Edited version of private advice

Authorisation Number: 1052306362670

Date of advice: 22 October 2024

Ruling

Subject: Bankruptcy

Question 1

Was the gain made on the disposal of the Property (or any income or profits made in respect of the disposal of the Property) derived by the taxpayers in their representative capacities for the purpose of subsection 254(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Do any of paragraphs (a), (b), (d) or (e) in subsection 254(1) of the ITAA 1936apply to the taxpayers in respect of any income, or any profits or gains of a capital nature made on the disposal of the Property?

Answer

No.

This private ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XX XX 20XX, the Bankrupt Individuals entered an 'off the plan' contract for the purchase of a proposed lot (the Property).

On XX XX 20XX, being prior to the settlement of the contact for the Property, the Bankrupt Individuals entered a contract for the sale of the Property.

Shortly thereafter, the Bankrupt Individuals became bankrupt, and the taxpayers were appointed the trustees of the bankrupt estates of each of the Bankrupt Individuals.

Following the appointment of the taxpayers, the purchase contract and sale contract for the Property settled simultaneously.

At no time were the taxpayers registered on the title to 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 section 104-10

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the taxpayers in their capacity as Trustees of the Bankrupt Estates.

This is to explain how we reached our decision. This is not part of the private ruling.

Question 1

Was the gain made on the disposal of the Property (or any income or profits made in respect of the disposal of the Property) derived by the taxpayers in their representative capacities for the purpose of subsection 254(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Do any of paragraphs (a), (b), (d) or (e) in subsection 254(1) of the ITAA 1936 apply to the taxpayers in respect of any income, or any profits or gains of a capital nature made on the disposal of the Property?

Answer

No.

Detailed reasoning for Questions 1 & 2

Section 254 of the ITAA 1936 sets out the obligations, liabilities and rights of agents and trustees.

Under subsection 254(1)(a) of the ITAA 1936, an agent or trustee is answerable as a taxpayer for things required to be done by the Act 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. This includes the payment of tax.

In respect of income, profits or gains referred to in paragraph 254(1)(a) of the ITAA 1936, subsection 254(1)(b) provides the agent or trustee is required to furnish tax returns in his or her representative capacity only and in accordance with subsection 254(1)(d) retain out of money which comes to him or her in the representative capacity an amount sufficient to pay tax that is or will become due. Further, subsection 254(1)(e) provides 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 is otherwise not personally liable for tax.

Any liability to pay tax is created under the relevant substantive liability provisions of the income tax legislation. The effect of the section subjects the agent or trustee to certain obligations which have the effect of protecting the Commissioner's right to collect certain tax liabilities.

Section 254 of the ITAA 1936 provides the machinery provisions that set out when an agent is liable to pay tax. In considering the tax liabilities it is useful to distinguish between:

•                     tax liabilities that arise to a liquidator because income or a gain is derived through the liquidator's activity, or by the company because of the liquidator's activity, and

•                     tax liabilities on income or gains derived by the company prior to the appointment of a liquidator and that rank as debts alongside other debts of the company.

Paragraph 254(1)(d) of the ITAA 1936 obliges a liquidator to retain out of any money coming into its hands, an amount sufficient to pay the tax on income, or any profits or gains of a capital nature derived by the liquidator. It does not authorise the retention of money to pay tax on income, or any profits or gains of a capital nature derived by the company. For this reason, section 254 of the ITAA 1936 applies only to income, profits and gains derived by a liquidator. It does not apply to any income-producing activity or asset realisation attributable to the period before the liquidator's appointment.

In view of this, for the purposes of section 254 of the ITAA 1936, 'derived' has to have a meaning that is consistent with the ordinary operation of the legislation in relation to income, profits, and gains of a capital nature.

When considering the sale of a capital gains tax asset, the timing rules contained in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) must apply to determine when such amounts are included in assessable income.

In this case, the disposal of the Property is something that happened prior to the appointment of the Liquidators. The timing rule in subsection 104-10(3) of the ITAA 1997 provides that CGT event A1 occurred when the contract was entered into on DD February 20YY. That is when the capital gain was derived for the purposes of section 254 of the ITAA 1936.

Accordingly, in this case the Liquidators have not derived a capital gain from the disposal of the Property for the purposes of section 254 of the ITAA 1936 as the contract was entered into, and the gain derived, prior to their appointment.