Edited version of private advice

Authorisation Number: 1052217313590

Date of advice: 4 September 2024

Ruling

Subject:Bankruptcy

Issue One - Property 1

Question 1

As a result of Section 66G Orders issued by the Federal Court on XX June 20XX, did Mr T as a Trustee for the sale of the Property 1 acquire the Property 1 under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Mr T as a Trustee for the sale of the Property 1 (the Property 1 Trustee) is a statutory trustee per the Conveyancing Act 1919 (NSW). The Property 1 is vested in the Property 1 Trustee upon the making of the Section 66G Orders. The Property 1 Trustee was taken to acquire the Property 1 as a result of CGT event A1 happening for the bankrupt estate on the making of the court order.

Question 2

Are the proceeds from the sale of the Property 1 assessable to the Property 1 Trustee under section 6-5 of the ITAA 1997, as a result of an 'isolated transaction' carried out for profit and commercial in character?

Answer

No.

The Property vested in the Property 1 Trustee under the Conveyancing Act 1919 (NSW) following a Court order. By disposing of the property, the Property 1 Trustee was merely exercising the obligations vested in them by the Court, and therefore this is not assessable under section 6-5 of the ITAA 1997.

Question 3

Does the Property 1 Trustee have a capital gain under section 100-45 of the ITAA 1997 as a result of CGT event A1 arising on the sale of Property 1?

Answer

No.

When Property 1 that came into the possession of the Property 1 Trustee is sold, CGT Event A1 happens, however there was no capital gain as the cost base equals the capital proceeds.

Question 4

Does the Property 1 Trustee have an income tax liability from the sale of Property 1 under sections 98, 99, or 99A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Sections 98, 99 and 99A only apply where there is net income of the trust estate. The Trustee has derived no net income from the sale of Property 1 and therefore sections 98, 99 and 99A do not apply.

Question 5

Does the Property 1 Trustee need to lodge an income tax return in relation to the sale of Property 1 under section 161 of the ITAA 1936 for the income years ending 30 June 20xx?

Answer

No. As per Question 3, there is no capital gain.

Question 6

Is the Property 1 Trustee answerable by operation of subsection 254 of the ITAA 1936, in respect of the income or capital gains on the sale of Property 1?

Answer

No.

There is no capital gain, therefore the retention obligation and the Property 1 Trustee's personal liability do not arise until a relevant assessment has been made.

Question 7

Is the Property 1 Trustee subject to the retention obligations under paragraph 254(1)(d) of the ITAA 1936 in respect of the Property 1?

Answer

No.

The retention obligation under paragraph 254(1)(d) of the ITAA 1936 does not arise until a relevant assessment has been made.

Question 8

Is the Property 1 Trustee personally liable under paragraph 245(1)(e) of the ITAA 1936 in respect of any tax payable on the gains made from the sale of Property 1, if the Property 1 Trustee fails to retain monies?

Answer

No.

The retention obligation, and the Trustee's personal liability under section 254 of the ITAA 1936 do not arise until a relevant assessment has been made. The liability under paragraph 254(1)(e) of the ITAA 1936 is enlivened after the Notice of Assessment is issued.

Question 9

In respect of any profit or gain made from the sale of Property 1 on xx/xx/20xx, is Mr T liable for the payment of tax in his capacity as Trustee of the Bankrupt Estate of Person A (the Bankruptcy Trustee), having regard to section 106-30 ITAA 1997?

Answer

No.

CGT event A1 happened for the bankrupt estate when the property vested in the Property 1 Trustee, not when it was later sold.

Question 10

Is the Bankruptcy Trustee answerable by operation of section 254 of the ITAA 1936, in respect of any capital gain made when the Trustees for sale were appointed in respect of the sale of Property 1?

Answer

Yes. As above, CGT event A1 happens (as discussed in ATO ID 2009/129) and will be subject to obligations under section 254 when the relevant assessment has been made.

Issue Two -Property 2

Question 11

In respect of any profit or gain made from the sale of Property 2, is Mr T liable for the payment of tax in his capacity as trustee of the Bankrupt Estate of Person A (the Bankruptcy Trustee), having regard to section 106-30 ITAA 1997?

Answer

No. Section 106-30 of the ITAA 1997 states that the primary tax liability falls on the bankrupt individual. However, the Bankruptcy Trustee is liable for the tax liabilities of the bankrupt pursuant to section 254 of the ITAA 1936.

Question 12

Is the Bankruptcy Trustee answerable by operation of section 254 of the ITAA 1936, in respect of the income or capital gains on the sale of Property 2?

Answer

Yes, to the extent there is any income or capital gain.

Section 254 provides that theBankruptcy Trustee is obligated for the income, profits or capital gains of the bankrupt.

Question 13

Is the Bankruptcy Trustee subject to the retention obligations under paragraph 254(1)(d) of the ITAA 1936 in respect of Property 2?

Answer

Yes.

Question 14

Is the Bankruptcy Trustee personally liable under paragraph 245(1)(e) of the ITAA 1936 in respect of any tax payable on the gains made from the sale of Property 2, prior to the issue of a Notice of Assessment, if the Bankruptcy Trustee fails to retain monies?

Answer

No.

The liability under paragraph 254(1)(e) of the ITAA 1936 is enlivened after the Notice of Assessment is issued.

Question 15

Will the Bankruptcy Trustee be 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 Property 2, post the issue of a Notice of Assessment but prior to the assessed liability becoming due and payable, if the Bankruptcy Trustee failed to retain monies?

Answer

Yes.

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.

This private ruling applies for the following period:

Year ending 30 June 20xx

Year ending 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

On xx/xx/20xx a sequestration order was made against Person A, in the Federal Magistrates Court of Australia. Mr P and Mr T as trustee of the bankrupt estate of Person A were appointed as the trustees of the bankrupt estate of Person A (Bankrupt Estate).

On xx/xx/20xx, orders were made accepting the registration of Mr P as a trustee of the bankrupt estate and directing Mr T to act as the sole trustee of the bankrupt estate (the Bankruptcy Trustee).

In 20YY, the two properties vested in the Bankrupt Estate were sold pursuant to Orders made on xx/xx20xx in the Federal Court of Australia:

(a)           Property 1 and

(b)           Property 2.

The history of the Property 1 and Property 2 that is known to the Bankruptcy Trustee through the administration of the Bankrupt Estate is set out below.

Acquisition and sale of Property 1

In or around 19XX Person A and Person B purchased the vacant land at Property 1 Land as joint tenants.

On xx/xx/19xx Person A and Person B built a duplex on the Property 1 Land and registered a plan of subdivision, thereby creating the Property 1 and Property 1A.

On xx/xx/19xx (at around the time of registering the subdivision) Person A and Person B sold Property 1A.

Around 20xx, by an unregistered transfer signed by Person A in favour of their estranged spouse Person B as transferee, Person A purported to transfer their half share interest in Property 1 to their estranged spouse for consideration of $X.00 (Property 1 Transfer).

Prior to 20xx, Property 1 was security for debts owing to a Finance Company. On xx/xx/20xx, a Bank advanced a total amount of $xxx,xxx to discharge the indebtedness to the Finance Company. The Bankruptcy Trustee accepts that $xxx,xxx was the amount paid by Person B as consideration for acquiring the Property 1 for the purposes of subsection 121(5) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).

Person A became bankrupt after Property 1 Transfer.

Person A and Person B remained as registered proprietors as joint tenants. Person B claims that after a squatter was removed from Property 1, they undertook repairs at a total cost of approximately $xx,xxx.

On xx/xx/20xx the Federal Court of Australia declared Property 1 Transfer was void against the Trustee pursuant to subsection 121(1) of the Bankruptcy Act. As such, Person A's half share of Property 1 vested in the Bankruptcy Trustee on the making of the sequestration order on xx/xx/20xx.

On xx/xx/20xx the Federal Court of Australia ordered that Mr T and Mr R (Property 1 Trustees) be appointed as trustees for the sale pursuant to section 66G of the Conveyancing Act 1919 (NSW) for the sale of the XXXXX Property (Section 66G Orders).

On xx/xx/20xx, the Property 1 Trustees entered into a contract for sale of Property 1 for $xxx,xxx. Prior to the completion of the sale, the Property 1 Trustees became the registered proprietors of Property 1. On xx/xx/20xx the Property 1 Trustees completed the sale of Property 1.

Acquisition and sale of Property 2

In 19xx, Person A acquired the land at Property 2 Land for $xxx,xxx.

On xx/xx/20xx Person A registered the transfer of the Property 2 Land (Property 2 Transfer) to their estranged spouse, Person B, for consideration of $X.00.

Person A became bankrupt after making the transfer.

On xx/xx/20xx, Person B caused the Property 2 Land to be subdivided into two lots by registering a plan of subdivision.

On xx/xx/20xx, Person B sold the first subdivided lot to a third party for $XXX,000, in an arm's length transaction.

On xx/xx/20xx, the Federal Court of Australia declared that the Property 2 Transfer was void against Bankruptcy Trustee pursuant to subsection 121(1) of the Bankruptcy Act. Accordingly the Property 2 Land (including the Property 2) vested in the Bankruptcy Trustee on the making of the sequestration order on xx/xx/20xx.

The court found that for the purpose of subsection 121(5) of the Bankruptcy Act, Person B gave consideration of $xxx,xxx for the Property 2 Transfer.

Pursuant to the Court Orders of xx/xx/20xx, the Bankruptcy Trustee caused the sale of the Property 2 by entering into a contract for sale on xx/xx/20xx for $xxx,xxx. The Bankruptcy Trustee's sale completed on xx/xx/20xx. Person B remained on the title to the completion of the sale. The transfer form for the sale was signed by the Court on behalf of Person B.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 section 161

Income Tax Assessment Act 1936 section 254

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 100-45

Income Tax Assessment Act 1997 section 106-30

Income Tax Assessment Act 1997 section 166-20

Detailed Reasoning

Section 254 of the Income Tax Assessment Act 1936 (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 Income Tax Assessment Act 1997 (ITAA 1997) does not negate a trustee in bankruptcy from their obligations under section 254 of the ITAA 1936.

Ownership interests of the bankrupt individual in Property 1 and Property 2 vested in the Bankruptcy Trustee. The properties are capital gains tax (CGT) assets. Under section 106-30 of the ITAA 1997, the vesting of an individual's CGT assets in a trustee under the Bankruptcy Act 1966 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 requires a trustee who derives income, profit or gains in their representative capacity to retain from time to time out of any money which comes to them so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains. The trustee is required to make the returns and shall be assessed in respect of that income, or those profits or gains, in their 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 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. It was determined that prior to the issue of an assessment there can be no tax which is due or will become due for the purposes of paragraph 254(1)(d) of the ITAA 1936.

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 the trustee derived gains from the disposal of the properties on the day each contract for sale was entered into. As such, a trustee in bankruptcy is 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 s254(1)(b) does is emphasise that in respect of the income or profits or gains referred to in subs(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 a trustee personally liable for the tax assessed under paragraph 254(1)(b) to the extent that the trustee has 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.

Property 1

In this case Mr T is both a Trustee for the sale of Property 1 (Property 1 Trustee) and the Trustee of the Bankrupt Estate of Person A (Bankruptcy Trustee).

While Property 1 vested in the Bankruptcy Trustee it was later sold by Mr T and Mr R in their capacity as trustees for the sale of Property 1 following court order.

The principles of ATO Interpretative Decision 2009/129: Capital gains tax: land vested in a statutory trustee for sale, CGT event A1 or CGT event E1? (ATO ID 2009/129) apply here. On the making of the Federal Court order on xx/xx/20xx, the totality of the legal and beneficial interest in Property 1 passed to Mr T and Mr R as Trustees for sale of Property 1.

It is considered that the making of the court order effects a disposal of the property from the owners to the trustees for sale of Property 1. Therefore, CGT event A1 happened in respect of the Property 1 on the appointment of Mr T and Mr R. A capital gain will be made as a result of CGT event A1 happening if the capital proceeds from the event are more than the asset's cost base.

Section 106-30 of the ITAA 1997 states that the primary tax liability falls on the bankrupt individual. However, Mr T as the Bankruptcy Trustee is liable for the tax liabilities of the bankrupt pursuant to section 254 of the ITAA 1936, following a relevant assessment being made on any capital gain derived.

In Dixon v Roy (1991) 5 BPR 11655, Young J held that Trustees for Sale appointed under section 66G of the Conveyancing Act 1919 have all the ordinary duties and obligations of trustees, including to get the best price, to make appropriate inquiries and to take expert advice and to act on it if they consider that. Accordingly, Mr T is a trustee for the purposes of the definition of 'trustee' in subsection 6(1) of the ITAA 1936.

Subsection 254(1) of the ITAA 1936 states that an agent or trustee is answerable as taxpayer for the doing of all such things as are required to be done by virtue of the ITAA 1936 in respect of income, or any profits or gains of a capital nature, derived by the agent or trustee in his or her representative capacity or derived by the principal by virtue of the agency.

An agent or trustee is required to furnish tax returns and to retain out of money which he or she receives as agent or trustee an amount sufficient to pay tax that is or will become due in respect of the income or such profits or gains. He or she is personally liable for any tax payable to the extent of any amount that has been retained or should have retained, but not otherwise.

When Property 1 that came into the possession of the Property 1 Trustee is sold, CGT Event A1 happened on the sale of Property 1. The cost base of the disposed asset under subsection 110-25(2) of the ITAA 1997 is 'the money you paid, or are required to pay' in respect of acquiring it'. Section 110-35 provides that certain incidental expenses of buying or selling an asset can be included in the cost base. At the time of the Section 66G Orders, the Trustee did not pay anything or give any property to acquire Property 1, but the Trustee had an obligation to pay the proceeds of the sale of Property 1 to the Court.

Under subsection 116-20(1) of the ITAA 1997, the capital proceeds from a CGT event are the money and the market value of any other property the Trustee received or was entitled to receive in respect of the CGT event.

Under the terms of the court order that appointed you as trustee you are required to distribute the proceeds of the sale of the property to the prior owners, less costs and expenses. It is reasonable to expect that the costs and expenses would be included in the cost base under s110-35. As such the capital proceeds will be equal to your cost base and there will be no capital gain.

Sections 98, 99 and 99A only apply where there is net income of the trust estate. As the Green Valley Trustee has not derived any net income from the sale of Property 1, sections 98, 99 and 99A do not apply. If income or profits or gains are derived by the Property 1 Trustee in their representative capacity and there is a relevant assessment, the retention obligation in paragraph 254(1)(d) of ITAA 1936 is enlivened. If no income or profits or gains is derived by Property 1 Trustee, or there has not been a relevant assessment, then neither the retention obligation nor the consequent exposure to personal liability for failure to retain under paragraph 254(1)(e) of the ITAA 1936 will be enlivened.

As no income has been derived by the statutory trust for sale in its income years of operation, there is no obligation upon the Property 1 Trustee to lodge a trust tax return under section 161 of the ITAA 1936 (Table L of the legislative instrument that sets out lodgment obligations each income year states that a trust must have derived income for a lodgment obligation to arise). Further, there is no obligation to withhold amounts from the remittance of the sale proceeds as it is not a distribution of trust income. There is no other obligation the trustees must attend to under section 254 of the ITAA 1936.

The Property 1 Trustee, rather than hand the proceeds to the bankrupt individual, would hand the proceeds to the Bankruptcy Trustee who would then have an obligation to retain so much out of the proceeds to cover the tax and lodge a return.

Property 2

Section 106-30 of the ITAA 1997 states that the primary tax liability falls on the bankrupt individual. However, Mr T as the Bankruptcy Trustee is liable for the tax liabilities of the bankrupt pursuant to section 254 of the ITAA 1936.

Section 254 provides that the Bankruptcy Trustee is obligated for the income, profits or capital gains of the bankrupt, to the extent there is any income or capital gain.

The Bankruptcy Trustee is not personally liable under paragraph 245(1)(e) of the ITAA 1936 in respect of any tax payable on the gains made from the sale of Property 2, prior to the issue of a Notice of Assessment, if the Bankruptcy Trustee fails to retain monies.

The Bankruptcy Trustee will be made personally liable under paragraph 254(1)(e) of the ITAA 1936 to the extent of an amount that they should have retained under paragraph 254(1)(d) of the ITAA 1936, post the issue of a notice of assessment and prior to and after the assessed liability becoming due and payable.