Edited version of private advice

Authorisation Number: 1052154846436

Date of advice: 19 September 2023

Ruling

Subject: Application of section 254 to court appointed receivers

Question 1

Are the Receivers liable to file any tax return, withhold or pay any tax under section 254 of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of the sale proceeds from the sale of the Asset?

Answer

The Receivers are responsible under paragraph 254(1)(b) of the ITAA 1936 for lodging, in a representative capacity, an income tax return in respect of any income, or any profits or gain of a capital nature, resulting from the sale of the Asset. For the purposes of the retention obligation in paragraph 254(1)(d) of the ITAA 1936, until a relevant assessment has been made, the Receivers are not obliged to withhold an amount.

Question 2

Are the Receivers liable to file any tax return, withhold or pay any tax under section 254 of the ITAA 1936 or section 99A of the ITAA 1936 in respect of any interest which accrues on the sale proceeds which are held in the controlled-monies accounts (CMA)?

Answer

The interest, which accrued on the sale proceeds held in the CMA, is income to which no beneficiary is presently entitled. As trustee to a trust (being the CMA), the Receivers are assessable under section 99Aof the ITAA 1936, in respect of the interest earned.

Section 254of the ITAA 1936also creates ancillary obligations, upon income, profits or gains being derived in a representative capacity. Under these ancillary obligations, the Receivers are responsible under paragraph 254(1)(b) of the ITAA 1936for lodging, in a representative capacity, an income tax return in respect of any interest earned in the CMA. For the purposes of the retention obligation in paragraph 254(1)(d) of the ITAA 1936, until a relevant assessment has been made, the Receivers are not obliged to withhold an amount.

This ruling applies for the following period:

XX/XX/XX

The scheme commenced on:

XX/XX/XX

Relevant facts and circumstances

1.            By Orders of the Court, you have been appointed as receiver (Receiver) of the Asset, including any sale proceeds.

2.            Under the Orders, as the Receiver, you are required to pay any net proceeds from the sale of the Asset into a CMA pending the outcome of litigation.

3.            You are the only signatory to the CMA.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part III Division 6

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 99A

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)(b)

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

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

Reasons for decision

All legislative references are to the ITAA 1936 unless otherwise stated.

Question 1

Are the Receivers liable to file any tax return, withhold or pay any tax under section 254 in respect of the sale proceeds from the sale of the Asset?

Summary

The Receivers are responsible under paragraph 254(1)(b) for lodging, in a representative capacity, an income tax return in respect of any income, or any profits or gain of a capital nature, resulting from the sale of the Asset. For the purposes of the retention obligation in paragraph 254(1)(d), until an assessment has been made, the Receivers are not obliged to withhold an amount.

Detailed reasoning

1.            Paragraph 254(1)(a) provides that every trustee shall 'be answerable as taxpayer for the doing of all such things as are required to be done' by virtue of the tax law in respect of any income, or any profits or gains of a capital nature, derived in a representative capacity.

2.            The term 'trustee', for the purposes of section 254, takes its meaning from the definition in subsection 6(1). A 'trustee' is defined in subsection 6(1) to include receivers. As trustee, any capital gains derived from the sale of the Asset were not derived in your personal capacity but rather in your representative capacity.

3.            Having regard to the Orders, the gain derived from the sale of the Asset was not derived in your personal capacity but was derived in a representative capacity. Your obligations under section 254 are therefore enlivened.

4.            Section 254 imposes ancillary obligations[1] on you to be answerable as taxpayer in relation to the gain you derived (in a representative capacity). Under paragraph 254(1)(a), you are responsible for the payment of tax on any capital gain realised on the sale of the Asset. Under paragraph 254(1)(b), you are responsible for lodging a tax return.

5.            As per Commissioner of Taxation v Australian Building Systems Pty Ltd (in Liquidation) [2015] HCA 48, your obligation to retain funds to pay tax under paragraph 254(1)(d) is only enlivened when a relevant assessment is made. Until such time as the relevant assessment in respect of the capital gain has been made, you are not obliged to retain funds.

6.            The obligation to retain funds is not necessarily linked to the income or capital gain in respect of which tax has been or will be due. The obligation to retain attaches to any money which comes to the trustee after the tax has been assessed.[2] The personal liability imposed by paragraph 254(1)(e) follows from the retention obligation in paragraph 254(1)(d) which is enlivened by an assessment. If, at the time the assessment is made, there are insufficient funds to pay the assessed tax liability, and no further funds or insufficient funds come to you as receivers, you will not be personally liable for any of difference between the assessed tax liability and the funds available at the time the assessment was made.

Question 2

Are the Receivers liable to file any tax return, withhold or pay any tax under section 254 or section 99A in respect of any interest which accrues on the sale proceeds which are held in the CMA?

Summary

The interest, which accrued on the sale proceeds held in the CMA, is income to which no beneficiary is presently entitled. As trustee to a trust (being the CMA), the Receivers are assessable under section 99A, in respect of the interest earned during those income years.

Section 254 also creates ancillary obligations, upon income, profits or gains being derived in a representative capacity. Under these ancillary obligations, the Receivers are responsible under paragraph 254(1)(b) for lodging, in a representative capacity, an income tax return in respect of any interest earned in the CMA. For the purposes of the retention obligation in paragraph 254(1)(d), until a relevant assessment has been made, the Receivers are not obliged to withhold an amount.

Detailed reasoning

7.            The interest which accrued on the sale proceeds are held in the CMA pending the outcome of litigation.

8.            As in Harmer v Commissioner of Taxation [1991] HCA 51 (Harmer), the interest is derived before the making of any order as to how the funds were to be distributed. In Harmer, the High Court held that the interest derived was income of a trust to which no beneficiaries were presently entitled, and the trustees were assessable under section 99A.

9.            In the first instance, the trial judge, French J, in Harmer & Ors v The Commissioner of Taxation [1989] FCA 651 at [5187] determined that the 4 essential elements of a trust are:

(a)          the trustee who holds a legal or equitable interest in the trust property

(b)          the trust property which must be property capable of being held on trust and which includes a chose in action

(c)           one or more beneficiaries other than the trustee

(d)          a personal obligation on the trustee to deal with the trust property for the benefit of beneficiaries which obligation is also annexed to the property.

10.          Having regard to your circumstances, a trust exists for the CMA because all 4 essential elements are present:

(a)          the CMA has been opened by you and you are the sole signatory to the CMA. Therefore, you had legal title to the funds in the CMA. The obligation to hold the funds in the CMA was imposed on you by order of the Court. You are acting as trustees in respect of the CMA.

(b)          the trust property are the funds in the CMA. There is certainty in the identification of the property to be held in trust and there are no statutory provisions that prevent the property from being held in trust[3].

(c)           the beneficiary would be one or more of the claimants. In Kafataris v The Deputy Commissioner of Taxation [2008] FCA 1454, Lindgren J said at [43]:

The word "beneficiary" reaches beyond a person who has a beneficial interest in the trust property. It is possible for the legal estate in land to be vested in "trustees" without equitable ownership being vested in someone else. The trustee must, however, owe fiduciary obligations in respect of the trust property to persons who, although they may have no interest in the trust property and may never have an interest in the trust property, are called "beneficiaries". In CPT Custodian Pty Ltd v Commissioner of State Revenue of the State of Victoria 2005 ATC 4925; (2005) 224 CLR 98, the High Court rejected (at [25]):

a 'dogma' that, where ownership is vested in a trustee, equitable ownership must necessarily be vested in someone else because it is an essential attribute of a trust that it confers upon individuals a complex of beneficial legal relations which may be called ownership.

In respect of the funds held in the CMA, you have fiduciary obligations to all the claimants of the funds and therefore, one or more of the claimants is, or are, the beneficiary or beneficiaries.

(d)          implicit in the Order, you have an obligation to deal with the funds in the CMA for the benefit of the beneficiaries and this obligation was annexed to the trust property.

11.        The scheme of Part III Division 6 is such that the treatment of the interest income in the trust depends on whether one or more of the beneficiaries can be said to be 'presently entitled' to the interest. The plurality in Harmer said that the question of 'present entitlement' must be answered as at the time when the interest was derived.

12.        In Federal Commissioner of Taxation v Whiting [1943] HCA 45 (Whiting), the High Court defined present entitlement as follows:

The words "presently entitled to a share of the income" refer to a right to income "presently" existing - i.e., a right of such a kind that a beneficiary may demand payment of the income from the trustee, or that, within the meaning of s.19 of the Act, the trustee may properly reinvest, accumulate, capitalize, carry to any reserve, sinking fund or insurance fund however designated or otherwise deal with it as he directs or on his behalf.

13.          In Harmer, the High Court considered Whiting and Taylor v Commissioner of Taxation [1970] HCA 10 and added that:

The parties are agreed that the cases establish that a beneficiary is "presently entitled" to a share of the income of the trust estate if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.

14.          In relation to the relevant income years, the beneficiaries were not vested in interest because none could be sure of being entitled to the interest income; nor were they vested in possession as none had the right to immediate possession or enjoyment of the interest. The beneficiaries were not entitled to demand that the interest income either be immediately paid to them or applied for their benefit. As in Harmer, in relation to the relevant income years and for the purposes of Part III Division 6, the interest income is income to which no beneficiary is presently entitled. As trustee, you are assessable under section 99A on the interest accrued in those income years.

15.          Section 254 also creates secondary obligations on you as trustee. These obligations under section 254 are ancillary to your primary obligations, upon income, profits or gains being derived in a representative capacity. You are responsible under paragraph 254(1)(b) for lodging, in a representative capacity, an income tax return in respect of any interest earned in the CMA. For the purposes of the retention obligation in paragraph 254(1)(d), until a relevant assessment has been made, you are not obliged to withhold an amount. Your secondary obligations under section 254 means that if your primary obligations (as trustees of a Division 6 trust comprised of the CMA) are met, the practical effect is that both the primary and ancillary obligations have been discharged.

[1] Commissioner of Taxation v Australian Building Systems Pty Ltd (in Liquidation) [2015] HCA 48.

[2] Ibid per Gageler J at [62].

[3] Heydon, JD & Leeming, MJ (2016) Jacobs' Law of Trusts in Australia, 8^th ed (online), at [1-06].