GORDON J.
Introduction
On 2 March 2011, Australian Building Systems Pty Ltd ("ABS") was placed into voluntary administration under Pt 5.3A of the Corporations Act 2001 (Cth) ("the Corporations Act"). On 6 April 2011, ABS's creditors resolved that it be wound up under s 439C of the Corporations Act. ABS's administrators, Ms Muller and Ms Dunn, were appointed liquidators of ABS ("the Liquidators").
At the time that ABS entered administration, ABS owned real property at 118-128 Magnesium Drive, Crestmead, Queensland ("the Crestmead Property"). On 21 July 2011, the Liquidators caused ABS to enter into a contract of sale for the Crestmead Property. That disposal caused CGT event A1 to happen under s 104-10 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act"). The proceeds from the disposal of the Crestmead Property were $4 million. ABS's cost base for the Crestmead Property was around $2.88 million. This gave rise to a capital gain for ABS under s 104-10(4) of the 1997 Act of about $1.12 million.
A dispute emerged between the Liquidators and the Commissioner of Taxation ("the Commissioner") as to whether the Liquidators were obliged by s 254 of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act"), prior to an assessment being raised against ABS, to retain money to meet any tax liability in relation to the CGT event.
Section 254(1) of the 1936 Act relevantly provides:
"With respect to every agent and with respect also 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.
(c) If he or she is a trustee of the estate of a deceased person, the returns shall be the same as far as practicable as the deceased person, if living, would have been liable to make.
(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.
(g) Where as one of 2 or more joint agents or trustees he or she pays any amount for which they are jointly liable, each other one is liable to pay him or her an equal share of the amount so paid.
(h) For the purpose of insuring the payment of tax the Commissioner shall have the same remedies against attachable property of any kind vested in or under the control or management or in the possession of any agent or trustee, as the Commissioner would have against the property of any other taxpayer in respect of tax." (emphasis added)
"[T]rustee" is defined in s 6(1) of the 1936 Act to include a liquidator. "[L]iquidator" is defined in s 6(1) of the 1936 Act to mean "the person who, whether or not appointed as liquidator, is the person required by law to carry out the winding-up of a company". "Agent" is not relevantly defined in the 1936 Act or the 1997 Act.
The Liquidators sought a private ruling from the Commissioner. The application specified the client as "[ABS] (in liquidation)". The questions posed and the answers given in the ruling were:
"Question 1
Is the liquidator required under section 254 of the [1936 Act] to account to the Commissioner out of the proceeds of sale, any capital gains tax liability that crystallises on the sale of an asset that belonged to [ABS] before liquidation?
Answer
Yes
Question 2
If the answer to question 1 is yes, are the monies to be retained once an assessment issues?
Answer
No
Question 3
If the answer to question 2 is no, are the monies to be retained at crystallisation of any capital gains?
Answer
Yes".
ABS lodged an objection to the private ruling. That objection was disallowed by the Commissioner. ABS filed an appeal against that objection decision in the Federal Court of Australia. The Liquidators also filed an application seeking declaratory relief against the Commissioner in respect of their obligations under s 254 of the 1936 Act. The proceedings were heard together and were the subject of appeal to the Full Court of the Federal Court.
The primary judge and the Full Court held that s 254(1)(d) of the 1936 Act only imposes an obligation to retain once an assessment has issued.
Issues and preliminary observations
Issues
Three issues were raised on appeal to this Court. First, is s 254 of the 1936 Act in its application to trustees limited to where the trustee is assessable for the income, profits or gains in relation to a trust estate under Div 6 of Pt III of the 1936 Act? Second, does s 254 of the 1936 Act only operate where the agent or trustee is otherwise assessable under some other provision of the revenue law, or does s 254 create by its own force an ancillary liability in the agent or trustee (and associated obligation and authorization of the agent or trustee) for the more convenient collection of tax for which the principal or beneficiary is principally liable? Third, does s 254(1)(d) of the 1936 Act authorize and oblige the Liquidators, as trustees, to retain an amount sufficient to pay the tax to be assessed in respect of the sale of the Crestmead Property prior to the issue of an assessment or does the obligation to retain only arise after the issue of an assessment?
The first two questions were raised for the first time by members of the Full Court on the hearing of the appeals before that Court. Neither party made any submissions in the Full Court about those questions. Before this Court, the Commissioner submitted that the Full Court was wrong in the conclusions it expressed. ABS and the Liquidators made no submissions in this Court in relation to those issues and did not seek to maintain the reasoning of the Full Court. For the reasons that follow, I would reach a different conclusion to the Full Court in respect of each issue.
The third question is the principal question on appeal. As seen earlier, the primary judge and the Full Court held that s 254(1)(d) of the 1936 Act only imposes an obligation to retain once an assessment has issued.
Before this Court, the Commissioner submitted that the retention authorization and obligation in s 254(1)(d) arose on and from derivation of the income, profits or gains identified in s 254(1)(a). ABS and the Liquidators' position was that the retention authorization and obligation in s 254(1)(d) did not arise until an assessment had issued. For the reasons that follow, the retention authorization and obligation in s 254(1)(d) arises on and from derivation.
Preliminary observations
Before turning to the three issues, some preliminary matters should be noted. First, s 254 of the 1936 Act is not a new provision. It had a colonial antecedent - s 12 of the Income Tax Act 1895 (Vic) ("the 1895 Act"). That section, in turn, can be seen to have been based on ss 41 and 44 of the Income Tax Act 1842 (5 & 6 Vict c 35). The colonial antecedent was used as a model for s 52 of the Income Tax Assessment Act 1915 (Cth) ("the 1915 Act"). In 1922, the Income Tax Assessment Act 1922 (Cth) ("the 1922 Act") was passed. The 1922 Act consolidated and amended the tax laws. Section 89 of that Act is the immediate predecessor to s 254 of the 1936 Act. There were some minor changes when s 254 was enacted in 1936.
Section 89 of the 1922 Act had relevantly provided:
"With respect to every agent and with respect also to every trustee, the following provisions shall apply: -
…
(d) where as agent or trustee he pays income tax, he is hereby authorized to recover the amount so paid from the person in whose behalf he paid it, or to deduct it from any money in his hands belonging to that person;
(e) he is hereby authorized and required to retain from time to time out of any money which comes to him in his representative capacity so much as is sufficient to pay the income tax which is or will become due in respect of the income;
(f) he is hereby made personally liable for the income tax payable in respect of the income if, after the Commissioner has required him to make a return, or while the tax remains unpaid, he disposes of or parts with any fund or money which comes to him from or out of which income tax could legally be paid, but he shall not be otherwise personally liable for the tax".
Section 89(d) of the 1922 Act was not re-enacted in s 254. Section 89(e) of the 1922 Act became s 254(1)(d). The personal liability obligation in s 89(f) became s 254(1)(e) but was amended with the effect that the personal liability of the agent or trustee was not restricted to moneys paid away after the Commissioner required the agent or trustee to make a return. The personal liability obligation was also amended to link the personal liability to the retention obligation in sub-s (1)(d). Section 254 has remained relevantly unchanged since 1936. As will become evident, this history is not unimportant.
Second, much of the debate in this Court focused on sub-s (1)(d) of s 254 and whether the retention authorization and obligation in that paragraph operated before or only after the issue of an assessment by the Commissioner. In resolving that and other debates about the construction of the provision, the text of the whole of s 254 is important. Section 254 is comprised of a number of parts. It would be wrong to approach the construction of s 254 "piecemeal". It would be wrong to consider the retention authorization and obligation in s 254(1)(d) without understanding the scheme created by s 254 as a whole.
It is against that background that each issue will be considered.
Issue 1 - s 254 and Div 6 of Pt III of the 1936 Act
The majority of the Full Court concluded that no amount of tax had, or ever could, become "due" for payment by the Liquidators within the meaning of s 254(1)(d) of the 1936 Act, whatever construction was accorded to the words "is or will become due" in s 254(1)(d).
That conclusion was said to be founded on the fact that s 254 could not operate in relation to the "income, or any profits or gains of a capital nature" derived on the sale of the Crestmead Property because the capital gain would be assessed to ABS, and not the Liquidators, as a result of Div 6 of Pt III of the 1936 Act. The proposition was that ABS would be "presently entitled" to all the income (of the trust estate) under Div 6 of Pt III of the 1936 Act and, therefore, ABS would be assessed to tax and the Liquidators, as trustees, would not. The premise underlying that conclusion, that the Liquidators were "trustees of a trust estate" to whom Div 6 of Pt III of the 1936 Act applied, is, with respect, misconceived.
Division 6 of Pt III of the 1936 Act sets out the basic income tax treatment of the net income of a trust estate. The basic elements in relation to a resident trust estate are found in ss 96, 97, 98 and 99 of the 1936 Act. First, except as otherwise provided by the 1936 Act or the 1997 Act, "a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate". Second, a beneficiary of a trust estate presently entitled to a share of the income of the trust estate, and not under a legal disability, is assessable on that share of the net income of the trust estate. However, where a beneficiary is presently entitled to a share of the income of the trust estate, but is under a legal disability, the trustee is to be assessed and liable to pay tax on that share of the net income of the trust estate. Finally, where there is a share of the income of the trust estate to which no beneficiary is presently entitled, the trustee is assessable on the net income of the trust estate equal to that share.
Two important principles underpin the operation of Div 6 of Pt III.
First, while the definition of "trustee" in s 6(1) of the 1936 Act goes beyond trusts of a settlement or testamentary trusts, the definition is stated to apply "unless the contrary intention appears". Not every person or entity which answers the statutory definition of "trustee" in s 6(1) will be a trustee for the purposes of Div 6 of Pt III.
As Rich and Dixon JJ stated in Howey v Federal Commissioner of Taxation, the references to "income of the trust estate" in s 31 of the 1922 Act (the predecessor to Div 6 of Pt III) suggested that the person who answers the description "trustee" in that context "must stand in some relation to the proprietary right [by] which the income arises, even although [that person] need not be a trustee in the proper sense".
A liquidator is identified in the definition of "trustee" in s 6(1) of the 1936 Act. But a liquidator is not a trustee of a trust estate in any ordinary sense. A liquidator does not stand in some relation to the proprietary right by which the income of the company being wound up is generated. During the winding up of a company, the company continues to exist. The liquidator takes over from the company's officers as the person to administer the company's property.
In a voluntary winding up, subject to the provisions of the Corporations Act as to preferential payments, the property of the company must be applied in satisfaction of its liabilities equally and, subject to that application, must, unless the company's constitution otherwise provides, be distributed among the members according to their rights and interests in the company. To achieve this, the liquidator must take into their custody, or under their control, all of the property which is, or appears to be, the company's property. But, in the absence of a vesting order made under a provision such as s 474(2) of the Corporations Act, the appointment of a liquidator to a company does not divest the company of its beneficial ownership in, or render the liquidator a trustee of, the company's assets. And there was no vesting order made in the liquidation of ABS.
Second, the operation of Div 6 of Pt III of the 1936 Act depends upon the existence of a trust estate and the presence of net income of that trust estate. In the present appeals, there was no trust estate and therefore no net income of any trust estate. Therefore, contrary to the view expressed by the majority of the Full Court, ABS was not, and could not be, a beneficiary of a trust estate presently entitled to the net income of that trust estate and thus assessable under Div 6 of Pt III. As between ABS and the Liquidators there was no "trust estate" to which Div 6 of Pt III could apply.
Section 254 of the 1936 Act, in its terms, applies to persons, such as liquidators, who fall within the definition of "trustee" in s 6(1) of the 1936 Act. Unlike the position with Div 6 of Pt III, there is nothing in s 254 to suggest that the word "trustee" when used in that section should not extend to persons who (in the ordinary case) are not "trustees of a trust estate" within the scope of Div 6 of Pt III.
The three authorities cited by the majority of the Full Court do not support the adoption of a narrower construction of "trustee" in s 254. The first, Howey, has been addressed. The statements in that case by Rich and Dixon JJ were directed to where a "trustee" was being assessed under s 31 of the 1922 Act. While their Honours suggested that it was "perhaps doubtful" that s 89 imposed a liability on a trustee beyond s 31 of the 1922 Act, their Honours specifically contemplated that "[i]f the appellant's case falls outside s 31", then s 89 of the 1922 Act might apply.
The other two authorities cited by the majority of the Full Court in support of a narrower construction of "trustee" (Union-Fidelity Trustee Co of Australia Ltd v Federal Commissioner of Taxation and Federal Commissioner of Taxation v Prestige Motors Pty Ltd) each concerned a situation where there was income of a trust estate. They do not assist in resolving the proper construction of "trustee" in the context of s 254.
The question of the application of the definition of "trustee" to a liquidator was considered by this Court in Joshua Bros Pty Ltd v Federal Commissioner of Taxation in the context of s 52 of the 1915 Act (a predecessor to s 254 of the 1936 Act). In that case, the question was whether income from the sale of trading stock by a company in liquidation was assessable under the 1915 Act. The Court held that it was. Three members of the Court addressed s 52. Knox CJ observed that a liquidator was included in the designation of "trustee" in the 1915 Act and was answerable by s 52 for the payment of income tax on income derived by them in their representative capacity. Isaacs J referred to s 52 and said that "[t]he intention of the [1915] Act was indubitably to reach income of a company 'derived' during the regime of a liquidator". Rich J observed that s 52, when read with two other sections in the 1915 Act, "was intended to and does cover the case of income made by the liquidator for the company". There is no cause to doubt those observations.
For these reasons, the conclusion of the majority of the Full Court that s 254 of the 1936 Act only operates in relation to "trustees" where those trustees are assessable upon the income, profits or gains to which the section applies under Div 6 of Pt III of the 1936 Act should be rejected.
Issue 2 - s 254 of the 1936 Act imposes ancillary liability and is a collecting provision
The second issue concerns the statutory scheme created by s 254 of the 1936 Act. The majority of the Full Court concluded that s 254 is a "collecting section" which only operates where the agent or trustee is otherwise assessable. In other words, the majority concluded that s 254 imposes no separate liability on an agent or trustee which has not been imposed on that agent or trustee by some other provision of the revenue law. That construction of s 254 should be rejected. In understanding the statutory scheme, it is necessary to address key aspects of s 254.
Section 254(1) does two things. It creates a liability in the agent or the trustee which is ancillary to the primary liability of the principal or beneficiary. It is also a machinery provision which provides a means of collection against the agent or trustee in certain circumstances.
Section 254(1)(a) in its terms creates a liability in the agent or trustee in respect of the income or any profits or gains of a capital nature (derived by them in their representative capacity, or derived by the principal by virtue of their agency) by making the agent or trustee "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", including "for the payment of tax thereon".
It will be necessary to say more about this paragraph later in these reasons. For present purposes, it is sufficient to note that, first, the liability it imposes on an agent or trustee is "as taxpayer", and second, the liability is in respect of the income or any profits or gains of a capital nature derived by them in their representative capacity or by virtue of their agency, and includes a liability for the payment of tax on that income or those profits or gains.
Section 254(1)(b) then provides that the agent or trustee shall, in respect of that income or those profits or gains, make the returns and be assessed but in their representative capacity only. What s 254(1)(b) does is emphasise that in respect of the income or the profits or gains referred to in sub-s (1)(a), the obligation of an agent or trustee to make a return and be assessed (as if the taxpayer) is in their representative capacity only. It is ancillary liability. Its purpose is to ensure payment of the tax; tax which at least ordinarily will be primarily payable by another person or entity. Adapting what Viscount Cave said in Williams v Singer when considering similar provisions in the United Kingdom, "[t]he object of the Acts is to secure for the State a proportion of the profits chargeable, and this end is attained (speaking generally) by the simple and effective expedient of taxing the profits where they are found".
The "collecting" aspect is then addressed in s 254(1)(d) and (e). Sub-section (1)(d) provides that an agent or trustee is both authorized and required to retain "so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains". That reference to the "income, profits or gains" in the last line is, of course, a reference to the "income, or any profits or gains of a capital nature" referred to in sub-s (1)(a), which is the foundation for the liability imposed by that provision. Paragraph (e) of s 254(1) creates the personal liability of the agent or trustee and limits that liability to the amount which was or should have been retained under s 254(1)(d).
It is, then, apparent that s 254 is a section with two purposes. It both imposes liability and is a collecting section. As the Commissioner correctly submitted, s 254 imposes on a trustee liability for tax in respect of income, or any profits or gains of a capital nature, derived in their representative capacity, as an aid to collection of that tax.
On the proper construction of s 254, there is no need to find another specific section in the revenue law rendering the agent or trustee liable for tax in respect of the "income, or any profits or gains of a capital nature" referred to in s 254(1)(a). If an agent or trustee has a liability under s 254(1)(e) because they failed to satisfy the retention obligation in s 254(1)(d), that liability is in addition to, and not in substitution for, any assessment of the beneficiary, principal or company (although of course only one amount of tax could ultimately be recovered). The contrary view adopted by the majority of the Full Court should be rejected.
The application of s 254, construed in the manner indicated, to the facts in these appeals is instructive. Under s 106-35 of the 1997 Act, the disposal of the Crestmead Property by the Liquidators was, for the purposes of Pts 3-1 and 3-3 of the 1997 Act, to be treated "as if the act had been done instead by [ABS]". The capital gain arising from that disposal entered the calculation of ABS's net capital gain and, then, ABS's assessable income. ABS was principally liable and assessable for the capital gain arising on the sale of the Crestmead Property. That is not in dispute.
But ABS was in liquidation and it was the Liquidators who caused ABS to enter into a contract of sale for the Crestmead Property. Those facts were essential to both the derivation of a capital gain and the application of s 254 in the present appeals.
Issue 3 - retention authorization and obligation
As has been seen, the principal issue in these appeals concerns the proper construction of the retention authorization and obligation in s 254(1)(d) of the 1936 Act and, in particular, whether that retention authorization and obligation only applies after the Commissioner makes an assessment in respect of relevant income, profits or gains.
Both the primary judge and the Full Court held that the retention authorization and obligation in s 254(1)(d) only applies after an assessment is made. The primary judge and Davies J in the Full Court reached their conclusions by an application of the reasoning of this Court in Bluebottle UK Ltd v Deputy Commissioner of Taxation in relation to the phrase "is or will become due" in s 255(1)(b) of the 1936 Act. The applicability of Bluebottle will be addressed later in these reasons. For the moment, it is sufficient to observe that the decision in Bluebottle is not determinative of the proper construction of s 254. The conclusion of Edmonds and Collier JJ in the Full Court was based on their reasoning addressed in "Issue 1 - s 254 and Div 6 of Pt III of the 1936 Act" and "Issue 2 - s 254 of the 1936 Act imposes ancillary liability and is a collecting provision" above and, for the reasons stated in those sections, should not be accepted.
What then is the proper construction of the retention authorization and obligation in s 254(1)(d)? For the reasons that follow, the retention authorization and obligation in s 254(1)(d) applies on and from the derivation of income, profits or gains by the agent or trustee. That obligation applies both before and after any assessment is made for tax in respect of that income or those profits or gains, not merely from the time of the assessment (if any).
This section of the reasons will address (1) the text, context and history of s 254 of the 1936 Act, (2) the duties and obligations of a trustee and a liquidator under the general law, (3) the position of an agent, (4) the absurdity that would result if the contrary construction was adopted and (5) the decision of this Court in Bluebottle.
(1) Text, context and history of s 254
Section 254(1)(a) defines an agent or trustee's obligations by reference to the nature of the obligation, the categories of receipts covered and an end point. As has been seen, an agent or trustee (including a liquidator) is made answerable "as taxpayer" by s 254(1)(a). That paragraph identifies that the nature of the obligation of the agent or trustee is "as taxpayer" and is for the doing of all such things as are required to be done by virtue of the revenue law.
But that liability of an agent or trustee, as taxpayer, is qualified. The qualification is important because it identifies, within the text of the provision, the central concept which recurs throughout s 254. The qualification is that the liability of each agent or trustee as taxpayer is not at large. It is limited by the character of the receipts. The liability is limited to liability "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". It is in respect of those amounts, and only those amounts, that the agent or trustee is answerable as taxpayer for the payment of tax. So, for example, a liquidator is not liable for the payment of tax on income, profits or gains made by the company before their appointment as liquidator.
The fact that an agent or trustee is answerable as taxpayer is amplified in s 254(1)(b). Section 254(1)(b) provides that an agent or trustee shall, in respect of the income, profits or gains referred to in sub-s (1)(a), make the returns and be assessed. That amplification is unsurprising. Under s 254(1)(a), an agent or trustee is answerable as taxpayer and obliged to do all such things as are required to be done by virtue of the revenue law in respect of that income or those profits or gains, including paying the tax. The obligation in sub-s (1)(b) might be thought to be subsumed in sub-s (1)(a). But, however sub-ss (1)(a) and (1)(b) are read, an obligation is imposed on an agent or trustee, as taxpayer, to make all due inquiries and keep all due records to ensure a proper return can be made in relation to the income, profits or gains referred to in sub-s (1)(a).
As seen earlier, s 254(1)(b) emphasises that the obligation of an agent or trustee to make a return and be assessed (as taxpayer) is in their representative capacity only. It is ancillary liability. Its purpose is to ensure the payment of tax; tax which at least ordinarily will be primarily payable by another person or entity. It creates a liability "quoad assets" which imposes a debt to be borne by the estate, the principal or the company. The balance of s 254 assists to achieve that objective.
Paragraphs (d) and (e) of s 254(1) address the collecting aspects of the statutory scheme. Sub-section (1)(d) provides that an agent or trustee is both authorized and required to retain "so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains". That reference to "income, profits or gains" is, of course, a reference to the "income, or any profits or gains of a capital nature" referred to in s 254(1)(a): the "income, or any profits or gains of a capital nature" derived by the trustee in their representative capacity (or by the principal by virtue of the agency). Section 254(1)(d) then specifies the amount that the agent or trustee is authorized and required to retain - "so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains". The "tax", of course, is the tax which the agent or trustee is answerable as taxpayer to pay under s 254(1)(a), and the agent or trustee is authorized and required to retain "so much as is sufficient to pay" that tax.
Two further questions of construction arise: what is "sufficient", and what is the proper construction of the phrase "which is or will become due in respect of the income, profits or gains"?
The answer to the first question informs, or at least assists in informing, the answer to the second question. And the answer to the first question depends again on a proper understanding of the statutory scheme.
Section 254(1)(d) is a facilitating provision. It facilitates the tax payment obligation in s 254(1)(a) by stating that the agent or trustee is "authorized and required to retain" certain money. The form and content of that provision is important.
Absent s 254(1)(d), there may be some argument about whether the retention by the agent or trustee of money belonging to another (an estate, a principal or a company), in the face of a demand from that person or entity, would be unlawful. On any view, s 254(1)(d) puts the matter beyond argument. Subject to important limitations contained within other sub-sections of s 254, s 254(1)(d) intersects with, and interrupts, any instruction to the agent or trustee for delivery up of money belonging to a beneficiary, a principal or a company and held by that agent or trustee.
Other aspects of s 254(1)(d) should be noted. The retention authorization and obligation imposed on the agent or trustee is "to retain from time to time out of any money which comes to [the agent or trustee] so much as is sufficient to pay tax". The obligation to retain from time to time reflects that the obligation is ongoing and that money may not (and often will not) come to an agent or trustee in one lump sum. It reflects reality. But the retention authorization and obligation has just one purpose - to meet the tax payment obligation imposed on the agent or trustee in s 254(1)(a).
The authorization and obligation to retain is limited to so much as is sufficient to pay tax that is or will become due in respect of the income, profits or gains, being the income, profits or gains in s 254(1)(a). As Barton J explained in Webb v Syme, it enables and requires the agent or trustee to "keep back out of the trust [or agency] receipts enough to pay the tax if it is not obtained from the beneficiary [or principal] and demand is made on himself". If the money belonging to the principal or beneficiary (or in this case, the company in liquidation) that comes to the agent or trustee exceeds that which is sufficient to pay tax on the income, profits or gains, as required by s 254(1)(a), the agent or trustee is not authorized to retain the excess.
How then does the agent or trustee determine what is sufficient to be retained? The upper limit of that obligation will be known, or will be readily ascertainable, by any agent or trustee. It is the amounts with which the agent or trustee deals that both found the relevant tax liability and mark the outer boundary of that liability. The agent or trustee can apply the relevant marginal tax rate to the particular income, profits or gains with which the agent or trustee deals to determine how much to retain. If the agent or trustee later becomes aware of allowable deductions or losses which will reduce the amount of tax payable on the income, profits or gains, then the amount retained can be adjusted. Moreover, as discussed later in these reasons, not only is the retention of funds not an unusual task for a trustee, a liquidator, or an agent, it is a task which pervades their roles and functions.
Section 254(1)(e) is in aid of s 254(1)(d). It imposes a personal liability on the agent or trustee "for not keeping a reserve of income or funds in hand to satisfy the tax, until it is seen whether it is paid by or recoverable from the beneficiary [or principal]".
Section 254(1)(h) "helps to show where the primary liability really is. It gives the Commissioner the like remedies against all … property of any kind vested in, controlled, or managed by any trustee as he would have against the … property" of any other taxpayer in respect of tax. As Barton J said in Webb v Syme, "although power has been given to make a beneficiary's property in the hands of the trustee liable, as if it were in the hands of the owner himself, it is still recognised that the trustee is not the person 'liable to pay tax'". The object was then, and remains now, to enable "the Commissioner to resort to the trustee to prevent any risk of the beneficiary's income escaping the payment legally due". As Barton J went on to say, "[i]t is primarily the beneficiary who is to pay; but the amount of the tax is to come out of his [or her] income in any event - if necessary, before it comes to his [or her] hands" (emphasis added). The obligation, the payment of the tax before the balance is handed over to the beneficiary or principal, applies regardless of whether there has been an assessment.
These statements, and the features of s 254 that have been outlined above, support the construction that the phrase "which is or will become due in respect of the income, profits or gains" does not depend on there being an assessment issued by the Commissioner. The retention authorization and obligation is not restricted to the period after an assessment has issued for the income, profits or gains. It arises on and from the derivation of that income or those profits or gains.
(2) Duties and obligations of a trustee and a liquidator under the general law
That construction of s 254 reflects, and is consistent with, the duties and obligations of a trustee and a liquidator under the general law. Retention of moneys by a trustee or a liquidator is not new. Just as at general law a trustee is entitled to retain trust property against a beneficiary pending determination of contingent liabilities of the trust for which the trustee is liable, under s 254(1)(d) an agent or trustee is authorized and required to retain moneys sufficient to pay tax which is or will become due in respect of income, profits or gains made by the agent or trustee in a representative capacity. It would be strange if s 254 was construed in a way that was inconsistent with the duties of a trustee under the general law.
In relation to a liquidator, s 254 therefore puts beyond doubt the existence of a right and an obligation that would otherwise exist. Further, the construction of s 254(1)(d) that has the retention authorization and obligation applying on and from derivation is consistent with a liquidator's duties and obligations under, and the priority of payments provided for in, the Corporations Act. These reasons will now explain how that is so.
A liquidator may carry on the company's business only so far as is necessary for the beneficial disposal or winding up of that business. A liquidator's other powers, including the power to sell or otherwise dispose of, in any manner, all or any part of the property of the company, are set out in s 477(1) and (2) of the Corporations Act. As seen earlier, the company's property does not vest in the liquidator. Instead, the liquidator, in a representative capacity, in place of the directors or officers of the company, is authorised to do certain things including those specified in s 477(1) and (2) of the Corporations Act.
The Corporations Act deals separately with the debts of a company according to whether the debts were incurred before or after the appointment of a liquidator. Section 553 relevantly provides:
"(1) Subject to this Division and Division 8, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.
(1A) Even though the circumstances giving rise to a debt payable by the company, or a claim against the company, occur on or after the relevant date, the debt or claim is admissible to proof against the company in the winding up if:
(a) the circumstances occur at a time when the company is under a deed of company arrangement; and
(b) the company is under the deed immediately before the resolution or court order that the company be wound up." (emphasis added)
The only debts and claims "admissible to proof against the company" are "debts or claims the circumstances giving rise to which occurred before the relevant date" (emphasis added). Section 555 provides that "[e]xcept as otherwise provided by this Act, all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately". The Crown, as a creditor, is bound by this statutory order.
Subdivision 260-B of Sched 1 to the Taxation Administration Act 1953 (Cth) ("the TAA") deals with recovery from liquidators. It provides what a liquidator and the Commissioner must do. First, a liquidator must give written notice of the fact that he or she was appointed liquidator of a company to the Commissioner within 14 days of appointment. Next, the Commissioner must, as soon as practicable, notify the liquidator of the amount (the "notified amount") that the Commissioner considers is enough to discharge any outstanding tax-related liabilities that the company has when the notice is given. These are pre-appointment tax-related liabilities. The liquidator must not, without the Commissioner's permission, part with any of the company's assets before receiving the Commissioner's notice. However, that prohibition does not prevent the liquidator from parting with the company's assets to pay debts of the company not covered by the matters set out in s 260-45(5), which include the outstanding tax-related liabilities and any debts of the company which are unsecured and are not required, by an Australian law, to be paid in priority to some or all of the other debts of the company. Finally, after receiving the Commissioner's notice, the liquidator must set aside, out of the assets available for paying amounts covered by s 260-45(5)(a) or (b) (the "ordinary debts"), assets with a value calculated using a specified formula. None of these provisions address post-liquidation debts or claims.
What then is to occur post-liquidation? That is addressed by s 556 of the Corporations Act. It relevantly provides:
"(1) Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:
(a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company's business;
…
(dd) next, any other expenses (except deferred expenses) properly incurred by a relevant authority;
(de) next, the deferred expenses[];
…" (emphasis added)
A "relevant authority" in relation to a company includes a liquidator.
A tax expense is an expense incurred by a liquidator. A tax expense may fall within s 556(1)(a) (an expense incurred in preserving, realising or getting in property of the company, or in carrying on the company's business) or s 556(1)(dd) (other expenses). It is not a question of priority for the Commissioner but a reflection of, and consistent with, the statutory scheme under the Corporations Act that post-liquidation creditors are to be treated equally, "in priority to all other unsecured debts and claims" and paid in a particular order. Of course, those post-liquidation debts are not limited to capital gains tax. They may include GST and income tax.
Two judgments at first instance which have considered s 254 and tax expenses - Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd and Benedict v Olde; in the matter of ATS (Asia Pacific) Pty Ltd - are instructive in the fact and manner of treatment of tax expenses incurred by receivers and liquidators. Lanepoint addressed s 254 of the 1936 Act in the context of receivers who, in the course of their duties, had generated income and derived a capital gain. French J (sitting as a single judge of the Federal Court) did not resolve the competing legal contentions concerning s 254 but held that the receivers were entitled to take the view that they were obliged to make appropriate provision against tax liabilities. Benedict concerned an application to terminate the winding up of a company in liquidation. There was a potential for liability for tax in respect of the trading undertaken during the period of liquidation. The liquidator sought directions and a regime was put in place to provide for the payment of "Expenses incurred by the Liquidator during the Liquidation". The State and federal taxes listed in the Order as "expenses" included employee PAYG tax payable to the Commissioner, GST payable to the Commissioner and payroll tax payable to the Office of State Revenue in Western Australia.
For those reasons, a liquidator's duties under, and the priority of payments provided for in, the Corporations Act are consistent with the construction of s 254(1)(d) that has the retention authorization and obligation applying on and from derivation.
(3) Agents
Section 254 also applies to agents. "Agent" is not exhaustively defined in the 1936 Act or the 1997 Act. It is notorious that it is a word which can be used in many different ways with many different meanings. The extent to which, and the manner in which, s 254 operates in relation to an agent is not the subject of these appeals. It is, however, appropriate to notice two facts and matters which may bear on those questions. They are facts and matters which illustrate that the construction of s 254(1)(d) that has the retention authorization and obligation applying on and from derivation will not result in practical difficulties in its application to an agent.
First, in its express terms, s 254 does not extend to all agents. It applies to "income, or any profits or gains of a capital nature", which have been "derived by the principal by virtue of his or her agency" (emphasis added). That conclusion about the scope of s 254 is reinforced by the reference in s 254(1)(b) to the fact that the agent is obliged to lodge a return "in his or her representative capacity only" and the further reference in s 254(1)(d) that the retention authorization and obligation only extends to money "which comes to him or her in his or her representative capacity".
Second, in relation to the predecessors to s 254, the view that has prevailed (since at least 1896) is that "[t]he word 'agent' obviously cannot extend to every agent for whatever purpose he [or she] may be employed". The predecessor sections were held to extend to persons who were connected with the principal's business and who received the gross proceeds (in which the net proceeds are included). "Agent" was limited to those persons "who have charge and control", "direction, control or management" or "management, receipt, disposal or control" of the income, profits or gains which would otherwise escape duty altogether. Indeed, the Commissioner may (and does) determine by notice in writing served on the "agent" that the Act, or a provision of the Act, applies to an entity as if the entity were an agent of another entity.
(4) Absurdity
The contrary construction of s 254, that the retention authorization and obligation under s 254(1)(d) would only arise after assessment, not only is inconsistent with the evident purpose of s 254, the text of s 254 and the other legal obligations of trustees (including liquidators) but leads to (or at least has the capacity to lead to) absurd results.
The contrary construction is inconsistent with the evident purpose of the provision because it would leave the agent or trustee vulnerable between the time of derivation of the income, profits or gains and the time of assessment to claims by the principal or beneficiary for payment over of that income or those profits or gains, thereby denying the agent or trustee the means to pay the tax in respect of that income or those profits or gains. That denial of means to pay would directly conflict with, and contradict, the statutory direction in s 254(1)(a) and (b) that the agent or trustee is answerable as taxpayer in respect of that income or those profits or gains and for payment of the tax thereon.
It could also lead to absurd results. The effect of accepting that the retention authorization and obligation under s 254(1)(d) only arises after assessment would be that in many cases the income, profits or gains that would generate the tax liability will have been distributed by the agent or trustee before the obligation to pay the tax arises. The agent or trustee would then seek to recoup the tax on the income, profits or gains in year 1 from those (if any) generated in year 2. That result ignores critical aspects of, and the text of, s 254.
It also ignores reality. There are at least two matters that need to be considered. First, the assessment process is now one of self-assessment - generally a system where the Commissioner is taken to have made, on the day the return is filed, an assessment of the relevant taxable income or net income and of the tax payable on that taxable income or net income, being the amounts as specified in the return. It would be an odd result that a trustee (including a liquidator) could meet their obligations (under both the revenue law and the general law) to prepare a return for filing by way of self-assessment, recognise that tax is payable on the income, profits or gains derived by them in their representative capacity, but then distribute the funds sufficient to pay that tax immediately before filing the return.
Second, the contrary construction ignores the fact that a liquidation effectively comes to an end when the liquidator has realised and distributed all the company's available property and made their report to the Australian Securities and Investments Commission. In many liquidations, that occurs relatively quickly and without the need for the company in liquidation to file an income tax return. In those cases, on the construction contended for by the Liquidators, the obligation to retain would never arise because a return would not be lodged and a deemed assessment would never be raised. Such a result is contrary to the express terms of s 254.
(5) Bluebottle
The construction this Court accorded to s 255(1)(b) of the 1936 Act, and, in particular, the words "is or will become due", in Bluebottle is inapplicable to s 254.
As acknowledged by this Court in Bluebottle, although there are "obvious similarities" in the wording of the retention authorization and obligation requirements in ss 254(1)(d) and 255(1)(b), the context of s 254 (and its predecessors) is "radically different" from s 255. The Commissioner identified a number of relevant differences. Those differences included the class of persons affected and their different tasks and roles, the different relationship each class has with the identified income, profits or gains, the different point at which the obligations attach, the different nature of the obligations imposed, the different subjects of the retention authorization and obligation and that the remedial powers in s 254 do not exist in s 255. The Commissioner's submissions should be accepted. It is to the differences identified by the Commissioner I now turn.
First, the class of persons to whom s 254(1) applies is different from and wider than the class of persons to whom s 255 applies. Section 255 applies to persons ("controllers") who have receipt control or disposal of moneys belonging to non-residents where it is the non-resident who has derived income, profits or gains from a source in Australia, or where the non-resident is a shareholder in a company deriving income, profits or gains from a source in Australia. Section 254(1) applies to a person falling within the definition of "trustee" in the 1936 Act, and to an "agent", who has derived income, profits or gains in a representative capacity.
Second, the classes of persons affected are in different positions. The Court in Bluebottle, when dealing with s 255, stated that "there is no reason to suppose that the controller of a non-resident's money would ordinarily, let alone invariably", have information to place them "in a position to make any useful prediction about the taxation affairs of the non-resident whose money the controller receives". That stands in stark contrast with the position of a trustee (including a liquidator) and an agent under s 254, which is likely to enable them to have, or acquire, a much greater familiarity with the taxation affairs of the beneficiary or principal. Indeed, as seen earlier, s 254(1) assumes and requires such familiarity by obliging (in s 254(1)(b)) the agent or trustee to make returns in relation to the income, profits or gains derived in their representative capacity. Moreover, the focus of the retention authorization and obligation in s 254(1)(d) is the amount sufficient to pay the tax in respect of the income, profits or gains derived in their representative capacity. The agent or trustee would know the amount of income, profits or gains they have derived in their representative capacity. Under s 255(1)(b), a controller does not necessarily know or understand a beneficiary or principal's taxation affairs for the relevant income year. They are simply in control of money belonging to a non-resident and respond to a notice requiring them to pay the tax specified in the notice from the money they control.
Third, the relationship of the agent or trustee in s 254 with the income, profits or gains the subject of the tax referred to in s 254(1)(a) is different from the relationship a controller has with the income, profits or gains referred to in s 255. In s 254, the agent or trustee derives the income, profits or gains in their representative capacity and pays tax on that income or those profits or gains. The relationship under s 254 is direct - consistent with the purposes of the section. In s 255, the moneys held by the controller need not have any relationship with the income, profits or gains derived by the non-resident or company the subject of the tax liability. Under s 255, the controller may be a complete stranger to the derivation of the income, profits or gains the subject of the tax. The controller simply has receipt, control or disposal of money belonging to a non-resident. The non-resident is the person who derives income, profits or gains from a source in Australia or who is a shareholder in a company deriving income, profits or gains from a source in Australia.
Fourth, the point at which the obligations attach to an agent or trustee under s 254 is different from the point at which they attach to a controller under s 255. Under s 255, it is only when the tax of the non-resident has become "due and payable by the non-resident" under s 255(1)(a) through an assessment of the non-resident that the controller can be required, by notice under s 255 issued to them, to pay the tax of the non-resident. Under s 254(1), the obligation engages at an earlier point in time - at the point of derivation of the income, profits or gains by the agent or trustee. It is at that point, and by force of s 254 itself, that the requirements of s 254(1)(a) and (b) attach to the agent or trustee.
Fifth, the nature of the obligations cast on an agent or trustee under s 254 is different from the nature of the obligations cast on a controller under s 255. As seen earlier, by making the agent or trustee "answerable as taxpayer", s 254 casts on them a wide-ranging responsibility to ensure assessment, and payment, of the tax due in respect of the income, profits or gains they derived in their representative capacity. That obligation arises before the time of the assessment of the income, profits or gains and includes the obligation to make returns and a liability to be assessed for the tax due in respect of the income, profits or gains. Section 255 does not make the controller "answerable as taxpayer", oblige them to make returns or render them liable to assessment on the income, profits or gains relating to the non-resident. It merely obliges them, when required by notice under s 255 being issued to them, to pay the tax that has been assessed to the non-resident from money of the non-resident which they control.
Sixth, the subject of the retention authorization and obligation in s 254(1)(d) is the amount which is sufficient to pay tax which is or will become due in respect of the income, profits or gains derived by the agent or trustee in their representative capacity. Accordingly, as was pointed out in Bluebottle, it is the amounts with which the agent or trustee deals that establish the relevant tax liability and mark its outer boundary. Under s 255(1)(b), the subject of the retention authorization and obligation is the amount sufficient to pay the tax which is or will become due by the non-resident. It could encompass the whole of the non-resident's taxation affairs in a relevant income year.
Seventh, s 255 lacks a remedial provision. Section 254(1)(h) further assimilates the position of an agent or trustee deriving income, profits or gains in a representative capacity to that of a taxpayer. It does that by giving the Commissioner, in respect of the income, profits or gains, the same remedies against the attachable property vested in or under the control or management or in the possession of the agent or trustee that the Commissioner would have against the property of any other taxpayer. Section 255 has no similar provision. The different statutory scheme created by s 255 does not require it.
"Judicial decisions on similar or identical legislation … are guides to, but cannot control, the meaning of legislation". "Judicial decisions are not substitutes for the text of legislation". In determining whether a decision on the construction of a phrase in one section can be applied in the construction of that phrase in another section, close analysis of the critical steps in the construction of the section is necessary.
That kind of close analysis reveals that the construction of the phrase "is or will become due" which the Court adopted in Bluebottle in relation to s 255 is inapposite to that phrase in s 254. In Bluebottle, critical to the construction of s 255(1)(b) was the intersection between the retention authorization and obligation in s 255(1)(b) and the obligation to pay in s 255(1)(a). The obligation to pay in s 255(1)(a) is an obligation to, when required by notice by the Commissioner under s 255 being issued to a controller, pay amounts assessed to the non-resident. The retention authorization and obligation in s 255(1)(b) intersected with, and was informed and given content by, what was sufficient to meet that obligation. Accordingly, the words "is or will become due" in s 255(1)(b) were construed as referring to tax assessed to the non-resident, although not yet payable.
What then is the position with s 254? The primary judge observed in s 254 the same "intersecting obligation" to which this Court referred in Bluebottle in relation to s 255. That statement, with respect, was incorrect. Section 254(1)(d) does intersect with and support the obligations in s 254(1)(a) and (b). But, as seen earlier, those obligations are different and more comprehensive, arise at an earlier time and are imposed on persons in a different position in relation to the income, profits or gains the subject of tax compared to those the subject of notice under s 255. Put another way, the nature and timing of the obligations in s 254(1)(a) and (b), with which s 254(1)(d) intersects and which s 254(1)(d) supports, are different from those in s 255(1)(a). The point of intersection, and the timing of engagement, of the retention authorization and obligation in s 254(1)(d) is different from, and earlier than, that in s 255(1)(b).
Conclusion
For those reasons, the appeals should be allowed.