The decision of the full Federal Court in Commission of Taxation v Australian Building Systems Pty Ltd (in liq) has confirmed that a liquidator’s obligation to retain funds sufficient to pay tax under s 254(1)(d) of the Income Tax Assessment Act 1936(“the Act“) only arises after an assessment has been issued by the ATO.


During the financial year ended 30 June 2012, the liquidators of Australian Building Systems (“ABS“) caused it to sell a property. ABS made a capital gain of approximately $1.12 million on the sale which entered into the calculation of ABS’ assessable income of that year. It was accepted by both parties that when an assessment of taxable income regarding the capital gain was issued that it would be issued to ABS as opposed to the liquidators.

No notice of assessment had been issued in this case.


The Commissioner claimed that under section 254(1)(d) of the Act the liquidators became liable to retain an amount sufficient to pay the tax that would become due in respect of the net capital gain when they received the proceeds from the disposal of the property. As a result, it was not necessary for a notice of assessment to have already been issued before the retention obligation could arise.

On the other hand, ABS and the liquidators submitted that, in the absence of an assessment, there could be no obligation.

Section 254(1)(d) of the Act

Section 254(1)(d) of the Act states:

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

…(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.

Decision and Consequences

Justice Edmonds, with Justices Collier and Davies agreeing, held that the words ‘the tax which is or will become due’ contemplate an existing liability or a state of affairs which it can be presently said a liability will arise in the future.

Consequently, they held that there can be no tax which “is…due” by the liquidators prior to the issue of an assessment to the liquidators. Further, they held that it cannot be said that tax “will become due” in the sense of “owing” prior to assessment being issued. This is because one or more beneficiaries may be presently entitled to the whole of the income of the trust estate and therefore the trustee would have no liability.

It should be noted that there is still uncertainty about whether section 254 of the Act gives the Commissioner a priority which overrides ordinary unsecured creditors under section 556 of the Act. Therefore, it may be prudent for liquidators to retain sufficient funds to meet any potential liability that will arise once an assessment has been issued.

Andrew Fletcher has completed the Australian Restructuring Insolvency & Turnaround Association (ARITA) run Insolvency Education Program, is a current member of ARITA and is qualified to provide advice in relation to restructuring, turnaround and insolvency.


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