High Court decides that liquidators are not obliged to retain funds from the sale of assets in respect of tax until a notice of assesment has been issued

27 January 2016

In the recent decision of Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2015] HCA 48, the High Court determined that there is no requirement under s 254(1)(d) of the Income Tax Assessment Act 1936 (Cth) (the Tax Act) for a liquidator to retain funds to pay tax until a notice of assessment has been issued.


In the course of their appointment, the liquidators of the company caused it to sell property which gave rise to a capital gain constituting a CGT event under the Tax Act.

Section 254(1)(d) of the Tax Act relevantly provides that an agent or trustee:

“is hereby authorised and required to retain from time to time out of any money which comes to him or her in his or her representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains” (emphasis added).

The liquidators sought a private ruling from the Commissioner as to whether they were required to account to the Commissioner out of the proceeds of the sale any CGT liability that crystallised on the sale, to which the Commissioner ruled in the affirmative.

Concerned that the ruling would give the Commissioner a form of priority contrary to the operation of ss 501, 555 and 556 of the Corporations Act 2001 (Cth), the liquidators objected to the ruling and subsequently challenged it in the Federal Court. At first instance, Justice Logan allowed the liquidators’ objection and held that, in the absence of any assessment of taxation, the liquidators were not subject to any obligation under the Tax Act to retain an amount in respect of capital gains tax. On appeal, the Full Federal Court agreed that the liquidators were not obliged to retain an amount in respect of capital gains tax until a notice of assessment had been issued.

The Commissioner appealed to the High Court.

The decision of the High Court

The High Court (by a 3:2 majority) dismissed the Commissioner’s appeal and confirmed that s 254(1)(d) of the Tax Act does not require a liquidator to retain an amount sufficient to pay tax before a notice of assessment has been issued.

In reaching this conclusion, the majority of the High Court (French CJ and Kiefel J in a joint judgment, Gageler J in a separate judgment) recognised that the section required certainty as to the total amount of tax payable before it could have effect, which may be difficult at the time the proceeds of sale of assets are received as there may be other losses or deductions to take into account.

The majority decision left unresolved the issue of whether s 254 affords the Commissioner a form of priority over ordinary unsecured creditors. In a dissenting judgment, Gordon J expressed a view on this issue to the effect that a tax expense was an expense incurred by a liquidator and may fall within ss 556(1)(a) or 556(1(dd)) of the Corporations Act 2001, and therefore payable in priority to all other unsecured debts and claims. However, this view was not adopted by the majority of the High Court.

The effect of the decision

The decision should provide a degree of comfort to liquidators and other external administrators as it confirms they are not required to retain funds for tax liability from sale proceeds prior to a notice of assessment being issued.

As observed by Justice Logan at first instance, however, “that does not mean that a liquidator is obliged immediately to distribute the resultant gain or part thereof as a dividend to creditors in the course of the winding up. A prudent liquidator… would be entitled to retain the gain for a time against other expenses which may arise in the course of the administration”.

Notwithstanding the High Court’s decision, liquidators should continue to act prudently when considering whether or not to pay a dividend to creditors, and seek legal advice – or if appropriate directions from the Court – in the event of specific complications or concerns.

This article was written by Andrew O’Halloran, Partner and Steven Hagivassilis, Special Counsel.

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