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CGT liability in Insolvency

Is it fair that when a Trustee in bankruptcy sells the property of a bankrupt, it is the bankrupt who bears the liability for capital gains, even though the bankrupt may receive no proceeds at all from the sale?

In a recent articleby Michael Murray it was stated that the Australian Restructuring Insolvency & Turnaround Association (" ARITA") was awaiting clarification on the ATO's view that CGT liability for assets sales in corporate insolvency falls on the practitioner,whereas the ATO takes a different view in personal insolvency.

To summarise the issue, when a trustee sells an asset that results in a CGT liability, that liability remains with the bankrupt personally, and not with the trustee. This has been the view in the past and is supported by s 106-30 of the ITAA 1997 which provides an example, stating that "A CGT asset of an individual vests in a trustee because of the bankruptcy of the individual. No CGT event happens as a result of the vesting. The trustee later sells the CGT asset. Any capital gain or loss is made by the individual, not the trustee."

The ATO appears to take the view that the liability for CGT on any capital gain made on the sale by the trustee is borne by the bankrupt, not the trustee, in the year of income in which the disposal occurs.

While ARITA offers no view on the correctness of these views or on its fairness to the former bankrupt, we are of the view that this approach is patently unfair to the bankrupt.

The asset vests in the Trustee and the bankrupt has no control over its sale. The bankrupt receives no proceeds from the sale, at least until the bankrupt's creditors have been satisfied in full, but bears the liability for the capital gain, if any. This liability takes effect from the date of the sale, and as it is a post-bankruptcy event, the liability survives the bankruptcy and has to be paid by a bankrupt who has no divisible assets or funds with which to do so. The outcome could result in a second bankruptcy, which benefits nobody.

In the corporate situation, s 106.35 of the ITAA 1997 is worded similarly as with bankruptcy, however, the difference here is that the company, which bears the liability, is still under the control of the liquidator. Accordingly, the liability for any capital gain, falls on the liquidator in that capacity. Thus, before the liquidator may distribute any funds to creditors, he first needs to satisfy the company's post-liquidation liability to the ATO, including the capital gain.

Interestingly, this may give rise to another issue. Picture a scenario where the mortgagee sells a property of the company in liquidation. No funds are available to the liquidator, but the company still has a liability for the capital gain.

This again, appears to be unfair

 

 

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