GST In These Troubled Times

A recent survey by Sydney's Daily Telegraph found "at the end of the day" to be the most irritating phrase in the English language. However, the current economic woes have set the scene for the crowning of a new champion, with the emergence of phrases like "global economic crisis", "financial meltdown" and the inevitable return of that old chestnut "in these troubled times"... a new winner to be sure!

Apart from a few minor linguistic irritations, a global economic downturn will damage Australia's economy and drive up the number of business failures. This will be the first real test of Australian businesses since the GST regime commenced on 1 July 2000. If corporate insolvencies increase dramatically then, sooner or later, the Tax Office will turn to insolvency practitioners to maximize dwindling tax revenues.

This paper looks at some developments in the law regarding the liability of insolvency practitioners for GST on supplies.

Personal liability – are we there yet?

The question of a liquidator's liability to account for GST arose in the Supreme Court of Queensland decision in Sunnyville Pty Ltd v ADIG (Australia Development and Investment Group) Pty Ltd & Anor [2006] QSC 249. In that case, ADIG had entered into a contract to sell land to Sunnyville. ADIG subsequently purported to sell the land to another buyer, JNJ Investments Australia Pty Ltd (JNJ), which handed over money in exchange for transfers and mortgage releases. Most of the money provided by JNJ was received by the mortgagees. Sunnyville lodged caveats and obtained an order for specific performance before JNJ could become registered as owner. At about the same time a liquidator was appointed to ADIG. Sunnyville subsequently obtained a declaration that its equitable interest ranked in priority to JNJ's equitable interest. Further proceedings followed and the liquidator of ADIG claimed an entitlement to a first ranking equitable lien for his reasonable costs, charges and expenses of completing the original sale to Sunnyville.

The liquidator contended that his costs might include a liability to pay GST of $300,000 and he pointed to the Explanatory Memorandum (E.M.) for the GST legislation to show that the intention of Parliament was to make liquidators personally liable for GST on supplies made during the period of their appointment. Sunnyville and JNJ both separately argued against this contention. Sunnyville submitted that there is nothing in the GST Act which clearly provides that the liquidator is the person who makes the supply in relation to pre-appointment contracts, which he merely carries into effect as agent of the company. Also, according to Sunnyville, it was unclear whether the liquidator would be personally liable to pay GST in relation to the company's supply. JNJ submitted that a claim for GST by the Commissioner of Taxation would be a matter of submitting a proof in the wind up because the contract was a pre-liquidation contract. JNJ argued that the Commissioner of Taxation had a 'future claim' that arose when the contract was made and the circumstances giving rise to that claim occurred before the 'relevant date' under s. 553 of the Corporations Act.

Lyons J found that "the state of the law is unclear and the view of the Deputy Commissioner in relation to the liquidator's liability is uncertain". However, her Honour commented that the view that a liquidator does not have a personal liability because he or she is an agent of the company "may prevail".

The Sunnyville case raises an important question of timing as to whether the 'supply' of the land to Sunnyville was made during the liquidator's period of appointment. The Australian GST law does not contain 'time of supply' rules (other than special transitional rules). However, the Tax Office view as to the 'day of supply' in the context of the sale of a going concern is discussed in GST Ruling GSTR 2002/5:

"The day of the supply occurs when the supplier has done everything to satisfy the obligations under the contract or arrangement governing the supply and the recipient has assumed effective control and possession of all of the things that are necessary for the continued operation of the enterprise." (at para 161)

In FC of T v Reliance Carpet Co Pty Ltd 2008 ATC 20-028, the Full High Court of Australia considered whether GST was payable on a forfeited security deposit under a land contract. The issues in the Reliance Carpet case surrounded the special attribution rules for security deposits (the 'wait and see' provisions), which provide that a security deposit is not treated as consideration for a taxable supply unless the deposit is forfeited because of a failure to perform an obligation or is applied as all or part of the consideration for a supply.

In a unanimous joint judgment the court found that upon forfeiture of the deposit by reason of the purchaser's failure to complete the contract, the 'supply' represented by making the contract became a 'taxable supply'.

The court considered whether this means that in a typical completion scenario there would be a second supply, in addition to making the contract, which is represented by the conveyance to the purchaser. Their honours concluded that no question of two 'taxable supplies' arises because of the 'wait and see' provisions. However, the decision anticipates two 'supplies', of which only one would ever be a 'taxable supply' because consideration is only attributed to the first supply if the deposit is forfeited.

It would seem to follow that the only 'taxable supply' that results where a land contract progresses to completion is the second supply, namely the conveyance to the purchaser. In the ordinary course, this second supply will happen on completion, which is consistent with the Commissioner's views in GSTR 2002/5.

The next important case is the decision of the Full Federal Court of Australia in Brady King Pty Ltd v FC of T 2008 ATC 20-034. There, the taxpayer entered into the purchase contract in May 2000 (pre-GST) and completion happened in October 2000 (post-GST). At some time after 1 July 2000 the land was redeveloped into stratum units. The taxpayer proceeded to sell the units under the margin scheme on the basis that it had 'acquired' the necessary interest in the units before 1 July 2000. Their honours allowed the taxpayer's appeal, reasoning that "once the 'precise juridical identity' approach is rejected and a more practical construction adopted, it is not possible to ring fence the interest the appellant acquired under the contract from the stratum unit which it later supplied to its customer". The court discussed the decision in Reliance Carpet and said that the High Court's "emphasis on the breadth of the statutory definition of 'real property' supports the conclusion that when the appellant entered into the contract on 22 May 2000 it acquired or held something that was an inextricable part of the interest which it sold after 1 July 2000".

The taxpayer in Brady King 'acquired' an interest in land when it entered into the purchase contract and the Full Federal Court considered, at least for the purposes of the margin scheme, that there should be no distinction between the interest acquired as purchaser under the contract and the stratum unit eventually sold to the taxpayer's customers. It may seem strange to say, on the one hand, that the relevant interest in land is acquired when the purchase contract is made while, on the other hand, the taxable supply (and corresponding creditable acquisition) in relation to the transaction does not happen until the contract is completed. This perceived inconsistency is attributed to the 'wait and see' rule for security deposits.

So what does this mean for the liquidator in the Sunnyville case? Applying the principles from Reliance Carpet, there were two distinct supplies to Sunnyville: the first happened when the contract between ADIG and Sunnyville was made, being before the liquidator's appointment; the second supply was the future conveyance of the land, which presumably happened while the liquidator was appointed. By virtue of the 'wait and see' rule, only the second of these was a taxable supply upon which GST was payable.

However, in Brady King the Full Federal Court explained the acquisition of the relevant interest in that case as follows:

"But that fee simple was not conferred on the appellant by the Lands Title Office without regard to anything the appellant had previously done to acquire it. The appellant was only able to complete the purchase and obtain registration because, by entering into the contract it had obtained or acquired enforceable rights against (and of course obligations to) the previous owner of the property. The Contract was the genesis or source of the appellant's interest in the stratum unit it supplied. In the language of the Commissioner's submission, the contract was the parent." (at para 27)

Once it is accepted that the genesis or source of a taxable supply of land is the contract, which in the Sunnyville case was made before the liquidator's appointment, the argument put by JNJ that the circumstances giving rise to a claim for GST occurred before the relevant date under s. 553 of the Corporations Act becomes much more appealing.

And what of the prophesy of Lyons J in Sunnyville? Namely, that the prevailing view might be that the liquidator does not have a personal liability for GST payable on taxable supplies made during his or her appointment because the liquidator is merely an agent of the company. The view stands in stark contrast to the E.M. to the GST Act, which explained the drafter's intention that:

"The representative is personally liable for the GST payable and for the other requirements of the Bill. The representative is liable from the date on 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.

"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." (at paras 6.272 to 6.273)

But this seemingly unambiguous statement requires further clarification. First, the E.M. suggests that the representative is liable for GST "attributable" to the period of the representative's appointment. This suggests that the representative may be liable for GST on pre-appointment supplies if the GST becomes payable while the representative is appointed. This may not accurately reflect the true intentions of the legislators and the Tax Office has taken a different course. Interpretative Decision ATO ID 2004/290 indicates that the GST on a taxable supply made by an incapacitated entity (say, an insolvent company) remains the liability of the company even though the GST is attributed to a tax period after the representative is appointed.

Secondly, there is nothing in Division 147, or elsewhere, that deems the representative to be carrying on the principal's enterprise. Unlike the special rules for mortgagee sale (which deems the sale to be a taxable supply if the sale would have been taxable had it been made by the debtor), Division 147 does not deem supplies by the representative of an incapacitated entity to be a taxable supply by the representative. If the GST law sought to impose a personal liability on representatives then that liability should be clearly stated in the Act; it should not be implied.

If a company is being wound up in insolvency by the court, or a provisional liquidator has been appointed, the liquidator (or provisional liquidator) must take control of all of the property of the company (s. 474 of the Corporations Act). However, it is well established that the property does not vest in the liquidator as trustee (see, Re Timberland Ltd (in liquidation) (1979) 4 ACLR 259; Commissioner of Taxation v Linter Textiles Australia Ltd (in liquidation) [2003] FCAFC 63; and Hamilton v Piggott Wood & Baker [2003] FCA 1055). Rather, the liquidator is the agent of the company.

The E.M. to the GST Act discusses the role of agents under the GST law and explains that:

"If you make supplies through agents the general law of agency applies. That is, a thing done by your agent as agent for you is a thing done by you. You are liable for the GST on taxable supplies and importations made through your agent. You are entitled to the input tax credits on creditable acquisitions and importations you make through your agent. Your agent is not liable for the GST and is not entitled to the input tax credits." (at para 6.277)

If a liquidator of a company is an agent of the company then any supplies made by the liquidator should be treated as having been made by the company. On that basis, the company should be liable for the GST on taxable supplies made through the liquidators as agent, unless the GST law expressly imposes a personal liability on the liquidator. In the writer's opinion there is nothing in the GST law that effectively shifts the GST liability from the company to the liquidator, other than in a reporting or administrative sense.

Subsection 444-70(1) of Schedule 1 to the Taxation Administration Act 1953 might be drawn on to support a view that the representatives of an incapacitated entity are personally liable. The subsection provides that where two or more representatives are appointed to the same incapacitated entity, "the representatives are jointly and severally liable to pay any amount that is payable under an indirect tax law by any of the representatives in relation to that same incapacitated entity".

Subsection 444-70(1) does not directly impose a personal liability on representatives; it only applies where there is an existing liability under an indirect tax law. It could be argued that to give effect to the subsection, there must be a liability imposed on representatives under the GST law. However, there may be a number of circumstances where the representative of an incapacitated entity has the primary liability under the ordinary GST rules, without implying a liability under Division 147. For example, the court may order that the property of a company vests in the liquidator pursuant to subsection 474(2) of the Corporations Act and in those circumstances the liquidator may hold and dispose of the property other than as agent.

Curiously, subsection 444-70(1) could have surprising implications where two or more representatives are appointed in different roles, such as where a receiver is appointed in relation to a company that is in liquidation, but that is the subject of a separate discussion.

At the end of the day

The decision of the Full Federal Court in Brady King indicates that the genesis or source of a taxable supply of land is the contract. If the contract is made before the liquidator is appointed then there seems to be substantial weight in the argument that a claim for GST by the Commissioner of Taxation should be a matter of proof in the winding up.

The contention that the liquidator is not personally liability for GST payable on taxable supplies made during his or her appointment because the liquidator is an agent of the company in liquidation is yet to be determined. In the absence of judicial guidance the Tax Office will almost certainly maintain that the liquidator is personally liable for post appointment supplies, but that claim is justifiably losing support.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.