Executor goes bankrupt – Accountant powerless – reposted by Andre Di Cioccio

Question: There is a new case where the trustee’s personal liability is extended. Even the courts are following a socialist agenda. Our accounting practice assists many executors of deceased estates. Does this extension of liability also extend to executors?

Answer: The case in question is Barkworth Olives Management Ltd v DCT [2010] QCA 80. The facts are: Barkworth administered an estate. It didn’t get one red cent from the estate. No money came into the estate. However, the ATO (who is a wicked power freak) decided to tax Barkworth on all income. In total, this came to over $80m. The assessment was initially under section 99A Income TaxAssessment Act 1936 . The deceased had been involved with a tax effective scheme.

When executors administer estates, their actions are regulated under the local state Trustees Act. Trust law states that a trustee is responsible for all losses and expenses incurred by a trust. However, the trustee is also entitled to an indemnity against these losses.

Further, taxation legislation holds the trustee responsible for lodging tax returns and paying tax. It also limits personal liability for associated tax debts. Our Platinum Members can read how section 254 of the ITAA operates here.

Let’s look closer to the taxation of the income of trust estates: Division 6 of Part III of ITAA 1936. “Net income” of a trust estate is taxable income. Section 96 states that a trustee is not liable as trustee to pay income tax upon the trust income except where the Act so provides. Accordingly, where tax is payable upon the trust income, it is the beneficiary who is assessed and is liable to pay the tax. This is unless some provision exceptionally renders the trustee liable. Where a beneficiary (not under a legal disability) is presently entitled to the trust income then the trustee is not liable to pay tax on the trust income. The beneficiary is assessed and liable to pay that tax: section 97.

However, if the beneficiary is under a legal disability, the trustee is assessed and pays the tax: section 98. Or, if no beneficiary is presently entitled to part of the trust income the trustee is assessed: sections 99 and 99A.

Barkworth argued that the law requiring it to pay tax on the deceased’s estate was reduced by section 254(1)(e) ITAA36. Therefore, it should not be personally liable for any taxes merely stated in a notice of assessment because it did not receive a cent of the monies subject to taxation.

Barkworth argued that the process of assessment of a trustee did not involve the ATO in determining the amount of money which the trustee received or retained in the trustee’s representative capacity for the purposes of section 254(1)(d). The ATO agreed with this.

In my 21 years of practice there has never been certainty as to the trustee’s tax liability. This causes confusion and uncertainty about trustee obligations.

Summary

However, there is now some clarity after the decision in Barkworth Olives Management Ltd v DCT. Thanks to this decision, a trustee is now personally liable for the entire trust tax debt – or in this case the estate’s tax debt. The trustee’s personal liability is not limited to the amount it should have retained. In particular Judge Fraser states:

“For these reasons I construe s 254(1)(e) as having no potential application to limit a trustee’s personal liability where the trustee is assessed to tax under a provision in Div 6 of Pt III, such as s 99A, which expressly provides for the liability of the trustee; that is so at least where the same person remains trustee during the whole of the period in which the relevant taxable income is derived and up to and including the date upon which the liability for tax accrues under s 204.”