Like every other working individual, Liquidators are also faced with that three letter word ending with an X which everybody loves to hear, TAX! A Liquidator’s duty in dealing with the assets of a Company under Liquidation can generally be summarised into a three step process as follows:-
- Identify the Assets;
- Secure the Assets; and
- Sell/Realise the Assets
It is at this third step that the Liquidator has sold and disposed of a Capital Gains Tax (“CGT”) Asset of the Company which opens the question of tax, particularly, those consequences borne by the Liquidator. Prior to 1985, individuals and entities alike were only subject to tax on the derivation of income and not the disposal of CGT Assets. However, since the introduction of the Capital Gains Provisions within the Income Tax Assessment Acts, dealing with the disposal of Assets has become more burdensome and complicated for Liquidator’s.
The starting point in dealing with the disposal of CGT Assets in a Liquidation is to determine who the CGT Asset actually “vested” in. Section 104-10 of Income Tax Assessment Act 1997 (“the Act”) provides that the CGT Asset vests in the Company and that the Liquidator did not acquire such CGT Asset upon their appointment. Therefore, upon disposal of the CGT Asset, CGT event A1 being the disposal of a CGT Asset, is not attracted by the Liquidator, rather it is attracted by the Company in Liquidation. A summary of the CGT events can be found under Section 104-5 of the Act.
This is reinforced under Section 106-35 of the Act which provides that any act done by a Liquidator in relation to the disposal of a Company’s CGT Asset, is said to be an act undertaken by the Company and not the Liquidator. This removes the Liquidator from any personal liability arising from the disposal of such CGT Assets. Essentially, this means that the net capital gain arising from the disposal of the Company’s CGT Asset is an increase in the Company’s Income Tax Liability.
As such, the Commissioner of Taxation (“CofT”) is entitled to adjust his claim against the Company in the Liquidation. For example, if the CofT makes a $100,000 claim against a Company in Liquidation, and during the course of the Liquidation the Liquidator sells a CGT Asset of the Company attracting a net Capital Gain of $20,000, then the CofT is entitled to adjust his claim to $120,000 ($100,000 plus $20,000). Accordingly, in the event the Liquidator is with sufficient funds to declare a dividend to Creditors; the CofT is entitled to the adjusted calculable return $120,000 claim.
As such, unless the CGT Asset is disposed of again after the disposal made by the Liquidator, then no CGT liability payable against an individual or entity has been incurred. It should be noted that the CGT provisions included within the Act limit the liability of the Liquidator on the disposal of CGT Assets, however, it does not eliminate personal liability in full. There are other complex areas involved in Liquidation scenarios which may make the Liquidator personally liable for net capital gains. In such complicated situations it would be diligent for all Insolvency Practitioners to obtain the appropriate Taxation advice.