Who is liable for a CGT event that is triggered by insolvency administration?

Insolvency statistics show that for the 2016-17 income year the number of insolvencies increased 2.1% compared to the previous year, according to the Australian Financial Security Authority (see a summary of the data here). By type of insolvency, bankruptcies decreased by 5.1%, however debt agreements were up by 11.9% and insolvency agreements increased by 39.4%.

But a question may arise when realising the insolvent person’s or entity’s assets about whether the sale of these assets (made while administering an insolvency agreement) creates a liability under the capital gains tax (CGT) legislation.

There are actually two parts to the same question regarding insolvency administration — who is responsible to pay tax on capital gains realised, and what happens to capital losses made available due to the same transaction?

Within ITAA97 there are provisions that deal with insolvent entities. Section 106.30, under the heading “Effect of bankruptcy”, states: “For the purposes of this Part and Part 3-3 (about capital gains and losses) … the vesting of the individual’s CGT assets in the trustee under the Bankruptcy Act 1966 … is ignored.”

The section goes on the say: “This Part, Part 3-3 … (applies) to an act done in relation to a CGT asset of an individual in these circumstances as if the act had been done by the individual (instead of by the trustee etc):

  1. as a result of the bankruptcy of the individual by the Official Trustee in Bankruptcy or a registered trustee, or the holder of a similar office under a foreign law;
  2. by a trustee under a personal insolvency agreement made under Part X of the Bankruptcy Act 1966, or under a similar instrument under a foreign law;
  3. by a trustee as a result of an arrangement with creditors under that Act or a foreign law.”

In other words, the vesting of assets by an administrator or trustee in a bankruptcy or liquidation is not a disposal of a CGT asset, and the beneficial owner does not change. Any acts of the insolvency administrator or trustee under Part 10 of the Bankruptcy Act (which allows a debtor to enter into an agreement with creditors to satisfy requirements without being made bankrupt — an insolvency agreement), are deemed to have been done by the debtor, not the trustee.

Treatment of losses
The procedure for capital gain calculations are touched upon in section 102.5 of ITAA97. However scroll down and an exception is revealed. This states: “However, if during the income year:

  1. you became bankrupt; or
  2. you were released from debts under a law relating to bankruptcy;

any net capital loss you made for an earlier income year must be disregarded in working out whether you made a net capital gain for the income year or a later one.”

So any capital losses accrued before the bankruptcy or insolvency administration are lost at the finalisation of the administration.

Who is liable CGT event triggered by insolvency administration? Who is liable CGT event triggered by insolvency administration? Who is liable CGT event triggered by insolvency administration?

 

Who is liable CGT event triggered by insolvency administration? Who is liable CGT event triggered by insolvency administration? Who is liable CGT event triggered by insolvency administration?