BANKRUPTCY TRUSTEES: HOW TO NAVIGATE CGT LIABILITIES PRUDENTLY

Bankruptcy trustees can act prudently in seeking a private binding ruling from the ATO in respect of their potential CGT liability.

Last year, the Federal Court gave judgment in Robson v COT [2024] FCA 720 where, by way of summary, a bankruptcy trustee was liable for CGT arising from the sale of properties sold in the course of their administration. By way of operation of the income tax laws, the capital gain was calculated as if it were made by the bankrupt and it became an ancillary liability on the bankruptcy trustee.

That case demonstrates that a bankruptcy trustee will want to ensure they make provision for tax liabilities for which they are personally liable (especially prior to paying dividends to creditors).

One way to derive certainty is to seek a private binding ruling from the ATO. A recent ruling result is a good example of this. see ATO Legal database

In this private ruling, the facts are that, prior to bankruptcy, the relevant individuals entered into an ‘off the plan’ contract for the purchase of a proposed lot. A contract of sale was was also entered into. Subsequently, the individuals became bankrupt. After appointment of the trustee, the purchase and sale contract were settled simultaneously.

In this ruling, the ATO held that the gain made on the disposal of the property was not derived by the trustee in its representative capacity and the other provisions of the relevant provision did not make the trustee liable for income, profit or gains from the property disposed.

Whilst this ruling is not a binding precedent for other taxpayers, in this case, the ATO held that the trustee had not derived the capital gain from the disposal of the property as the contract was entered into, and the gain derived, prior to their appointment. This is a different outcome than Robson where the relevant disposal contract was entered into after the trustee’s appointment.

As a result, the trustee likely has a greater pool of funds to distribute to pay fees, disbursement and make payments to commercial creditors.

The team at SMAILES KRAWITZ has experience in dealing with these matters, including tax compliance, reviews, audits, voluntary disclosures, reviews/appeals, debt disputes, director penalty matters and criminal prosecutions.

The material in this article is provided only for general information. It does not constitute legal or other advice.

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Alan Krawitz21 January 2025