February 2009

Retroactive changes ensure liquidators not liable for GST

Stop Press - Government to retrospectively amend GST Law

In an announcement on 6 February, the Assistant Treasurer Chris Bowen MP has said that the Government will retrospectively amend the GST law, with effect from 1 July 2000, to ensure that representatives of incapacitated entities are liable for GST on post-appointment transactions.  The Government is to shortly release and consult on draft legislation to implement this change.  According to the Assistant Treasurer the decision discussed in the following article is "contrary to the underlying policy intention and the way the law has been administered since the introduction of GST".

One matter that should arise in considering the draft legislation will be whether imposing personal liability for the Company\'s supply is consistent with the policy intention behind the distribution of a company\'s assets to all creditors in accordance with the priorites set out in the Corporations Act, and in particular section 556.  A further issue for liquidators and receivers to carefully consider is how to deal with the GST issue whilst this legislation is pending.

Liquidators not liable for GST

A recently decided case has held that a liquidator is not personally liable for GST on the sale of assets of an Incapacitated Entity (IE).  The liability will still rank ahead of most payments as an expense of the liquidator payable under s556(1)(a) of the Corporations Act.  Nevertheless this may significantly alter how asset realisations are conducted in liquidation and may also mean liquidators can look at claiming back overpayments of GST on former administrations.  The ATO has also promised a swift response to this decision.  It may be that the Treasurer\'s announcement is that response.

Facts

In Deputy Commissioner of Taxation v PM Developments Pty Limited [2008] FCA 1886 (12 December 2008) the Federal Court considered an application by an Official Liquidator for directions and declarations as to his personal liability for GST.  The GST had been collected by the liquidator on the sale of property owned by the company and amounted to $159,545.45.  A private ruling obtained from the ATO found the liquidator personally liable for payment of this GST. 

Personal Liability of Liquidators

It was said that a Liquidator's personal liability for GST flowed from the operation of Division 147 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act).  This Division requires \"representatives\" (including liquidators) to be registered for GST in some cases.  Section 147-20 of the GST Act provides that GST adjustments arising after a liquidator's appointment are to be treated as those of the IE, if they relate to a supply that occurred before the representative was appointed.  Section 147-25 provides that the tax periods applying to a representative of an IE are the same tax periods that apply to the IE, regardless of Division 27, which sets out other ways of working out what tax periods apply.  From these provisions, the ATO argued that it was implicit that following his or her appointment, a representative is to be taken to be personally carrying on the enterprise of the IE, and, therefore, to incur personal liability in respect of any taxable supplies. 

Further, the Commissioner relied upon the explanatory memorandum (EM) to the bill which introduced the GST Act and which noted that following an insolvency appointment, \"the person who conducts your enterprise on your behalf is, generally, personally carrying on the enterprise.  This person (the representative) could be a trustee in bankruptcy, receiver, receiver and manager or a liquidator\".  The EM went on to say that.

\"The representative is personally liable for the GST payable and for the other requirements of the Bill.  The representative is liable from the date on which he or she becomes entitled to act for you (the principal) until he or she ceases to be so  entitled.  The representative is liable for GST, entitled to input tax credits and has any adjustments attributable to that period.\"

The Commissioner argued that the EM indicated a clear intention on the part of Parliament to impose personal liability on representatives of IEs, and that the court should give effect to that intention.

Consideration by the Court

In considering the GST Act, Justice Logan of the Federal Court noted the law regarding interpretation of taxation statutes, to the effect that:

\"The subjection of a person to tax by Parliament requires clarity of language, not inexactitude or indirect references.  Especially that is so where the asserted subjection of a particular person to tax is counter intuitive to what one might  expect having regard to the prevailing general law position and the otherwise usual incidence of the tax in question.\"

Justice Logan went on to note that unlike in bankruptcy, assets of companies in liquidation do not ordinarily vest in the liquidator. If the liquidator continues to trade the company's business, it is the company which trades. His Honour observed that since the GST Act imposed liability on \"taxable supplies\" (s 9-5), it would seem simple enough that a sale of the company's assets (in this case real property) could only be a supply by the company, not by the liquidator.

The court then turned to consider the Commissioner's arguments in respect of Division 147, and noted that there was missing from Division 147 anything which might indicate liquidators were deemed to be carrying on the company\'s business personally.

The court was not troubled by the EM to the GST Bill.  The court found that the EM, in this case, was simply wrong in suggesting liquidators were personally trading on a company's business:

\"Such errors hardly, with respect, inspire confidence in the utility of the Explanatory Memorandum.  The description in the Explanatory Memorandum is not matched by the language employed within Div 147 as enacted.\"

His Honour contrasted the Australian GST Act with that of the New Zealand GST Act, which includes a specific provision that a liquidator is \"deemed to be a registered person carrying on the taxable activity of the incapacitated person\". 

Justice Logan therefore found that the liquidator of PM Developments was not carrying on the business of the company, and the liquidator could not be personally liable in respect of a taxable supply by the company.

Logan J then noted that as the GST was a post-liquidation debt, \"it enjoys the payment priority for which s 556(1)(a) of the provides.  It is but one of a number of equal ranking post-liquidation debts", eligible to receive available funds on a pro-rata basis amongst all section 556(1)(a) creditors.

ATO Response

On its website, the ATO has announced that it is considering the effect of this decision carefully and preparing a response which was to have been available mid January 2009.  No further details have as yet been provided of what form the response will take.

Conclusion

Whilst each matter should be considered individually, the correct approach now would seem to be to treat the amount collected on sale in respect of GST as funds available in the liquidation of the company. At the same time any otherwise admissible claim by the ATO for GST will be an expense of the winding up payable in priority under section 556(1)(a) of the Corporations Act, pari passu with all other (1)(a) expenses.  Liquidators may also wish to look at whether payments of previous amounts of GST can (or should!) be recovered and distributed in accordance with section 556(1)(a).

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.

Stephen Mullette

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