Much was written about the Federal Court’s decision the PM Developments Pty Ltd case. In that case the Federal Court decided that a liquidator in particular (but external administrators in general) were agents of the entities over which they were appointed. The consequence of that is that GST payable on post-appointment transactions was payable by the company and had the same priority as other costs of the liquidation.
We failed to see a great practical significance in that decision, as we always pay the costs of administrations in full (including any GST on post-appointment transactions) and certainly before we draw any fees. From our point of view, whether the legal responsibility for GST was with the entity or the practitioner was not important, it was always paid. We can foresee that in some instances this may be an issue for practitioners.
The Government has announced that it intends to amend the GST law (effective from 1 July 2000 to “ensure that representatives of incapacitated entities are liable for GST on post-appointment transactions”.
The government’s position was set out in a media release as “The Court’s finding is contrary to the underlying policy intention and the way the law has been administered since the introduction of GST. In the interests of providing certainty for all representatives of incapacitated entities, the Government is announcing today its intention to amend the GST law to restore the status quo“.
In effect the change will be to move the practitioner from being an agent of the entity entering into a transaction that has GST consequences, to the entity that actually conducts the transaction – for GST purposes anyway.
Will this retrospective action affect Worrells? Not really. We ensure that all GST liabilities are paid anyway. GST is collected and remitted on relevant transactions, usually after deducting the appropriate credits. We as a firm cannot think of any instance when the GST has not been paid. Frankly we were of the opinion that we would be held personally liable if we did not.
Will this amendment change the position of unsecured creditors or employees? No. Costs of the liquidation or bankruptcy have to be paid before dividends (regardless of their priority) anyway. These changes will not affect them.
Will these changes affect secured creditors (assuming that the changes relate to these types of appointment, and they most likely will)? Possibly.
If a controller sells an asset, they will have to pay the GST or be personally liable for it. Only the net proceeds would be paid to the secured creditor. If the asset is sold before a controller is appointed, the GST liability will rest with the company and the secured creditor will be able to exercise its security over the money, taking the gross proceeds of the transaction (before the GST is paid). This would leave the GST liability unpaid and claimable in any liquidation of the company.
The obvious point is that the ATO (the Australian taxpayer) would be subsidising the payment to the secured creditor at times when the asset secured under the charge is worth less than their amount of their secured debt. As an Australian taxpayer, that prospect does not thrill me.
Even without knowing the detail, we can say that the general principle proposed in the change of legislation does not concern us at all.
Deputy Commissioner of Taxation v PM Developments Pty Ltd  FCA 1886