On December 10, The High Court dismissed the Commissioner’s appeal from the decision of the Full Federal Court in Australian Building Systems.
The case concerned the application of section 254(1)(d) of the Income Tax Assessment Act 1936 which requires every agent and trustee “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…”. The appeal concerned the interpretation of the words “tax which is or will be come due” and specifically whether the obligation to retain arose before an assessment for tax was issued.
By a 3:2 majority, the High Court held that section 254 does not impose an obligation on agents and trustees (which include liquidators, administrators and receivers) to retain moneys to pay tax unless and until an assessment has been issued.
The decision significantly limits the ability of the Commissioner to use section 254 to achieve priority over secured creditors. Secured creditors may no longer be forced to realise secured assets pregnant with tax liabilities by way of mortgagee in possession sale rather than receiver sale to circumvent the operation of section 254. However, it is too early to predict how the Commissioner will react to the decision and it is possible in the case of significant secured assets that the Commissioner may issue special assessments immediately after a receiver sale to invoke the operation of section 254.
We expect that the Commissioner will withdraw the draft Taxation Determinations (TD 2012/D6 and TD 2012/D7) in which he had asserted the view that a retention obligation arises even before an assessment has been issued.
It remains to be seen whether the Commissioner will seek legislative changes to remedy his position.