- The decision about how a debtor’s assets should be sold affects tax liabilities and, ultimately, how much money is returned to creditors.
- Income tax and GST outcomes arising from a receiver sale of distressed assets can differ to those arising under a sale by a mortgagee-in-possession sale.
- When acting for a distressed entity, it’s important to seek advice to understand how the tax rules may affect you.
Some common tax traps lay in wait for receivers when deciding how a debtor’s assets should be sold. This arises from a seemingly insignificant decision, but one that has a big impact on the tax outcome.
Certain tax obligations may be triggered depending on whether the receiver sells the asset, or the creditor does so as a mortgagee-in-possession.
The commercial difference between the two can seem quite fine, but can give rise to major differences in how tax liabilities are collected and, ultimately, the amounts returned to creditors.
Receivers must consider four main issues when considering a receiver sale of distressed assets versus a sale as mortgagee-in-possession.
1. The ‘stick over carrot’ approach (Section 254)
Regardless of who sells the asset, the debtor has the primary tax liability for the asset’s disposal, whether under the ordinary income tax provisions or the capital gains tax regime.
But a receiver effectively becomes the tax collector for the debtor’s tax liability when appointed over the debtor. Section 254 of the Income Tax Assessment Act 1936 (Cth) requires the receiver to pay the tax liability arising on an asset sale, to the extent that the receiver receives the sale proceeds in their representative capacity.
It’s a ‘stick over carrot’ approach to collecting the tax debt, with the receiver responsible for collecting, and personally liable for remitting, the debtor’s tax liability. A receiver must therefore ensure sufficient funds are available to cover any tax liability from the sale proceeds – but this raises certain challenges.
“A receiver must therefore ensure sufficient funds are available to cover any tax liability from the sale proceeds.”
Realistically, it may be impractical to ascertain the debtor’s actual tax liability. What if the debtor is hostile? The prospects of accurately calculating a cost for an asset, to determine a taxable gain, are likely slim.
These uncertain tax outcomes, coupled with personal liability for the debtor’s tax bill, have caused grief for receivers, liquidators, administrators and other representatives, at least until relatively recently.
Historically, the position of the Australian Taxation Office (ATO) was that receivers are obliged to retain an amount under section 254 representing tax that had not yet been assessed, and not only in respect of tax that had already been assessed (Taxation Determination TD 2012/D6, now withdrawn).
The ATO’s position was put to the test in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq)  HCA 48 (ABS). In that case, the majority of the High Court held that a liquidator (also subject to section 254) was not required to retain funds from the sale proceeds sufficient to pay tax on the sale of assets unless a relevant tax assessment had been issued by the Commissioner of Taxation.
The ATO reluctantly waved the white flag and withdrew TD 2012/D6, to the relief of receivers and other representatives of distressed entities. The ATO subsequently issued TD 2019/D2, which effectively, although not expressly, accepts the High Court’s decision in ABS.
2. The unconstrained mortgagee
Section 254 applies to persons who act as ‘agents or trustees’ of taxpayers – receivers are caught because the tax definition of the term ‘trustee’ includes a receiver (along with liquidators and administrators).
However, a mortgagee-in-possession does not suffer the same burden.
If a mortgagee sells the debtor’s asset, exercising its power of sale as mortgagee, section 254 should not impose a liability on the mortgagee for any tax payable by the debtor.
In this respect, a mortgagee is neither an agent nor a trustee for the purposes of section 254. Several cases dealing with broadly equivalent provisions suggest that a mortgagee is not a trustee for, or an agent of, a mortgagor when it exercises its powers of sale (e.g. Chant v Deputy Commissioner of Taxation 94 ATC 4733; Deputy Commissioner of Taxation v General Credits Ltd 87 ATC 4918).
3. Should a mortgagee therefore always sell a distressed asset?
The different treatment between receivers and mortgagees under section 254 may suggest a bias towards mortgagee sales of distressed assets.
But while a mortgagee sale provides greater certainty over tax administration, compared with a sale by receivers, the actual benefit from a mortgagee sale may have diminished since the High Court’s decision in ABS. Each case must be considered on its merits and its particular facts.
Any prudent decision must also consider the income tax anti-avoidance rules. However, there may be a question as to whether a sale is undertaken by a mortgagee because it is more commercially advantageous than a sale by a receiver, does in fact constitute a ‘tax benefit’ for the purposes of the anti-avoidance rules – particularly given that section 254 is a collection provision rather than a taxing provision.
4. Income tax and GST hand-in-hand?
If an asset sale is subject to GST the seller typically accounts, and is liable, for the GST:
- where a ‘representative’ such as a receiver is appointed over a debtor, the representative is liable for the GST consequences of transactions entered into during their appointment (Division 58 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act))
- likewise, a mortgagee-in-possession will be liable for any GST arising from a sale made under its power of sale (Division 105 of the GST Act).
But similarly to income tax, there are some important GST differences between a receiver sale and a mortgagee sale, outlined in the following table.
|Required to be registered for GST for each debtor it represents, if the debtor is registered or required to be registered||No requirement to separately register for GST for each debtor or mortgagor|
|Personally liable as a representative for any GST that would be payable by the debtor, only to the extent the supply is within the scope of the representative’s responsibility or authority for managing the debtor’s affairs||Liable to remit GST on a supply, unless on the reasonable information available to the mortgagee, the supply made by the mortgagee towards satisfaction of the debt owed to it would not have been taxable had the debtor made the supply|
Burden of ‘proving’ GST liability
|Strictly liable||Based on reasonable information available to mortgagee, or written notice from debtor as to GST treatment of sale|
Where an entity acts both as a representative and as a mortgagee-in-possession with respect to the same entity, then the rules with respect to a mortgagee-in-possession take priority.
However, when you’re acting for a distressed entity or considering the sale of distressed assets, it’s important to seek advice to understand how the tax rules may affect you.
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