CGT liability for receivers and liquidators

February 2014

On Friday 21 February 2014, Justice Logan of the Federal Court of Australia delivered his decision in Australian Building Systems Pty Ltd v Commissioner of Taxation [2014] FCA 116. The case is significant for receivers and liquidators because it overturns the position of the Commissioner of Taxation regarding the personal liability of liquidators and receivers for capital gains under section 254 of the Income Tax Assessment Act 1936 (Cth) (ITAA36).

Australian Building Systems Pty Ltd (ABS) v Commissioner of Taxation [2014] FCA 116

In a private ruling, the Commissioner of Taxation found that the liquidators of ABS must retain sufficient funds out of the proceeds of sale of property owned by the company before its liquidation to comply with a future tax assessment. Failure to retain sufficient funds to satisfy such a prospective liability would have resulted in a personal liability for the liquidators. The liquidators commenced proceedings challenging the correctness of the private ruling.

His Honour Logan J found that in the absence of an assessment issued by the Commissioner of Taxation, trustees (defined in the ITAA36 to include receivers and liquidators) are not required to retain from the proceeds of sale of an asset, sufficient money to pay any capital gains tax arising from that sale. His Honour found that the obligation to retain funds arises only once an assessment is issued.

In light of his Honour’s decision, Draft Taxation Determination TD2012/D6 dated 19 September 2012 will now need to be withdrawn and revised.

However, his Honour noted that a prudent practitioner would retain funds sufficient to discharge a potential capital gains tax liability even though he or she is not required to do so by law. The intention and meaning of his Honour’s comments is unclear in circumstances where such ‘prudence’ is fundamentally inconsistent with the clarity of his Honour’s findings.

Unresolved issue of priority

The case had the potential to resolve whether or not section 254 creates a priority in favour of the Commissioner. His Honour found it unnecessary to consider this question given his findings and considered that a determination should await a matter in which an assessment had been issued by the Commissioner.

The pre-appointment tax liability of liquidators and receivers is determined by sections 260-45 and 260-75 of Schedule 1 of the Taxation Administration Act 1954 (Cth), respectively. The formula prescribed by those sections for determining the tax debt (and personal liability of the insolvency practitioner) affirms the pari pasu distribution principle. However, s 260-90 states that the subdivision ‘does not reduce any obligation or liability of the receiver or receivers arising elsewhere’.

Section 254 appears to provide a priority collection mechanism for liabilities crystallised by liquidators and receivers even if those liabilities were in respect of increases in market value attributable to the period prior to appointment. Accordingly, once an assessment has issued, section 254 of the ITAA36 continues to give rise to the potential to argue that the Commissioner is entitled to a priority for unremitted capital gains tax.

What next

If section 254 is intended to operate as a mechanism for the Commissioner to collect tax revenue from an insolvent entity, then this decision renders the section ineffective.

It also creates very different outcomes for creditors depending on the timing of when insolvency proceedings start. An insolvency that spans two separate financial years may result in an assessment being issued by the Commissioner that results in the funds available for distribution being diminished. On the other hand, an insolvency that occurs and completes within the space of one financial year may result in a distribution to creditors being possible without an assessment occurring. 

As such, we would expect that this decision will be either appealed or be the trigger for legislative review.

The result for insolvency practitioners is that they enjoy a degree of comfort (for the time being) that, assuming an assessment has not issued, they may make a distribution to creditors without personal liability. However, until the priority issue around section 254 is finally resolved and the impact of this decision is considered further, the prudent course would be for insolvency practitioners to retain enough funds to pay any potential capital gains tax liabilities prior to making any distribution to creditors.


Scott Atkins

I'm unapologetically determined and fearless. I pursue excellence. Always.

Scott Atkins Partner

Scott is the Chair of our Board and an internationally renowned insolvency and restructuring lawyer. He is an inaugural Fellow and a member of the Board of INSOL International. Scott is also Vice President of the Australian Restructuring Insolvency and Turnaround Association (ARITA).

Scott is a trusted adviser to Australia's leading banks and insolvency and restructuring practitioners and has acted on some of the industry's most complex and sensitive banking and insolvency advisory and dispute resolution matters.

Prior to joining HDY, Scott practiced for 7 years as in-house counsel with Commonwealth Bank Group. He is now our Client Relationship Partner for the CBA Group. He is also the co-leader of our cross-border insolvency practice and our regulatory enforcement practice. Scott is recognised by his peers for his leading expertise in cross-border insolvency, acting on both inbound engagements in Australia and advising Australian clients on outbound engagements in the USA, UK, Cayman Islands, Hong Kong and The Netherlands, among other jurisdictions.

Scott was the Australian delegate on the Advisory Committee on Comparative Law established by the American Bankruptcy Institute as part of its Commission to Study the Reform of Chapter 11 of the US Bankruptcy Code. This resulted in a landmark report for the reform of Chapter 11.

He is a published author on insolvency and cross-border insolvency. Most recently, Scott was one of the Australian contributors to the 2015 publication 'International Contributions to the reform of Chapter 11 U.S. bankruptcy code' which is volume 2 of the European and International Insolvency Law Studies series. He also authored the Australian chapter of Avoidance of Antecedent Transactions and Cross-Border Insolvency (INSOL International). Among other publications, he is the co-author, together with Professor Rosalind Mason, of the Australian chapter of Look Chan Ho's leading text: Cross-Border Insolvency: Cases and Materials (Kluwer International).

Scott is a visiting lecturer on cross-border insolvency at the University of Sydney in its undergraduate and postgraduate law programs lead by Professor John Stumbles.

see my profile
Mark Hilton

I walk with honour in dark places. Take my hand. We've got this.

Mark Hilton Partner

Mark specialises in banking recovery, including all forms of consumer and corporate recovery and insolvency. He has acted for banks and other financial institutions, receivers, liquidators and administrators for over 28 years.

Mark is a leading insolvency lawyer who has been involved in some of Australia's largest and most complex insolvency matters over the past decade.

He is known for his solid relationships with Australia's Big 4 Banks, as well as his expertise in recovery and enforcement, and litigation and dispute resolution.

Clients call upon Mark for his industry knowledge, achieved from being exposed to businesses across a spectrum of industries such as aged care, banking and financial services, retail, property development, manufacturing, pharmaceutical and infrastructure.

His background in commercial litigation has provided a basis for a substantial practice involving the recovery of loss associated with negligent valuations in connection with securitised loans.

Mark's willingness to embrace innovation is, among other things, evidenced by his coordination of the establishment of recovery extranets to assist financial institutions to monitor the status of recovery and enforcement action on secured and unsecured lending transactions.

see my profile

John Martin Partner

John is a leading lawyer in both financial sector dispute resolution (complex and regulatory) and corporate insolvency and restructuring, with a particular specialty in cross-border insolvencies. He is recognised by his clients, peers and legal directories as a leader in his field.

Domestically, John advises on large and complex insolvencies and assists in finding solutions for financial institutions with regulatory and other complex issues. His clients include several of Australia's major banks, as well as insolvency practitioners appointed to insolvent entities.

Internationally, John has advised in connection with insolvencies in England, Fiji, Bermuda, Cambodia, Cayman Islands, Brunei, and Norfolk Island. His cross-border experience includes acting for the liquidators of an insolvent bank, and various liquidators of insurance and reinsurance companies.

John is a recognised authority on insolvency issues, with articles published in media outlets such as The Australian Financial Review and the Insolvency Law Journal. He has presented at numerous domestic conferences as well as internationally in the US, England, South Africa, Singapore, Canada, New Zealand, and the Netherlands.

see my profile
Greg Reinhardt

Expert advice delivering commercial solutions.

Greg Reinhardt Partner

Greg is the Head of our Tax practice and is a recognised specialist in taxation law, advising clients across a range of industries in relation to income tax, GST, stamp duty and other state taxes.

Greg has particular expertise advising clients in the financial services sector, including managed investment funds, derivative markets, insolvency and restructuring.

He advises public and private companies, investment funds, foreign corporations and banks in respect of the tax implications of mergers and acquisitions, disposals, corporate restructures, property and infrastructure projects, financing and leasing arrangements, international taxation, financing transactions, property and infrastructure projects, managed investment schemes and other collective investment vehicles (CIVs) and tax due diligence as well as the establishment of new businesses in Australia.

Greg has published a number of articles on taxation law issues, particularly on the topic of making Australia a financial services hub, and is a regular speaker at conferences.

see my profile

Claudine Salameh Partner

Claudine has over 15 years' experience dealing with legal issues in the financial services sector.

She is a banking and insolvency litigator and regulatory expert. She acts for the major Australian financial institutions in matters involving customer disputes and litigation, fraud, regulatory and compliance issues, regulatory investigations, inquiries and enforcement matters, security enforcement and insolvency litigation. She also acts for insolvency practitioners in formal receiverships, voluntary administrations and liquidations.

Claudine is well known for her ability to manage risks posed by litigation and regulatory inquiries and investigations. She is particularly attuned to reputational and business risks. She is highly strategic and creative and is recognised by her clients for being able to achieve the perfect balance between legal arguments and commercial and practical outcomes.

Claudine has been instrumental in working with clients to provide insights into the field of behavioural economics, which over the past few years, has been of interest to policy makers and regulators as a tool to engage in 'choice architecture'. On a practical level, Claudine has worked closely with clients to design approaches to customer engagement that make use of behavioural insights.   

Claudine is an expert in the conduct of review and remediation programs and provided assistance to the regulator, by way of submissions and her involvement in an industry working group, on ASIC's regulatory guide on review and remediation programs.

Claudine is very familiar with ASIC's powers to obtain documents and information from financial institutions and is called upon by financial institutions to provide assistance in these matters. She has a style that is conducive to having a fruitful dialogue with both the regulator and the various stakeholders within a financial institution.

see my profile
Mark Schneider

Achieving our clients' business goals drives our strategy and advice. It's what we do.

Mark Schneider Partner

Mark is the partner responsible for managing our Brisbane office. He has broad experience in corporate restructuring, insolvency and banking and general commercial litigation. Mark specialises in resolving disputes, advising both banks and insolvency practitioners in relation to all aspects of the enforcement of securities and the realisation of distressed assets in Australia and internationally.

Mark has advised insolvency practitioners, secured and unsecured creditors including financial institutions and directors in relation to debt recovery, security enforcement, restructuring, formal insolvency procedures and dispute resolution throughout Australia and in Europe.

He takes pride in helping banks, financiers and their appointees implement practical strategies for resolving disputes, enforcing securities and realising distressed assets in Australia and internationally.

Mark regularly advises on secured creditors' rights, including undertaking complex security reviews and the intensive management of complex and sensitive debt positions.

Mark is sought out by clients involved in potential disputes who are concerned about protecting their reputation. He is experienced with alternative dispute resolution as well as appearing and instructing in the State and Federal Courts, including at Appellate level.

Mark has experience in many industry sectors including commercial, rural and residential property, hotels and leisure, retail, energy and resources (including mining services).

see my profile
Mark Thomas

A deep understanding of my clients and truly partnering with them is key to helping them succeed.

Mark Thomas Special Counsel

Mark has more than 15 years' experience specialising in banking litigation, restructuring and insolvency related matters. He acts for Australia's largest Banks, financial institutions and insolvency practitioners.

Mark has broad litigation experience which includes acting in fraud recovery proceedings, conducting complex multi-party litigation arising out of the collapse of companies and co-operatives, defending proceedings involving challenges to security documentation, as well as negligence and breach of duty claims. Mark also advises creditors and insolvency practitioners in the areas of debt recovery, security enforcement, voluntary administrations, receiverships, liquidations and bankruptcies.

His experience spans a wide range of industries including childcare and schooling, motor dealerships, real estate development, healthcare and pharmacy, tourism, and mining.

Mark has extensive in-house experience acting in both legal and management roles. During his time at HDY, Mark has been seconded to Commonwealth Bank of Australia, Westpac Banking Corporation, Macquarie Bank Limited, Ge Real Estate, and Investec Bank (Australia) Limited. Through his in-house/secondment experience, Mark has a strong appreciation of the need to truly partner with clients to achieve their objectives and to provide legal advice which is practical, commercial and strategic.

Mark regularly presents to clients in relation to developments in the areas of insolvency and general banking law and has published opinion pieces in relation to the liability of receivers and managers under the Income Tax Assessment Act 1936 (Cth) and the Taxation Administration Act 1954 (Cth).

see my profile