GST and Stamp Duty in the context of an external administration
The external administration of a company involving as it often does, the relinquishment of the control of the company by its governing body to an external party, raises a myriad of complexities. These are mainly sourced in corporate and tax law.
Faced with the task of maximising value, an external administrator is equipped with powers ranging from carrying on the companys undertaking in the hope of salvaging it, to realising the companys assets as a forerunner to the cessation of the companys existence. As the exercise of these powers typically involves a dealing with assets, tax considerations will be relevant to an external administrators task.
This paper considers some of the GST and stamp duty issues in the context of an external administration of a company.
GST in the context of the external administration of a company
GST and that TAA (1)
The starting point to understanding the relevance of GST to external administrations is the basic premise that GST is payable by an entity which makes a taxable supply (2) (which is subject to a number of exceptions)(3).
Where an external administrator is appointed to a company, the Commissioner of Taxations position is fairly transparent. He will seek to recover any unpaid GST owing by the company for the period before and after the appointment.
The Commissioner is aided in his recovery of pre-appointment GST liabilities by Subdivision 260-B, 260-C and 260-D of the TAA. Subdivisions 260-B and 260-C impose an obligation on a liquidator or receiver who takes control of the assets of a company to notify the Commissioner of that fact within 14 days of taking control (4). As soon as practicable, the Commissioner is required to notify the liquidator or receiver of the amount necessary to set aside to cover the GST which is or may be payable by the company (5). The rules specify a formula for calculating the assets to be set aside (6).
The liquidator or receiver cannot, without the Commissioners permission, part with any assets of the company to pay an unsecured debt that is not required by any law to be paid in priority to the other debts of the company (7). The liquidator or receiver must then discharge the GST liability to the extent provided for by the assets which they have set aside (8). A failure by a liquidator or receiver to comply with these rules renders the liquidator or receiver personally liable to discharge the pre-appointment GST liabilities of the company (9).
Whilst these rules do not give the Commissioner any form of priority in relation to pre-appointment GST liabilities, they do seek to ensure that funds available to discharge those liabilities are so applied.
The Commissioners protection in relation to post-appointment GST liabilities is less certain under the TAA. It seems that the only avenue open to the Commissioner is to invoke the garnishee provisions in Division 260-A. Even so, the Commissioners ability to successfully recover post-appointment GST liabilities under those provisions is limited. This is particularly so where a notice under Division 260-A is given to a debtor after the appointment of a liquidator to the company (10).
It seems that Divisions 105 and 147 of the GST Act are aimed at ensuring that the Commissioner can recover post-appointment GST liabilities, perhaps even in priority to all other debts owed by the company. It has been suggested that they achieve this by imposing the GST liability personally on the external administrator. At issue is whether these Divisions achieve their intended purpose.
The operative provision of Division 105 is section 105-5 which provides:
You make a taxable supply if:
a. you supply the property of another entity (the debtor) to a third entity in or towards the satisfaction of a debt that the debtor owes to you; and
b. had the debtor made the supply, the supply would have been a *taxable supply.
The Division creates a hypothesis in that if applicable, it imposes a liability on the creditor to the extent that the supply would have been a taxable supply had the debtor made it. In this regard, account is not taken of whether the creditor made the supply in furtherance of an enterprise it carried on or of whether the creditor is registered or required to be registered (11).
A carve out exists, and the creditor is not taken to have made a taxable supply, in two cases. First, where the creditor is notified by the debtor (with reasons) that the supply would not have been taxable had the debtor made it (12). Second, if the creditor reasonably believes that the supply would not have been taxable had the debtor made it (13).
The threshold requirement which needs to be satisfied for Division 105 to apply is whether you, ie, the creditor, supplies property of another person. The following observations flow from this requirement:
a. Notwithstanding the breadth of a supply14, the application of Division 105 is limited to supplies of property of the debtor. Accordingly, it would not apply to supplies of non-proprietary assets such as information (JV (Crows Nest) Pty Limited v Commr of Stamp Duties (NSW) 85 ATC 4198; Pancontinental Mining Limited v Commr of Stamp Duties (Qld) 88 ATC 4190). Equally, it would not apply to the provision of services (eg, where a mortgagee in possession carries on the undertaking of a company which is a service provider).
b. The Division operates on the assumption that supplies can be made by one person (ie, the creditor) even though the owner of the property in question is someone else (ie, the debtor). This accords with the broad meaning of supply which is not limited by concepts of ownership. Additional support for this view is found in section 9-10(3) of the GST Act which renders irrelevant the lawfulness of the supply and would operate to forestall any suggestion that a supply, for example, of converted goods was not a supply (assuming it met all other relevant criteria).
c. The property in question must be that of the debtor and not that of the creditor. Interestingly, the Explanatory Memorandum to Division 105 gives as an example of when the Division will apply, the supply of goods by a creditor which it repossessed under a hire purchase agreement15. Recent authority would tend against the proposition that goods under a hire purchase agreement are the property of the hirer (ie, debtor) (Bellinz Pty Limited & Ors v FC of T 98 ATC 4634 ).
The most limiting aspect of Division 105 in the context of external administrations is that it requires you, ie, the creditor, to make the supply of the debtors property. This leads to an inquiry as to who made the supply? the answer to which will depend on the capacity in which the creditor makes the supply.
It is suggested that a creditor makes a supply only if the creditor supplies the property on its own behalf. A creditor, therefore, will not make a supply if it does so as agent for the debtor. This is because on ordinary agency principles, the supply in that case is made by the debtor and not by the creditor. This approach is consistent with that taken by the Commissioner in GSTR 2000/37 where he states (at 15):
When an agent uses his or her authority to act for a principal, then any act done on behalf of that principal is an act of the principal. Also, a principal is not bound by acts that are not within the expressed, implied or ostensible authority conferred on the agent. However, the principal may ratify or confirm an unauthorised dealing.
He then states (at 20):
Where a principal makes a taxable supply or a creditable acquisition through an agent, the GST payable by the principal or the input tax credit to which the principal is entitled would be attributable according to the basic attribution rules set out in sections 29-5 and 29-10 unless a special attribution rule applies. Similarly, the principal would attribute a decreasing adjustment according to the basic attribution rules set out in section 29-20 unless a special attribution rule applies.
This approach is also endorsed by the Explanatory Memorandum to Division 153 of the GST Act in which it is said (16):
6.277 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.
The issue then turns to the circumstances in which an external administrator will supply property of a debtor as agent for the debtor and on its own behalf.
If we focus on the common forms of external administrators, ie, receiver, receiver and manager, administrator appointed under Division 2 of Part 5.3A of the Corporations Act 2001, a liquidator and a mortgagee, we find that in most if not all cases, a receiver or receiver and manager appointed under an instrument of charge will be the agent of the company (17). Equally, an administrator appointed under Division 2 of Part 5.3A of the Corporations Act 2001 will be acting as the companys agent (18). Whilst the nature of a liquidators office has been described as a hybrid, composite with elements of fiduciary, trustee, agent, officer of the company and (in some instances) officer of the Court (19), a liquidator is generally described as a fiduciary agent of the company (20).
The only external administrator unlikely to be an agent of the company in the context of an enforcement is a mortgagee. A mortgagee who enters into possession of the mortgaged property does not do so in a fiduciary capacity (21) and in exercising a power of sale, does so on its own behalf (22).
If, therefore, the application of Division 105 depends on the creditor supplying the property of the debtor on its own behalf, and not as agent of the debtor, then the Division will not apply to supplies made by the more common external administrators, with the exception of a mortgagee exercising a power of sale.
Whilst this represents a narrow view of Division 105, there is a faint suggestion that the Commissioner accepts it. In the ATO Receivables Policy, Division 105 is described as follows (23):
Where control of a debtor's property has passed to a creditor, the creditor may be liable for GST on supplies of the debtor's property where the supply is in satisfaction of a debt owed to the creditor. Examples of situations that fall within the operation of Division 105 ANTS(GST)A 1999 include supplies made by a mortgagee who has taken possession of assets of a debtor or an entity that has repossessed goods under a hire purchase agreement. (Emphasis added).
Perhaps the fact that no mention is made of the other common forms of external administration is coincidental and little should be made of it. That might be so if it were not for the Commissioners view on the operation of Division 147 of the GST Act. As discussed below, the Commissioner takes the view that representatives of incapacitated persons, which comprise most common forms of external administrators but excluding mortgagees, are personally liable to pay any GST during the conduct of their administration. On that view, Division 147 fills the loophole in Division 105 and we are left with two mutually exclusive regimes; ie, essentially one applicable to mortgagees (Division 105) and one applicable to all other common forms of external administrations (Division 147). For the reasons given below, there appears to be doubt over the correctness of the Commissioners interpretation of Division 147.
Division 147 of the GST Act is headed Representatives of incapacitated entities and is expressed to be about the following (27):
Representatives of incapacitated entities may be required to register for GST purposes.
An incapacitated entity is either a bankrupt, an entity that is in liquidation or receivership or an entity that has a representative' (28). As discussed above, a representative includes most common forms of external administrators such as liquidators, receivers and voluntary administrators, but excludes mortgagees (29).
Division 147 deems a representative of an incapacitated entity to be required to be registered in that capacity (30), makes provision for post-appointment adjustments which relate to pre-appointment supplies by the incapacitated entity (31) and establishes that the tax periods applying to the representative during the appointment period are those which apply to the incapacitated entity (32).
Nowhere, however, in Division 147 is there any express provision like that, for example, in the UK (33), which shifts the GST liability of any taxable supply during the post-appointment period to the representative. Nor is this achieved indirectly, as is the case in New Zealand, by deeming the representative to be carrying on the enterprise of the incapacitated entity during the appointment period (34).
Despite this shortfall, the Explanatory Memorandum to Division 147 asserts its scope in these terms:
If you are registered and you become bankrupt, or go into receivership or liquidation, the person who conducts your enterprise on your behalf is, generally, personally carrying on the enterprise. This person (the representative) could be a trustee in bankruptcy, receiver, receiver and manager or a liquidator -- section 195-1 . The Administration Act provides for what happens to your GST liabilities if you die.
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 principal35.
This perceived operation of Division 147 has been adopted by the Commissioner in the ATO Receivables Policy which provides:
Representatives of incapacitated entities are required to lodge GST returns for tax periods during which they are registered in that capacity and are personally liable to pay any GST they incur during that period. However in some circumstances a GST liability that arises while a representative is registered may remain the liability of the incapacitated entity, for example an adjustment that relates to a pre-appointment supply (36). (Emphasis added).
It may be said that sections 147-20 and 147-25 are predicated on the assumption that Division 147 operates to shift the GST liability during the post-appointment period to the representative. That assumption also forms the basis of section 54 of the TAA which provides for joint and several liability of two or more representatives of an incapacitated entity in respect of their GST liabilities (and other tax related liabilities). Notwithstanding these provisions, a gaping hole still exists and it is suggested that a Court would need to undertake substantial drafting to fill it. On this front, whilst the intended position appears clear from the Explanatory Memorandum, a Court is unlikely to adopt that position if the language of Division 147 requires a different construction (37).
Perhaps the only way to shift the liability to the representative is if the representative makes the supply on its own behalf, which thereby brings the representative within the ordinary charging regime38. For the reasons given above, a representative will generally act as agent for the incapacitated entity. Accordingly, the ordinary agency rules will treat any taxable supply as being made by the incapacitated entity.
Stamp duty in the context of the external administration of a company
Enforceability of security documents
Whilst in all States except Queensland and South Australia, stamp duty on security documents is imposed on the person bound (ie, mortgagor, chargor or obligor), the documents will generally be inadmissible in enforcement proceedings unless they have been duly stamped (39). In fact, it is arguable that the sanction extends beyond inadmissibility to rendering the instrument a nullity until the correct duty has been paid and the document is duly stamped (40).
This restriction places the burden on a lender, and consequently an external administrator, of ensuring that all security documents have the correct amount of duty paid on them and that they are duly stamped. If this is not the case, a lender and an external administrator face the prospect of bearing the unpaid duty (including penalties and fines) in order to admit the security documents into evidence in enforcement proceedings.
Obligations of external administrators for post-appointment dealings
There are no specific exemptions for transactions undertaken by external administrators in relation to a companys assets (eg, a sale of assets). The duty consequences, therefore, are those which would have applied had the company undertaken the transactions in the ordinary course had the external administrator not been appointed.
Accordingly, an external administrator must be alive to any stamp duty liability which may be imposed on the company as a consequence of the dealings which it commits the company to as its agent. The most significant head of charge in this context is the conveyance head and in all jurisdictions except Queensland and South Australia, the duty under this head is imposed on the transferee41. Accordingly, except in Queensland and South Australia, the issue under this head of charge is unlikely to be of any real practical risk to the external administrator.
Exemptions for in specie distributions to shareholders on a winding-up
There is no uniform rule applicable in all jurisdictions which exempts from duty in specie distributions by a company to its shareholders on a winding-up. Instead, some jurisdictions allow an exemption outright, some allow an exemption only in limited circumstances and others do not allow an exemption at all.
A summary of the position is as follows:
a. In Victoria, a transfer of dutiable property made to a shareholder of a company in the course of a compulsory winding-up of the company is not liable to duty to the extent that the shareholder is not a creditor of the company. Transfer duty will only be avoided in the case of a voluntary winding-up if the Commissioner is satisfied that the company is not being wound up as part of an arrangement or scheme devised with the collateral purpose of reducing the duty otherwise payable on the transfer (42).
That aside, it is possible to obtain relief from stamp duty under the corporate reconstruction rules where the parties are 90%-100% group companies and have been such group companies for at least three years or from the time of the incorporation of either the transferor or transferee (43). There are two limitations to this form of relief. First, a claw-back obligation may apply consequent upon the liquidation if there is a change in the ultimate ownership of land in the possession of either the transferor or transferee within three years (44). Second, the transfer must not be made for the purpose of avoiding Victorian taxes (45).
b. In New South Wales the transfer is only exempt if it meets the requirements prescribed by the New South Wales Commissioner for corporate reconstruction relief (46). Under those rules, an exemption will only apply if the parties are 90%-100% group companies and have been such group companies for at least 12 months or from the time of the incorporation of either the transferor or transferee (47). An important limitation is that the exemption will not apply where a purpose of the transaction is to avoid any Commonwealth, State or Territory taxation (48). The position in New South Wales generally applies in the Australian Capital Territory (49).
c. In South Australia the transfer is generally exempt from duty (50).
d. In Queensland the transfer is not exempt from duty (51). It is, however, possible for an exemption to apply where the transfer is made between 90%-100% group companies (52). Claw-back of duty, however, will apply if the liquidation occurs within five years and a significant purpose of the liquidation was to effectively avoid a claw-back of duty (53).
e. In Western Australia the transfer is subject to duty unless the Commissioner is satisfied that the transfer is not made for a collateral purpose of avoiding stamp duty (54). Like Victoria, any duty saving is limited to the extent that the shareholder is not a creditor of the company (55). Whilst is it possible for an exemption to apply where the transfer is made between 90%-100% group companies56, its likely that there will be a claw-back of duty (57).
f. In the Northern Territory the transfer is generally exempt from duty unless the transfer is part of a tax avoidance scheme (58).
g. In Tasmania a transfer of dutiable property made to a shareholder of a company in the course of a winding-up of the company is not liable to duty to the extent that shareholder is not a creditor of the company (59). A requirement, however, is that the shareholder must have been a shareholder for at least 12 months immediately prior to the notice of appointment of liquidator being given under section 537 of the Corporations Act (60).
Creditors schemes of arrangement
With the exception of South Australia (61), there are no provisions which generally exempt duty on property transfers made by a company to creditors as part of a creditors scheme of arrangement under Part 5.1 of the Corporations Act.
Exemptions do apply, however, in the context of the landrich provisions (62). Under these provisions, duty at conveyance rates can apply to the transfer of majority or further interests in non-listed companies which are substantial landholders. Where the provisions apply, the duty attaches to the change in indirect ownership of the land interests owned by the company.
This paper was delivered on 27 November 2001 at a Taxation Institute of Australia Seminar on Corporate Insolvency.
1. Taxation Administration Act 1953.
2. A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-40.
3. See the list in GST Act section 9-69.
4. TAA sections 260-45(2) and 260-75(2).
5. TAA sections 260-45(3) and 260-75(3).
6. TAA sections 260-45(6) and 260-75(6).
7. TAA sections 260-45(4), (5) and 260-75(4), (5).
8. TAA sections 260-45(7) and 260-75(7).
9. TAA sections 260-45(8) and 260-75(8).
10. Macquarie Health Corporation Ltd & Ors v FC of T 2000 ATC 4015.
11. GST Act section 105-(2).
12. GST Act section 105-5(3)(a).
13. GST Act section 105-5(3)(b).
14. GST Act section 9-10.
15. Explanatory Memorandum to A New Tax System (Goods and Services Tax) Bill 1998 at 6.173.
16. Explanatory Memorandum to A New Tax System (Goods and Services Tax) Bill 1998 at 6.277.
17. Fords principles of Corporations Law 10th Ed at [25.090]; Corporations Act 2001 section 420C(3).
18. Fords principles of Corporations Law 10th Ed at [26.210]; Corporations Act 2001 section 437B.
19. Sydlow Pty Ltd (In Liq) v TG Kotselas Pty Ltd (1997) 144 ALR 159 at 163.
20. Loose on Liquidators, 3rd edition, 1989, at page 13.
21. D.F.C. of T. v General Credits Ltd 87 ATC 4918.
22. Ford and Lee, Principles of the law of trusts 3rd Ed at .
23. at 34.3.36.
24. See also ATO ID 2001/466.
25. See representative in GST Act section 195-1.
26. ATO Receivables Policy at 34.4.20.
27. GST Act section 147-1.
28. See incapacitated entity in GST Act section 195-1.
29. See representative in GST Act section 195-1.
30. GST Act section 147-5.
31. GST Act section 147-20.
32. GST Act section 147-25.
33. Value Added Tax Act 1994 (UK) section 46(4), Value Added Tax Regulations (UK) regulation 9.
34. Goods and Services Tax Act 1985 (NZ) section 58(1A).
35. Explanatory Memorandum to A New Tax System (Goods and Services Tax) Bill 1998 at 6.271-6.273. See similar comments in the Explanatory Memorandum to the Taxation Laws Amendment Bill (No.8) 2000 at 4.27.
36. ATO Receivables Policy at 34.4.20.
37. Grollo Nominees Pty Ltd & Ors v FC of T 97 ATC 4585 at 4623; Pearce & Geddes, Statutory Interpretation in Australia 3rd Ed at [3.18].
38. GST Act section 9-40.
39. Duties Act 2000 (Vic) (Vic Act) section 272; Duties Act 1997 (NSW) (NSW Act) section 304; Stamp Act (Qld) 1894 (Qld Act) section 4A(1) and Duties Act (Qld) 2001 (Qld Duties Act) section 487; Duties Act 1923 (SA) (SA Act) section 22; Duties Act 2000 (Tas) (Tas Act) section 246(2); Stamp Act 1921 (WA) (WA Act) section 27(1); Taxation (Administration) Act (NT) 1978 (NT TAA) section 121; Duties Act 1999 (ACT) (ACT Act) section 250(1).
40. Dent v Moore (1919) 26 CLR 316; Acclaim Holdings Pty Ltd v Vlado Pty Ltd (1989) 1 WAR 128; cf Comptroller of Stamps (Vic.) v. B.H. South Ltd 84 ATC 4635.
41. Vic Act section 12; NSW Act section 13; Qld Act section 26; Qld Duties Act section 17 which shifts the liability to the transferee; SA Act section 4(2); Tas Act section 11; WA Act Item 4 Second Schedule; NT Act section 50; ACT Act section 12.
42. Vic Act section 50.
43. Vic Act section 250 and Ruling DA 009.
44. Vic Act section 250 and Ruling DA 009 at 14.
45. Vic Act section 250 and Ruling DA 009 at 8.
46. NSW Act section 281 and Ruling Dut 009.
47. NSW Ruling Dut 009 at 9.
48. NSW Ruling Dut 009 at 4.
49. ACT Act section 232 and Instrument Number 246 of 2001.
50. SA Act section 71(5)(b).
51. See, for example, Qld Act section 49B.
52. Qld Act section 49C(2); Qld Duties Act section 406.
53. Qld Act section 49C(4)(b); Qld Duties Act section 413(4), with a reduced related period of three years.
54. WA Act section 74A(2).
55. WA Act section 74A(4) and (5).
56. WA Act section 75JB.
57. WA Act section 75JB(5a) and (5b).
58. Stamp Duty Act 1978 (NT) Schedule 2 Item 9.
59. Tas Act section 50.
60. Tas Act section 50(4).
61. SA Act section 71E(2)(c).
62. Vic Act section 84(1)(c); NSW Act section 119(1)(b1); SA Act section 101(2)(a); Qld Act section 56FA(1)(f); Qld Duties Act section 193; WA Act section 76(1)(b)(iii); Tas Act section 72(1)(c) and NT TAA section 83A(2)(c).