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Client Update: GST and representatives of incapacitated entities

29 July 2009

In brief: In an attempt to reverse the effects of a recent court decision, the Federal Government has released draft legislation intended to make the representative of an incapacitated entity (and not the incapacitated entity) liable for GST on supplies made by the incapacitated entity. Partner Michael Perez (view CV), Senior Associate Chris Peadon and Lawyer Gulfam Ahmed report.

Introduction

In our Client Update (December 2008) we reported on the Federal Court's decision in Deputy Commissioner of Taxation v PM Developments Pty Ltd.1

In that case, it was held that, contrary to the intention expressed in the Explanatory Memorandum to the GST legislation2 (the GST Act), the company in liquidation (and not the liquidator) was liable for GST on supplies made by it during the course of being wound up.

The Government has released draft legislation intended to reverse the effect of the decision in PM Developments.

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Background

In PM Developments, a liquidator had been appointed to a company; ie, an 'incapacitated entity' under the GST Act.

The liquidator, on behalf of the company, entered into a contract to sell a parcel of land owned by the company. The sale was one to which GST applied and the liquidator collected from the purchaser the GST amount on the sale. The GST amount was applied by the liquidator to meet costs associated with the liquidation of the company. This left no amount for the Commissioner of Taxation for the GST on the sale of the land by the company..

Proceedings were commenced in the Federal Court to determine who was liable for the GST on the sale of the land – the liquidator or the company. If the company was liable, the Commissioner would not recover the GST, as the company had insufficient funds to pay that amount. If the liquidator was liable, the Commissioner could claim the GST amount from him, despite the fact that the company had insufficient funds.

The Commissioner (among others) relied on the Explanatory Memorandum to the GST Act, which supported the proposition that, in these circumstances, it was intended that the liquidator, and not the company, be liable for GST on the sale of the land.

The Federal Court agreed that the Explanatory Memorandum evidenced that intent but held that Division 147 of the GST Act failed to give effect to that intent. Consequently, the court held that the liquidator was not liable for GST on the sale of the land and that the GST liability rested with the company.

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The exposure draft legislation

The Government has released draft legislation that effectively reverses the decision in PM Developments.

Some of the key features of the proposed legislation are that:

  • Supplies, acquisitions or importations by representatives are taken to be supplies, acquisitions or importations of the incapacitated entity (and not its representative).
  • Certain acts or omissions of the representative are taken to be acts or omissions of the incapacitated entity.
  • Subject to certain exceptions, representatives will:
    • be liable for GST;
    • be entitled to input tax credits; and
    • have adjustments if the making of the supply, importation or acquisition to which the GST, input tax credit or adjustment relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.
  • Representatives must, if directed to do so, give the Commissioner a GST return for a tax period applying to the incapacitated entity.
  • In certain circumstances, representatives must not declare dividends to unsecured creditors without first notifying the Commissioner.
  • Representatives will be indemnified for any payments made to meet their GST obligations so long as they act in 'good faith'.
  • Under the transitional provisions, the Commissioner will be granted an extension to the four-year time limit to recover GST which was refunded following the decision in PM Developments.

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Supplies, acquisitions or importations by representatives of incapacitated entities

The proposed legislation will treat an incapacitated entity (and not its representative) as having made all the supplies, acquisitions or importations in the period of the representative's appointment.

The incapacitated entity will also generally be taken to have done all of the acts or made all of the omissions that were done or made by the representative for the purposes of working out whether:

  • a supply is a taxable supply or taxable importation;
  • an acquisition is a creditable acquisition or creditable importation; and
  • an adjustment arises in relation to a supply, acquisition or importation, or the amount of such an adjustment.

This will ensure that any GST liability (or input tax credit entitlement) under the new provisions is determined by reference to the characteristics of the incapacitated entity.

However, it is the representative, and not the incapacitated entity, that will be liable to pay any GST. The representative will also be entitled to any input tax credits and will have any adjustments that the incapacitated entity would otherwise have had (but for the GST grouping rules).

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GST returns

The Commissioner can direct a representative to provide a GST return for a tax period applying to an incapacitated entity where the incapacitated entity has not provided one. This direction may even be made for periods prior to the appointment of the representative.

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Notifying the Commissioner of certain liabilities

Under the proposed legislation, the representative of an incapacitated entity that is in liquidation cannot declare a dividend to unsecured creditors if it becomes aware, or could reasonably be expected to become aware, that:

  • the incapacitated entity is liable for an amount of GST, or has an increasing adjustment; and
  • the amount of GST, or the adjustment, is attributable to a tax period applying to the incapacitated entity for which a GST return has not been given to the Commissioner.

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Indemnities

Representatives that are liable to pay an amount under the proposed legislation will be authorised and required to apply any money they receive to pay that liability. The proposed legislation also confers on the representative statutory protection from any claims arising from the application of funds by the representative towards paying the incapacitated entity's GST liabilities. The protection, however, is effectively limited to cases where the representative has acted in good faith.

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Ranking of creditors

It would seem that the practical effect of the proposed legislation is to give the Commissioner priority in relation to GST arising from transactions following the appointment of a representative to an incapacitated entity. This is at odds with the general position of the Commissioner in relation to other GST liabilities and income tax.

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Retrospective effect

The proposed legislation will take effect from 1 July 2000. This puts into question the impact of the legislation for representatives that have acted in accordance with the decision in PM Developments, and are facing a personal liability for GST where the GST collected was, at the time, lawfully distributed. Take the example of the liquidator in PM Developments. The GST collected on the sale of the land was lawfully applied towards payment of liquidation-related expenses of the company. After application of that amount and all other amounts available for distribution by the company, there was no amount left to satisfy the GST payable on the sale of the land. If the proposed legislation is enacted, it means the liquidator would be liable for the GST amount without recourse to funds from the company (ie, as there are none).

Published 29 July 2009

Footnotes
  1. [2008] FCA 1886.
  2. A New Tax System (Goods and Services Tax) Act 1999 (Cth).

For further information, please contact:

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