Draft Taxation Determination TD 2019/D2

The ATO released a draft taxation determination (draft TD) setting out a receiver’s obligation to retain money for post appointment tax liabilities under section 254 of the Income Tax Assessment Act 1936.

This draft TD has been issued following the decision in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liquidation) [2015] HCA 48 (ABS), which resulted in the withdrawal of TD 2012/7 due to a conflicting position with the decision in ABS.

The draft TD provides that when income, profits or gains of a capital nature are derived by an entity through the actions of a receiver acting as the entity’s agent, the receiver must retain enough money to pay the tax that has been assessed on the income, profits or gains.

In the draft TD the Commissioner recognises that where a receiver acts as agent of the company:

  • Section 556 does not apply to receivers, thus tax liabilities incurred by a taxpayer after the receiver is appointed are simply unsecured debtors with no greater priority that any other unsecured debt.
  • Caution needs to be taken though, as there can be exceptions where some other statute, or agreement, provides the Commissioner with an enforceable legal right to require payment before other unsecured creditors or even secured creditors (for example section 53 of the Law of Property Act 1936 (SA) and section 110 of the Property Law Act 1958 (Vic) which provide for the discharge of rent, taxes, rates and outgoings whatever affecting the mortgaged property).
  • That the amount to be retained by the receiver does not have to exceed the amount of income tax that can be legally recovered by the Commissioner from the entity (that the receiver has been appointed to).
  • There is no enforceable right for the Commissioner to be paid before a secured creditor.
  • The receiver’s retention obligation under s254 related to the amount that the Commission is entitled to be paid after the secured creditors are paid and this amount may be zero.

ARITA made a submission which focused on the practical application of the draft TD by insolvency practitioners. Stating that:

  • The examples provided in the draft TD did not provide sufficient clarity on the interaction of the status of the ATO as against secured creditors and situations where assessments have and have not been made prior to funds being distributed.
  • The draft TD needs to provide an explanation of how receivers should deal with retained funds as it is not the role of the receiver to distribute funds to ordinary unsecured creditors (noting the Commissioner’s position that the ATO is an ordinary unsecured creditor in respect of this debt).
  • Much of the guidance is provided in an Appendix to the draft TD and that Appendix is not proposed to form part of the final Taxation Determination. ARITA submitted that the Appendix should be retained as part of the final Taxation Determination.