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Liability of a Liquidator for GST A PAPER BY PAUL ANDERSON JANUARY 2009


Liability of a Liquidator for GST

Summary A recent Federal Court decision has considered whether a liquidator is personally liable for GST in respect of a post appointment sale of new residential property owned by the company in liquidation.

Who Does This Impact? All registered company liquidators.

What Action Should Be Taken? Liquidators can take heart that they are not personally liable in these circumstances but the Deputy Commissioner of Taxation is unlikely to let the matter rest with this decision.

Contents:

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Facts

2

Significance of Issue

2

Terms of Statute

2

Judge’s Reasoning

3

Accounting

4

Conclusion

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Liability of a Liquidator for GST by Paul Anderson

The recent Federal Court decision of Deputy Commissioner of Taxation v PM Developments Pty Limited (‘PMD’) handed down on 12 December 2008 raises the interesting question of whether the liquidator of a company is personally liable for GST in respect of a sale of new residential premises owned by the company pursuant to a contract exchanged and completed after the making of the winding up order.

Facts PMD was wound up by order of the Federal Court on 5 July 2007. Prior to the making of the order, PMD was the developer of a new residential project at Burleigh Heads on the Gold Coast in Queensland. The project consisted of eight residential units. By 5 July 2007 the sales of seven out of eight units had been completed and the sale proceeds paid to the first mortgagee. At all times, title to all eight units remained in PMD and was never vested in the liquidator in his own name. Any sale was by PMD and not by the liquidator. This is in line with generally accepted principles. On 27 August 2007, PMD entered into a contract to sell lot 8 for $1,755,000.00 inclusive of GST and the sale was settled on 31 August 2007. Following settlement, the sum of $159,545.45 representing GST calculated at the rate of one eleventh of the price was paid into the trust account of PMD’s solicitors plus another $8,520.46 making a total in trust of $168,065.91. There were also outstanding claims for costs and expenses by the liquidator and the solicitors. The Deputy Commissioner alleged that the liquidator was personally liable for the GST rather than PMD.

Significance of Issue The parties considered that the issue was of considerable significance to the extent that the Deputy Commissioner was prepared to treat it as a test case by paying the liquidator’s legal costs, whatever the outcome. In addition, the Deputy Commissioner agreed not to issue an assessment in respect of the claimed GST. The issue of such an assessment would have been conclusive evidence of the liability set out in the assessment under Section 105-100 of the Taxation Administration Act 1953.

Terms of Statute Although prima facie it appeared that PMD and not the liquidator was liable for the GST by virtue of the fact that it was PMD and not the liquidator that sold unit 8, the Deputy Commissioner relied upon Division 147 of the GST Act. Section 147-5 provides that ‘a representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entry is registered or required to be registered.’ ‘Incapacitated entity’ is defined to include ‘an entity that is in liquidation or receivership’ and ‘representative’ is defined to include a liquidator or a receiver.

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Liability of a Liquidator for GST by Paul Anderson

The Deputy Commissioner also relied upon the explanatory memorandum to the Bill when it was introduced into Parliament. Such explanatory memorandum stated – 6.271 If you are registered and you become bankrupt, or go into receivership or liquidation, 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 – Section 195-1… 6.272 The representative is personally liable for the GST payable and for the other requirements of the Bill. The representative is liable from the date from 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. 6.273 During that period the effect of Division 147 is that the representative rather than the principal is carrying on the enterprise. The representative is not personally liable for GST attributable before he or she becomes entitled to act for the principal.

However, Logan, J pointed out that an assertion as to its meaning and effect in an explanatory memorandum is not a substitute for language employed by Parliament in the Bill as enacted: If, truly, the language of an enactment does not translate into law a meaning and effect that one might apprehend from secondary materials was intended it is for the Parliament to rectify that by further legislative provision.

It would certainly appear that the intention of the Minister was to make a liquidator personally liable for GST. But was he successful?

Judge’s Reasoning Section 147-5 simply requires a liquidator to be registered. It is more difficult to construe Section 147-5 as carrying with it an implication that the representative is to be deemed to be carrying on the incapacitated person’s enterprise and making its supplies and acquisitions. One would have expected to see a provision in Division 147 deeming a representative to carry on an incapacitated person’s enterprise and to make its supplies and acquisitions even though that representative may not do so under the general law. There is no such provision in Division 147. There is also no mention in Division 147 to Section 9-5 of the GST Act which is its pivotal provision insofar as it defines a taxable supply. GST is only payable on a taxable supply without which there is no liability for GST. There are four elements in Section 9-5, only one of which is the need to register: The registration requirement does not carry with it the other three. To regard Division 147 as achieving this is to give its provisions a weight that their language cannot bear especially so as to create a counter intuitive taxation liability on the part of a liquidator.

The Judge also referred to a comparable provision in the Goods and Services Tax Act 1985 of New Zealand. Under Section 58 (1A) of the NZ Act a liquidator is ‘deemed to be a registered person carrying on the taxable activities of the incapacitated person’. The Judge also made a telling comparison of Division 147 with Division 157-B which deals with principals and agents. Under that Division, principals and agents can agree that effectively it is the agent making the taxable supply for GST purposes. However, the Division provides in detail that if the principal makes a supply as a question of fact, it is the agent as a matter of law who is deemed

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Liability of a Liquidator for GST by Paul Anderson

to make the supply. There is no such nexus in Division 147. The effect of section 147-5 in requiring a liquidator to register is that he will be personally liable for GST only in the rare circumstances where a court has ordered property to be vested in the liquidator. Otherwise, the disposal of property of a corporation in liquidation will remain a taxable supply by the corporation which will have to account for the GST. In the final result, Logan, J found for the taxpayer and held that the taxpayer was not personally liable for the GST.

Accounting Logan, J held that the GST received, being a post liquidation debt, attracted the payment priority in Section 556 (1) (a) of the Corporations Act 2001 with a number of equal ranking post liquidation debts. Since the amount held by PMD’s solicitor was insufficient to pay all of these claims, the liquidator was obliged to effect a proportionate payment pursuant to Section 559 of the Corporations Act.

Conclusion With respect, the decision of Logan, J is both correct and important and gives valuable guidance to liquidators. However, the Deputy Commissioner clearly takes the view that a liquidator should be personally liable for GST incurred post his appointment. In these circumstances, his alternatives are to appeal the decision or, more likely, to seek an amendment to the legislation.

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Liability of a Liquidator for GST by Paul Anderson

For more information, please contact:

Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au

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Liability of a Liquidator for GST