Who Is Liable for Cgt in the Administration of a Bankrupt Estate?

November 30, 2021

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May 20, 2022

Where a trustee in bankruptcy sells a CGT asset, formerly owned by a bankrupt individual, in the administration of a bankrupt estate, a long-standing view held by bankruptcy lawyers and trustees in bankruptcy has been that the trustee is not responsible or liable for any CGT obligation of the bankrupt as a result of the sale.

The ATO has recently published a contrary view, being that the trustee in the above position would be personally liable for CGT payable upon the sale of an asset in the administration of the bankrupt estate.

The relevant provision of the Income Tax Assessment Act 1936 (Cth) is section 254. In short, section 254 of the ITAA imposes various obligations upon agents and trustees (in their capacity as agent or trustee) in respect of income, profit or gains of a capital nature derived by the agent or trust in that representative capacity.

In addition, section 106-30 applies in respect of bankruptcy to provide special rules where a capital gain or loss is made by someone other than an entity to which a CGT event happens. The traditional view of section 106-30 is that it operates to the effect that the relevant CGT asset is taken to be owned by the bankrupt individual, despite the fact that the asset is vested in the trustee in bankruptcy. It also ensures that no disposal is taken to arise for CGT purposes on the vesting of the asset in the trustee in bankruptcy by operation of the Bankruptcy Act.

A newsletter of the Australian Financial Security Authority dated June 2021 states:

“While section 106-30 of the ITAA 1997 makes a capital gain or loss that has been derived by a trustee in bankruptcy attributable to the bankrupt individual instead of the trustee for CGT purposes, section 254 of the ITAA 1936 makes a trustee answerable as the individual taxpayer.”

This apparent change in position of the ATO presents uncertainty for bankruptcy practitioners, bankruptcy lawyers and individuals in the bankruptcy process. Until the position is clarified, bankruptcy practitioners should ensure that they make adequate provision for CGT on assets before making distributions to creditors. Should they fail to make adequate provision, they may be personally liable for any shortfall in CGT paid by the bankrupt estate.

Carneys Lawyers’ bankruptcy lawyers regularly advise insolvency and bankruptcy practitioners in all aspects of bankruptcy administration and court applications. Our bankruptcy lawyers are also highly experienced at advising individuals and creditors involved in the bankruptcy process. 

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