Edited version of private advice

Authorisation Number: 1052198840676

Date of advice: 18 December 2023

Ruling

Subject: CGT - trustee in bankruptcy

Question 1

Does section 106-30 (1) of the Income Tax Assessment Act 1997 (ITAA 1997) apply in relation to the vesting of the Property in the Trustee in Bankruptcy for the Bankrupt such that no capital gains tax (CGT) event happened as a result of the vesting?

Answer

Yes.

Question 2

Does section 106-30 (1) of the ITAA 1997 apply in relation to the sale of the Bankrupt's interest in the Property by the Trustee in Bankruptcy, such that any capital gain on disposal of the Property was made by the Bankrupt and the co-owner of the Property, and not the Trustee in Bankruptcy for the Bankrupt?

Answer

Yes.

Question 3

Does section 106-30 (1) of the ITAA 1997 apply in relation to the sale of the Bankrupt's interest in the Property by the Trustee in Bankruptcy, such that any CGT liability assessedon a capital gain from the sale of the Property is not payable by the Trustee in Bankruptcy for the Bankrupt?

Answer

No. While section 106-30 of the ITAA 1997 applies in this case, it is to be read in conjunction with section 254 of the ITAA 1936. 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.

This ruling applies for the following period

1 July 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On DD MM 20XX, the Bankrupt was declared bankrupt and the Official Receiver was appointed Trustee in Bankruptcy.

On DD MM 20XX, the Trustee in Bankruptcy was appointed for the Bankrupt.

The Bankrupt had a half share interest in the Property, with Person A as tenants in common.

The Property was purchased on DD MM 20XX and was not the main residence of the owners.

The Trustee in Bankruptcy and Person A sold the Property with settlement occurring on DD MM 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 106-30

Income Tax Assessment Act 1936 section 254

Reasons for decision

Summary

Section 106-30 of the ITAA 1997 provides that for CGT purposes, the vesting of an individual's CGT assets in a trustee in bankruptcy is ignored. Further, it makes a capital gain or loss that has been derived by a trustee in bankruptcy attributable to the bankrupt individual instead of the trustee.

While section 106-30 of the ITAA 1997 does apply, it is to be read in conjunction with section 254 of the Income Tax Assessment Act 1936 (ITAA 1936). 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.

The ATO has published guidance material to support insolvency trustees in understanding their obligations under section 254 of the ITAA 1936. In particular, search ATO legal database on ato.gov.au, for Practice Statement Law Administration - Insolvency - collection, recovery and enforcement issues for entities under external administration (PS LA 2011/16).

Detailed reasoning

Section 106-30(1) of the ITAA 1997, states for CGT purposes, the vesting of an individual's CGT assets in a trustee under the Bankruptcy Act 1966 or under a similar foreign law is ignored.

Section 106-30(2) of the ITAA 1997, provides that an act done in relation to a CGT asset by the trustee in any of the following circumstances is treated as having been done by the individual instead of the trustee:

(a) as a result of bankruptcy by the Official Trustee in Bankruptcy or a registered trustee, or the holder of a similar office under a foreign law;

(b) by a trustee under a personal insolvency agreement made under Pt X of the Bankruptcy Act 1966, or under a similar instrument under a foreign law;

(c) by a trustee as a result of an arrangement with creditors under the Bankruptcy Act 1966 or a foreign law.

The definition of 'trustee' in section 6(1) of the ITAA 1936 is both broad and inclusive. A bankruptcy trustee is within that definition and consequently section 254 of the ITAA 1936 covers trustees in bankruptcy.

While there are no beneficiaries of the statutory trust created by the Bankruptcy Act 1966, neither the tax definition of 'trustee' nor section 254 of the ITAA 1936 requires there to be a beneficiary.

Section 254 of the ITAA 1936 requires a derivation of income or profits or gains in a representative capacity. A Trustee in Bankruptcy receives an amount in a representative capacity, not for their own benefit, and holds that amount for the purposes of the Bankruptcy Act 1966.Therefore, 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 him or her in his or her representative capacity.

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 Federal Commissioner of Taxation v Australian Building Systems Pty Ltd (in Liq) & Ors [2015] HCA 48 (ABS), the High Court described section 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.

Application to your circumstances

This means that the trustee in bankruptcy will need to:

•         report the net capital gain by lodging a return in their representative capacity and be assessed thereon;

•         retain the requisite amount of CGT upon being issued a notice of assessment; and pay tax on the relevant capital gain.