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Did you know that bankruptcy trustees are now liable for capital gains tax (CGT) on the sale of real property? Section 254 of the Income Tax Assessment Act 1936 (Cth) imposes specific obligations on trustees and agents, covering income, profits, and gains of a capital nature in their representative capacity. This has recently taken on new importance for bankruptcy trustees.

What has changed?

Prior to June 2021, bankruptcy trustees were not responsible for any capital gains tax (CGT) arising on the disposal of a CGT asset in administering a bankrupt estate.

Despite vesting in a bankruptcy trustee on appointment, the Income Tax Assessment Act 1997 (Cth) section 106-30 deems all assets of a bankrupt estate as being owned by the bankrupt individual.

Before June 2021, bankruptcy trustees didn’t have to worry about CGT when selling assets in a bankrupt estate. Why? The Income Tax Assessment Act 1997 (Cth) section 106-30 deemed all assets of the bankrupt estate to be owned by the individual, not the trustee. So, if the bankrupt person owned the asset, wasn’t the tax their responsibility?

Revised interpretation of Section 254

Recently, the Australian Taxation Office (ATO) has revised its interpretation of section 254 to also apply to bankruptcy trustees. The revised position is such that, bankruptcy trustees:

1. are obliged to meet tax obligations arising from capital gains that they have caused to arise in their “respective capacity” as bankruptcy trustee in administering the bankrupt estate;
2. must apply for a tax file number and lodge a tax return for the bankrupt estate if they derive a capital gain during their appointment; and
3. are required to retain money to pay any resulting liability following receipt of a Notice of Assessment from the ATO.

Federal Court decision

You might wonder: is this really enforceable? The Federal Court thinks so. In Robson as trustee for the bankrupt estate of Lanning v Commissioner of Taxation [2024] FCA 720, the ATO’s approach to the application of section 254 on bankruptcy trustees was upheld by the Federal Court.

In this case, Mr. Robson, acting as the trustee for Mr. Lanning’s bankrupt estate, sold two properties that resulted in capital gains liabilities. Robson challenged the ATO’s position, arguing that he wasn’t acting in a “representative capacity” and that the sale should be treated as the bankrupt’s, not his.

Robson applied for a private ruling by the Commissioner of Taxation in respect of his liability for the payment of CGT on the properties. However, the Commissioner disallowed the objection and found that he was liable for the CGT.

Robson sought to have the decision appealed by the Federal Court, and his argument was framed such that:

1. he was not acting in a “representative capacity” and thus there was no fiduciary relationship between the bankruptcy trustee and the bankrupt; and
2. the properties were not owned by him, but merely vested in him, meaning that disposal of the properties should be considered to be that of the bankrupt, not him.

Nonetheless, the Federal Court upheld the Commissioner’s decision in finding that trustees in bankruptcy are liable for GGT for all relevant sales of property made in their capacity as trustee of the bankrupt.

Application of the Bankruptcy Act 1966 (Cth)

Despite this outcome, it is important to note that section 109 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) enables a bankruptcy trustee to apply proceeds of the sale of an asset to cover the tax liability expense, as a priority payment.

Where tax has been assessed on a capital gain derived by a trustee in managing an estate, and the bankrupt will not pay the tax, the trustee should treat the liability as an expense of the estate within the meaning of section 109(1)(a) and regulation 25 of the Bankruptcy Regulations 2021 (Cth) (the Regulations).

Regulation 25(1) of the Regulations sets out the order in which the trustee must apply the proceeds of the property for the purposes of section 109(1)(a). Depending on the nature of the event giving rise to the CGT liability, the liability may potentially be covered under items 3 or 5 of the table, being:

1. an expense reasonable incurred by (or on behalf of) the trustee in:
   • protecting all/part of the bankrupt’s assets; or
   • carrying on, in accordance with the Bankruptcy Act, a business of the bankrupt;
2. fees, costs, charges or expenses (other than those covered in another item of the table) paid or payable by the trustee in administering the bankrupt’s estate.

Need more information?

Understanding your responsibilities as a bankruptcy trustee can prove to be a headache without obtaining appropriate legal advice.

If you are involved in a dispute about your obligations, or need further guidance, contact us today to get the clarity and support you need.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.