a notice of assessment. Conversely, a trustee will be made personally liable under paragraph 254(1)(e) to the extent of an amount that they should have retained under paragraph 254(1)(d), post the issue of a notice of assessment and prior to and after the assessed liability becoming due and payable.