Upcoming Mallesons seminarsThis decision will impact both insolvency practitioners (including liquidators, administrators and receivers) and creditors of insolvent companies.
What do you need to do?Creditors should consider whether they will be entitled to increased distributions from liquidators, administrators and receivers as a result of the decision. Insolvency practitioners will also need to consider how they will now deal with GST liabilities that arise post appointment in light of this decision.
Matthew Cridland
Senior Associate
Frank Brody
Partner
T +61 3 9643 4075
Sydney
Peter Green
Melbourne
Peter Fogarty
Perth
On 12 December, Logan J of the Federal Court handed down his decision in a GST “test case”. The case involved the sale of “new residential premises” (which attracted GST) by a liquidator that had been appointed to a company. The question was which entity is liable for the GST on the sale: the liquidator (personally) or the company?
The decision is reported as Deputy Commissioner of Taxation v PM Developments Pty Ltd [2008] FCA 1886.
Logan J's decision
Logan J held that the company was liable for the Goods and Services Tax (“GST”) on the sale of the premises and that the liquidator was not personally liable for the GST. He also held that the GST on the sale fell within the category of costs and expenses to be applied in accordance with and under s556(1)(a) of the Corporations Act (“Corps Act”). He further directed that the GST on the sale be paid proportionately by the liquidator (subject to liens in favour of creditors under s556(1)(a) of the Corps Act) to discharge priority payments (pursuant to s559 of the Corps Act).
While the case dealt only with supplies by a liquidator, the decision will likely be equally applicable in the context of supplies by receivers or managers and administrators.
ATO's view on supplies by liquidators, receivers, managers and administrators (“representatives”)
Under the GST Act, liquidators, receivers, managers and administrators are all collectively referred to as “representatives of incapacitated entities”. The view of the Australian Taxation Office (“ATO”) is that such representatives are personally liable for any GST payable on taxable supplies that are made by a company post appointment.
The ATO ranks as an unsecured creditor in respect of pre-appointment liabilities (meaning that generally, it will not recover pre-appointment GST liabilities in full). However, if a representative is personally liable for the GST liability that arises post appointment, the ATO is likely to recover its GST liability on post appointment supplies in full.
It is highly likely that the ATO will appeal this decision to the full Federal Court (and then possibly further). In the short term, the ATO will likely issue a “decision impact statement” that will explain how the ATO proposes to administer the GST Act following the decision and during the appeals process.
Impact for representatives
The decision may seem like a win for representatives. However, in practice, most representatives have simply adopted the ATO's view and treated themselves as being personally liable for GST post appointment.
In light of this decision, representatives will likely come under increased pressure from creditors to distribute GST amounts (as opposed to paying such amounts to the ATO). Representatives may also now find that they will come under pressure from creditors to seek refunds of GST that has incorrectly been paid to the ATO in the past, so that the refund amount can be distributed to creditors.
Impact for creditors
If the decision stands, it is a win for creditors, as it means that GST amounts are available for distribution by liquidators (and other representatives).
If the decision is appealed, creditors may not immediately see the benefit of this decision, as many representatives will likely continue to pay GST to the ATO until the outcome of any appeals is known (so as to avoid late payment penalties and interest in the event that the decision is subsequently overturned).
Will the GST Act be retrospectively amended?
The Explanatory Memorandum to the GST Act would seem to make it plain that it was the Government's intention to make representatives personally liable for GST post appointment. Logan J has held that the legislation is not effective in achieving this result. It may be that this deficiency will now be corrected through legislative amendment, possibly with retrospective effect. Retrospective amendments have been made to the GST Act as a result of court decisions in the past.