Readers may recall an article in our March 2009 e-update (“PM Developments and the proposed amendments”) dealing with the decision in PM Developments and its perceived effect on insolvency practitioners. It was decided in that case that a liquidator in particular (but external administrators in general) were agents of the entities over which they were appointed and that GST payable on post-appointment transactions was payable by the company and had the same priority as other costs of the liquidation. They could not be provable debts as they were not incurred before the commencement of the liquidation.
We also mentioned that we failed to see any practical significance in the decision as we (Worrells) have always held that GST on post-appointment transaction was a cost in the estate and paid them with all other costs of administrations. The government announced at that time that it was considering amendments to the law to “ensure that representatives of incapacitated entities are liable for GST on post-appointment transactions”. They have been true to their word.
New draft legislation an Exposure Draft Bill, and the following media release deals with that legislation.
Assistant Treasurer, Senator Nick Sherry, has today released for consultation an Exposure Draft Bill aimed at protecting $655 million in revenue, put at risk as a result of a decision last year of the Federal Court concerning insolvency and the application of the goods and services tax (GST).
“The court’s decision goes against the underlying intention of the GST law, as clearly stated and applied since its introduction nine years ago.”
“Up to $655 million in revenue could be lost if the Government doesn’t take this action.”
“The decision has also created a degree of uncertainty for the business community and insolvency practitioners in particular.”
“These amendments will restore the policy intent as clearly stated in the Explanatory Memorandum to the law introducing GST,” the Assistant Treasurer said.
The amendments contained in the Exposure Draft Bill became necessary after the Federal Court decision in Deputy Commissioner of Taxation v PM Developments Pty Ltd . The court found that the GST liability for transactions occurring during the period of a liquidator’s appointment is the liability of the company in liquidation and not the liquidator.
The intention of the GST law is that the liquidator of an insolvent company is responsible for paying GST on transactions made in their capacity as the liquidator of that insolvent company.
If left to stand, the Federal Court decision would mean that the GST liability would instead fall to the insolvent company, greatly reducing the likelihood of payment.
The $655 million is made up of refunds of GST already paid and ongoing revenue costs over the forward estimates.
The amendments will apply from the commencement of the GST law on 1 July 2000.
It still seems that the most significant change proposed will affect secured creditors. If the current commentary is correct, controllers will soon have to pay GST on sales of assets before handing money to their secured creditor – where the PM Development decision will allow them to pay the full proceeds (including any money received as GST on the sale) and leave the GST debt with the company, to be proved in its liquidation if it cannot be paid. We made the observation in March that the Australian Taxpayer effectively would be subsidising payments to secured creditors – and we are sure that was not intended in the legislation or the PM decision.
There is also some commentary that suggests that the new amendments will give the ATO a higher priority than unsecured creditors for pre-appointment debts. We are not sure whether we have interpreted that commentary as intended, but we will have to wait to see whether this is the intention of the government. Nothing we have seen by the government suggests that this is likely to occur.
We have always been of the view that any GST consequences of actions by Representative of Incapacitated Entities form part of the costs of that estate and should be paid before dividends to any creditors. Whether practitioners are personally liable or not, the monies received for GST in a transaction should be paid after relevant deductions.