Federal Court of Australia

Robson as trustee for the bankrupt estate of Lanning v Commissioner of Taxation [2024] FCA 720

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

DOWNES J:

1    The applicant, Mr William Robson in his capacity as trustee for the bankrupt estate of Clifford Dylan Lanning, appeals against the decision of the respondent (the Commissioner), in relation to an objection decision and reasons for decision dated 24 April 2023 in respect of a private ruling made under Division 359 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA).

2    For the following reasons, the appeal should be dismissed.

Background

3    On 14 July 2015, Mr Lanning (the bankrupt) purchased two properties within the Noosa local government area. These properties were Lot 156 on SP 213710, Title Reference 50742385 and Lot 155 on SP 213710, Title Reference 50742384.

4    On 12 December 2019, the applicant was appointed by court order as the bankrupt’s trustee in bankruptcy.

5    After his appointment, the applicant arranged for the properties to be sold. On 14 November 2020, a contract of sale was entered into for the first property with a purchase price of $155,000. Settlement of this contract occurred on 14 December 2020. On 1 May 2021, a contract of sale was entered into for the second property with a purchase price of $233,000. Settlement of this contract occurred on 31 May 2021.

6    On 18 May 2022, the applicant lodged an application for a private ruling under Division 359 of Schedule 1 to the TAA. The application concerned the applicant’s liability for the payment of capital gains tax or CGT, and obligations of retention sufficient to pay that tax, in relation to the sale of the properties. On 18 October 2022, the Commissioner emailed correspondence to the applicant seeking to amend the questions asked in the application for the private ruling. The applicant consented to the amendments sought by the Commissioner on 25 October 2022.

7    On 31 October 2022, the Commissioner made a private ruling (the Ruling). The Ruling answered the questions in the following terms:

Question 1

In respect of the capital gains tax payable on the gain made from the sale of the Properties, [is the applicant] liable for the payment of tax in [his] capacity as Trustee for the Bankrupt Estate of Clifford Dylan Lanning having regard to the operation of s 106-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes, to the extent of [the applicant’s] obligations under section 254 of the Income Tax Assessment Act 1936 (ITAA 1936).

Question 2

In [the applicant’s] capacity as Trustee for the Bankrupt Estate of Clifford Dylan Lanning:

(a)    [is he] answerable by operation of s 254(1) of the ITAA 1936 or otherwise, in respect of the income, or capital gains made from the sale of the Properties?

Answer: Yes.

(b)    [is he] subject to the retention obligations under [s 254(1)(d)] of the ITAA 1936?

Answer: Yes.

(c)    will [he] be made personally liable under [s 254(1)(e)] of the ITAA 1936 in respect of any tax payable on the gains made from the sale of the Properties, prior to the issue of a Notice of Assessment, if [he fails] to retain monies or [he pays] away monies that have been retained, in respect of the tax liability?

Answer: No.

(d)    will [he] be made personally liable under [s 254(1)(e)] of the ITAA 1936 in respect of any tax payable on the gains made from the sale of the Properties, post the issue of a Notice of Assessment but prior to the assessed liability becoming due and payable, if [he fails] to retain moneys or [he pays] away monies that have been retained, in respect of the tax liability?

Answer: Yes.

8    On 22 December 2022, the applicant lodged an objection to the Ruling (the Objection). The applicant contended that he was not liable in his capacity as trustee for the estate of the bankrupt for capital gains tax payable on the gains made from the sale of the properties. This contention was advanced on the basis that:

(a)    section 160-30 [sic] of the Income Tax Assessment Act 1997 (ITAA 1997), including because it operates such that the Properties are taken to be owned by the bankrupt, despite it having been vested in me, and the disposal giving rise to the CGT lability is considered to be that of the bankrupt and section 254 of the ITAA 1997 does not impose any tax liability on me for the gain independent of the capital gains tax provision; and

(b)    section 254 of the ITAA 1997 is not applicable as I do not, as a trustee in bankruptcy, fall within the parameters of the section including because for the purposes of section 254, a trustee in bankruptcy is not a “trustee” of a bankrupt either at general law or pursuant to section 6 of the Income Tax Assessment Act 1936 (ITAA 1936) or an “agent” of the bankrupt. There is no fiduciary relationship of trustee and beneficiary or of agency between the trustee in bankruptcy and the bankrupt such that I did not derive the gain in a representative capacity in respect of the bankrupt or as an agent of the bankrupt by virtue of any agency.

9    The Commissioner disallowed the applicant’s Objection in a decision dated 24 April 2023 (the Objection Decision). The Objection Decision stated inter alia:

2.    In your capacity as Trustee for the Bankrupt Estate of Clifford Dylan Lanning:

(a)    You are a trustee within the definition in subsection 6(1) of the ITAA 1936;

(b)    Under subsection 254(1) of the ITAA 1936 you are answerable as taxpayer in respect of the income, or any profits or gains of a capital nature made from the sale of the Properties.

(c)    Once a relevant Assessment has been made you are subject to the retention obligation in paragraph 254(1)(d) of the ITAA 1936.

(d)    You are not personally liable under paragraph 254(1)(e) of the ITAA 1936 in respect of any tax payable on the gains made from the sale of the Properties prior to a relevant Assessment on the tax liability of those gains.

(e)    You will be personally liable under paragraph 254(1)(e) of the ITAA 1936 in respect of any tax payable on the gains made from the sale of the Properties upon a relevant Assessment of the tax liability on those gains, to the extent of the retention obligation.

3.    Section 106-30 of the ITAA 1997 does not operate to negate your obligations under section 254 of the ITAA 1936.

10    The applicant now appeals the Objection Decision pursuant to s 14ZZ of the TAA. By reason of s 14ZZO(b)(ii) of the TAA, the burden rests on the applicant to prove that the taxation decision, being the Objection Decision, should have been made differently.

Relevant legislation

11    Whether the Objection Decision was made correctly turns on whether the applicant is subject to s 254(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) such that he is liable for the tax payable on the capital gains from the sale of the bankrupt’s properties that vested in him by operation of s 58 of the Bankruptcy Act 1966 (Cth).

12    This raises issues of construction of, and interaction between, three legislative provisions.

13    Section 254(1) of the ITAA 1936 relevantly provides:

Agents and trustees

(1)    With respect to every agent and with respect to every trustee, the following provisions shall apply:

(a)    He or she shall be answerable as taxpayer for the doing of all such things as are required to be done by virtue of this Act in respect of the income, or any profits or gains of a capital nature, derived by him or her in his or her representative capacity, or derived by the principal by virtue of his or her agency, and for the payment of tax thereon.

(b)    He or she shall in respect of that income, or those profits or gains, make the returns and be assessed thereon, but in his or her representative capacity only, and each return and assessment shall, except as otherwise provided by this Act, be separate and distinct from any other.

…

(d)    He or she is hereby authorized 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.

(e)    He or she is hereby made personally liable for the tax payable in respect of the income, profits or gains to the extent of any amount that he or she has retained, or should have retained, under paragraph (d); but he or she shall not be otherwise personally liable for the tax.

(f)    He or she is hereby indemnified for all payments which he or she makes in pursuance of this Act or of any requirement of the Commissioner.

…

14    The definition of “trustee” for the purposes of s 254(1) of the ITAA 1936 is contained within s 6 of that Act, which states:

trustee in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes:

(a)    an executor or administrator, guardian, committee, receiver, or liquidator; and

(b)    every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.

(Emphasis original.)

15    Section 106-30 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) provides:

Effect of bankruptcy

(1)    For the purposes of this Part [3-1] and Part 3‑3 (about capital gains and losses) and Subdivision 328‑C (What is a small business entity), the vesting of the individual’s *CGT assets in the trustee under the Bankruptcy Act 1966 or under a similar foreign law is ignored.

(2)    This Part [3-1], Part 3‑3 and Subdivision 328‑C apply to an act done in relation to a *CGT asset of an individual in these circumstances as if the act had been done by the individual (instead of by the trustee etc.):

(a)    as a result of the bankruptcy of the individual by the Official Trustee in Bankruptcy or a registered trustee, or the holder of a similar office under a *foreign law;

(b)    by a trustee under a personal insolvency agreement made under Part X of the Bankruptcy Act 1966, or under a similar instrument under a foreign law;

(c)    by a trustee as a result of an arrangement with creditors under that Act or a foreign law.

Example:    A CGT asset of an individual vests in a trustee because of the bankruptcy of the individual. No CGT event happens as a result of the vesting.

The trustee later sells the CGT asset. Any capital gain or loss is made by the individual, not the trustee.

Consideration

16    By the notice of appeal, the applicant advanced three grounds as to why the Objection Decision was incorrect and should have been made differently. These will be considered in turn.

Ground 1

17    By ground 1, the applicant contends that he is not a trustee within the meaning of s 6 of the ITAA 1936, or agent of the bankrupt, for the purposes of s 254 of the ITAA 1936. However, this ground was not pressed at the hearing and the applicant accepted that he was a trustee within the meaning of s 6 of the ITAA 1936.

Ground 2(a)

18    Ground 2(a) relevantly states that:

Further or in the alternative, by reason of s 106-30 of the ITAA 1997 and/or s 116 of the Bankruptcy Act 1966 (Cth), the proceeds from the sale of the Properties in the hands of the Applicant are:

(a)    not profits or gains of a capital nature derived by the Applicant in his representative capacity for the bankrupt within the meaning of s 254(1) of the ITAA 1936 because they constitute money received by the Applicant in his representative capacity as trustee for the bankrupt’s creditors; …

19    In summary, the applicant submits that, for s 254(1) of the ITAA 1936 to apply and for a trustee or agent to be liable for the tax payable on gains of a capital nature, the gains must be derived by a trustee or agent in their “representative capacity”. The applicant submits that the proceeds of a capital gains tax event are not derived by a trustee in bankruptcy in a “representative capacity” and so s 254(1) does not apply.

20    The applicant advances several reasons in support of this ground.

21    First, the applicant submits that, as a matter of ordinary textual construction, the applicant did not derive a gain of a capital nature and he did not derive it in his representative capacity.

22    The applicant submits that the word derive in s 254(1) should not be construed as merely “obtained”, “got”, or “acquired”, but must be considered in the context of the capacity in which such amounts are received. However, the word “derive” is a word which is readily capable of extending to the many ways in which income, profits and gains are obtained by the wide range of persons and entities that fall within the definition of “trustee” in s 6 of the ITAA 1936, including monies that:

(1)    have been gained or obtained: Brent v Commissioner of Taxation (1971) 125 CLR 418 at 427–‍428 (Gibbs J);

(2)    have “come home”: Commissioner of Taxes (SA) v Executor Trustee and Agency Company of South Australia Limited (1938) 63 CLR 108 at 155 (Dixon J, with whom Rich and McTiernan JJ agreed);

(3)    have been received: s 6-5(4) of the ITAA 1997.

23    The applicant submits that he did not derive any profits or gains in his representative capacity but, rather, he received proceeds of sale of the properties of the bankrupt, which properties had vested in him, and that he received the proceeds in his capacity as trustee of a statutory trust for statutory purposes to be administered in accordance with the Bankruptcy Act. He submits that a trustee in bankruptcy is not a trustee “in the ordinary sense of the word” and therefore, as the applicant was not a trustee for the bankrupt, he did not act in a “representative capacity” for the bankrupt. The applicant further submits that the use of the words “representative capacity” in s 254 operates to limit the scope of the words “every trustee” to a subset of trustees who fall within the definition of s 6. He submits that, if s 254 was intended to apply to every trustee within the scope of s 6, the words “representative capacity” would have no work to do.

24    However, the chapeau to s 254 provides that the operative part, being subsections (a)–(h), applies to “every trustee” (emphasis added), which tells against the applicant’s construction.

25    Further, the purpose of the expression “representative capacity” in s 254 is to distinguish a trustee acting in their personal capacity from the situation where a trustee is acting in their role within one of the wide variety of relationships which fall within the scope of the term “trustee” as defined by s 6. Receipt of a capital gain in a “representative capacity” is therefore broad enough to capture a trustee in bankruptcy who derives a capital gain in that capacity.

26    Section 254(1)(a) of the ITAA 1936 provides that the trustee “shall be answerable as taxpayer… for the payment of tax” on income, profits or gains derived by him in his representative capacity. This provision creates a personal liability in the trustee to pay tax that is ancillary to the liability of the beneficiary. Such a conclusion accords with the observations in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) (2015) 257 CLR 544; [2015] HCA 48 (ABS) per Keane J at [103]–‍[104], Gageler J (as his Honour then was) agreeing at [64] and Gordon J at [171]–[172] and [177].

27    Although the facts of ABS concerned a liquidator who sold real property of the company which resulted in a capital gain, and the question in the appeals concerned whether the retention obligation in s 254 of the ITAA 1936 is imposed on an agent or trustee before the Commissioner makes an assessment of the amount of tax payable on income or capital gains derived by that agent or trustee in their representative capacity, the obiter dicta observations of the judges in that case concerning s 254 deserve particular attention: see Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [158].

28    The applicant submits that the proceeds of sale were not “profits” or “gains” in his hands, and that any gain would need to be calculated from the time of vesting. However, s 106-30(2) of the ITAA 1997 operates such that the gain would be calculated as if made by the bankrupt.

29    Second, the applicant submits that his posited construction of s 254 of the ITAA 1936 is supported by the express provisions of the ITAA 1997 and the contextual considerations that apply specifically to capital gains and losses in Part 3-1 and Part 3-3 of that Act. In particular, the applicant relies upon s 106-30 of the ITAA 1997 and submits that it creates a carve-out for a trustee in bankruptcy from the operation of s 254. He submits that there is no CGT event when a CGT asset of the bankrupt vests in the trustee in bankruptcy and the later (inevitable) sale is deemed to have been done by the bankrupt, such that any capital gain or loss is made by the bankrupt, and not the trustee in bankruptcy.

30    However, as is plain from its opening words, the operation of s 106-30 of the ITAA 1997 is limited to specific parts of that Act, being Part 3-1 (Capital gains and losses: general topics), Part 3-3 (Capital gains and losses: special topics), and Subdivision 328-C (What is a small business entity). Further, s 106-30(2) is a deeming provision that operates such that, where a CGT asset of a bankrupt has vested in the trustee in bankruptcy and an act in relation to that asset is then done by the trustee, that act is treated as if done by the bankrupt. This has the consequence that if the trustee triggers a CGT event, such as by disposing of the asset, the primary tax liability for any capital gains falls on the bankrupt rather than the trustee.

31    In summary, then, the carve-out for a trustee in s 106-30(2) is for the purposes of dealing with the capital gain or loss under Part 3-1, Part 3-3 and Subdivision 328-C of the ITAA 1997, such that any capital gain or loss is ascertained by reference to the position of the bankrupt.

32    However, neither s 106-30 nor the fact that the primary liability falls on the bankrupt prevents s 254 from imposing an ancillary liability on the trustee in bankruptcy. The carve-out for a trustee in s 106-30(2) is not for the purposes of s 254 of the ITAA 1936, which is a liability-imposing and collecting provision in relation to “every trustee” for any income, profits or gains of a capital nature which are derived in their representative capacity: see ABS at [104] per Keane J, with Gageler J agreeing at [64]; also [171] per Gordon J.

33    Third, the applicant submits that his construction is the preferable one because the ITAA 1997, read as a whole, evinces an intention that a bankrupt’s taxation liabilities which relate to events happening after the date of bankruptcy are generally to be dealt with separately and outside the bankruptcy. However, this submission is infected with an incorrect assumption that there can only be one party liable for paying the tax assessed upon the gain of a capital nature derived on the sale of the properties. As was identified in ABS, the “trustee” for the purposes of s 254 can also have an ancillary tax obligation. Section 254 is both a collecting and liability-imposing provision: see ABS at [103]–[104] (Keane J) applying Webb v Syme (1910) 10 CLR 482.

34    The applicant’s fourth argument relies on legislative history. The applicant submits that the references to “profits or gains of a capital nature” in s 254(1) of the ITAA 1936 cannot be read divorced from the context in which those words were inserted. He submits that those words were inserted into the ITAA 1936 at the time when the predecessor provision to s 106-30 of the ITAA 1997 was enacted, being the insertion of s 160W into the ITAA 1936 by the Income Tax Assessment Amendment (Capital Gains) Act 1986 (Cth). He submits that this is a further reason why the definition of “trustee” is not intended to refer to money obtained by a trustee in bankruptcy who realises an asset of a bankrupt.

35    To the contrary, the legislative history is consistent with a primary tax liability arising for the bankrupt and an ancillary liability arising for the trustee. The relevant provisions were enacted when the capital gains tax system was introduced. Section 106-30 operates both to ensure that the vesting of CGT assets in the trustee does not constitute a CGT event and so that acts done by the trustee in dealing with those assets, such as disposing of them, are attributable to the bankrupt. However, it says nothing about the ancillary liability imposed upon the trustee in bankruptcy as a consequence of s 254 of the ITAA 1936.

36    Fifth, the applicant submits that the consequence of construing s 254(1) as applying to capital gains derived by a trustee in bankruptcy is to cause a substantial alteration to the order of priorities by which debts are payable under the Bankruptcy Act. He submits that the Commissioner is afforded “preferential treatment” because there is a preference for the payment to the Commissioner of the whole of the tax debt, which debt is not provable in the bankruptcy and which arises after the date of bankruptcy, and which payment is made before the trustee in bankruptcy is remunerated and before payment is made to those creditors with provable debts.

37    However, the liability of a trustee to pay tax under s 254(1) is a personal liability that arises in the course of disposing of an asset and is, in substance, made by s 254 to be part of the cost of selling that asset. Section 109 of the Bankruptcy Act empowers the trustee to apply proceeds to cover that expense, being the tax liability, as a priority payment. There is nothing remarkable about a trustee in bankruptcy being indemnified for an expense or payment that the trustee is required to make in the administration of the bankrupt’s estate. If the payment of the capital gains tax can be somehow characterised as a “preferential payment”, then so be it. In that event, this argument appears to be an attack on the policy behind the legislation (which is outside the remit of a court of law), rather than an argument which relates to the proper construction of it.

38    The applicant’s sixth argument is that, while s 254 may have the purpose of protecting the revenue, this purpose does not justify the Commissioner’s construction (which would give the Commissioner a preference, so the applicant says). This is because, in the context of bankrupt estates, the risk to the revenue has already eventuated, which is not the position for most classes of “trustees”. However, the Commissioner’s debts as at bankruptcy are provable and are treated like all other debts. The new post-date of bankruptcy liability arising from the CGT event is not provable in bankruptcy and is treated as a cost in realising the value of the asset. Section 254 should and does protect the revenue in this way.

39    The applicant’s seventh argument is that considerations of consistency support his construction. He submits that the Commissioner’s priority only arises under s 254 if a trustee in bankruptcy files a return and at the time a notice of assessment issues, the trustee remains in possession of “any money”, but if the funds have been dissipated, then no personal liability arises. The applicant submits that the Commissioner’s construction of s 254 leads to the absurd outcome that the revenue would only be protected in an almost arbitrary set of circumstances and in circumstances which would be to the disadvantage of creditors of the estate. However, the Commissioner’s construction does not lead to such an anomalous result as to justify its rejection: see, generally, Commissioner of State Revenue v EHL Burgess Properties Pty Ltd (2015) 209 LGERA 314; [2015] VSCA 269 at [72] (Tate and Kyrou JJA and Robson AJA).

40    The applicant also submits that his construction is supported by the fact that a difficulty arises in assessing the capital gain of the trustee, and that a different calculation under s 106-30 of the ITAA 1997 ought to be applicable to a trustee in bankruptcy than to an individual. Again, this appears to be a complaint about the policy behind the legislation, or a suggestion as to how it might be amended, rather than an argument which supports the applicant’s construction. For that reason, it does not assist the applicant.

41    Accordingly, this ground of appeal must fail.

Ground 2(b)

42    Ground 2(b) relevantly states that:

Further or in the alternative, by reason of s 106-30 of the ITAA 1997 and/or s 116 of the Bankruptcy Act 1966 (Cth), the proceeds from the sale of the Properties in the hands of the Applicant are:

…

(b)    not subject to the operation of s 254 of the ITAA 1936 because they constitute property divisible amongst the creditors of the bankrupt Clifford Dylan Lanning in accordance with the requirements of the Bankruptcy Act 1966 (Cth).

43    This ground was not pressed at the hearing, or at least, to the extent that it was pressed, it was not done so with any enthusiasm. To the contrary, the applicant’s primary position at the hearing was that a liability to pay capital gains tax, which liability crystallises upon the sale of an asset by a trustee in bankruptcy, is not a debt provable in the bankruptcy. This is a position which is shared by the Commissioner. No cogent submissions were presented by the applicant to cause me to take a different view to the parties.

44    Accordingly, this ground of appeal must fail.

Conclusion and disposition

45    For these reasons, the appeal will be dismissed as the applicant has not shown that the Ruling should have been made differently. The parties do not seek an order for costs.

Associate:

Dated:    4 July 2024