Taxing Times

In July 2024, Justice Downes of the Federal Court delivered judgment in Robson as trustee for the bankrupt estate of Lanning v Commissioner of Taxation' [2024] FCA 720. In Robson, a bankruptcy trustee appealed against an objection decision made by the Commissioner of Taxation in respect of' a private ruling on his personal liability to pay capital gains tax on the sale of the bankrupt's properties.

Background

In 2015,' Clifford Lanning purchased two properties within the Noosa' area.'  On 12 December 2019, the applicant was appointed by' court order as Mr Lanning's trustee in bankruptcy ("Trustee").'  After his appointment, the Trustee arranged for the' properties to be sold. Section' 254(1)(a) of the Income Tax Assessment Act 1936 ("ITAA 1936")' provides that "every trustee '€¦ shall be answerable as taxpayer'€¦ for' the' payment of tax" on income, profits or gains derived by the trustee in a representative capacity. This provision' effectively creates a personal liability in the trustee to pay tax that is ancillary to the liability of the beneficiary. The Trustee lodged an application for a private ruling.'  The application concerned the Trustee's liability for the payment of' CGT and obligations of retention sufficient to pay' that' tax in relation to the sale of the' properties. On 31 October 2022, the' Commissioner' made a private ruling that:

• the Trustee was liable for the payment of tax in' his capacity as trustee having regard to the operation of s' 106-30 of' the' Income Tax Assessment Act 1997 ("ITAA 1937");
• the Trustee was answerable by operation of s 254(1) of the ITAA 1936 in respect of the capital gains made from the sale of the' properties and subject to the retention obligations under' s 254(1)(d)' of the ITAA 1936;
• the Trustee will not be personally liable in respect of GST, prior to the issue of a Notice of Assessment, if' he fails' to retain monies or' pays' away monies that have been retained, in respect of' the' tax liability;
• the Trustee will be liable in respect of GST post the issue of a Notice of Assessment but prior to the assessed liability becoming due and payable, if the Trustee fails' to retain moneys or' pays' away monies that have been retained in respect of the tax liability.

On 22 December 2022, the Trustee lodged an objection to the Ruling' which was disallowed.

Appeal

The Trustee appealed against the objection decision and advanced grounds as to why the decision should have been made differently.

Representative capacity

The substantive ground of appeal was that for' s' 254(1) of' the' ITAA 1936 to apply, and for' a' trustee' or agent' to be' liable for' the tax payable on gains of a capital nature, the gains must be' derived by' a trustee or agent in their' "representative capacity".'  The Trustee submitted that' the proceeds of a capital gains tax event' are not derived' by a trustee in bankruptcy in a' "representative capacity"' and so s' 254(1) does not apply. However, Downes J observed that the' chapeau' to s 254 provides that the operative part, being subsections (a)'€“(h), applies to "every' trustee".' '  Further, Her Honour stated, the' purpose' of the' expression "representative capacity"' in s' 254' is to' distinguish' a' trustee acting in' their' personal capacity' from' the situation where' a trustee' is acting in' their' role within' one of' the' wide variety of' relationships' which fall within the scope of the term' "trustee"' as defined by' s' 6 of the ITAA. Her Honour concluded that receipt of a capital gain in a "representative capacity" is' therefore' broad enough to capture' a' trustee in bankruptcy' who' derives' a capital gain in' that' capacity.

Not profits or gains

The Trustee also submitted that the proceeds of sale' were not' "profits"' or' "gains"' in' his hands, and that any gain would need to be calculated from the time of vesting. Section' 106-30 of ITAA 1937 operates both to ensure that the vesting of CGT assets in the trustee' does not' constitute a CGT event' and' so' that' acts' done' by the trustee' in dealing with those assets, such as disposing of them,' are attributable to the bankrupt.'  This has the' consequence' that' if the' Trustee triggers a CGT event, such as by disposing of the' asset,' the' primary tax liability for any capital gains falls on the bankrupt' rather than the Trustee. However, Downes J stated that s 254 imposes an ancillary liability on the Trustee.'  It is a liability-imposing and collecting provision in relation to' "every trustee"' for any income, profits or gains of a capital nature' which' are' derived in their representative capacity.

Preferential Treatment

The Trustee' argued that that' the' consequence of construing s 254(1) as applying to capital gains' derived by a trustee in bankruptcy' is to afford the Commissioner "preferential treatment".' ' '  However, the liability of a trustee to pay' tax' under s' 254(1) is a personal liability that arises in the course of' disposing of' an asset and is, in substance, made by s 254 to be part of the cost of selling that asset.'  Section 109 of the' Bankruptcy Act 1966 empowers the trustee to' apply proceeds to cover that expense, being the tax liability,' as a priority payment.

Consistency

The Trustee also argued that considerations of consistency supported' his' construction.'  He submitted that the Commissioner's priority only arises' under s' 254' if' a trustee in bankruptcy files a return and at the time a notice of assessment issues, the trustee remains in' possession of' "any' money", but if the funds have been dissipated, then no personal liability arises.'  Otherwise, the Commissioner's construction of s' 254' would lead to the' absurd' outcome that the revenue would only be protected in an almost arbitrary set of circumstances and in circumstances which would be to the disadvantage of creditors of the estate. Regardless, Her Honour was not satisfied that such a construction' would lead to such an' anomalous' result' as to justify its rejection. The Trustee made other grounds of appeal but they were not pressed at the hearing. In the result, the Trustee had not shown that the' Ruling should have been' made' differently and so the appeal was dismissed.

Take Aways

The Robson judgment provides important guidance for the treatment of capital gains tax by trustees in bankruptcy.'  It also brings it in alignment with a liquidator's similar obligation. Oddly, it is permissible for a trustee to avoid personal liability if the bankrupt's divisible property is distributed to creditors prior to issue of a Notice of Assessment. ' Even so, we might not expect a risk-averse trustee to be too quick to pay moneys away leaving an unpaid tax liability.