Goods and Services Tax (GST) Groups consist of two or more business entities that are treated as a single entity for GST purposes. One of the main benefits is from the "representative member" system, where one of the GST Group members is nominated as the representative. The representative member is responsible for paying the group's GST debts, which reduces administrative costs of compliance with GST. However, s.444-90 of Schedule 1 to the Tax Administration Act 1953 (TAA) makes all members of a GST Group jointly and severally liable for the GST payable by the representative member of the group.
It is important that companies within GST Groups have knowledge of the representative GST member. As the liability of the companies are several as well as joint, where there are several debts payable by each of them, each separate GST debt can be treated as if it was a claim against each entity. Unfortunately, a company's records may not readily indicate the existence of a representative (e.g. they may reside with an external tax agent).
Insolvency practitioners ought to inquire specifically when appointed as administrators or liquidators of a corporate group if a GST representative has been appointed. This also ought to be asked of the ATO.
Case
In Application of Solomons & Tayeh [2012] NSWSC 923, Addisons acted for the plaintiffs, who were formerly voluntary administrators of companies which were part of a group of companies known as the Johnson Property Group. The plaintiffs subsequently became trustees of a creditors trust.
The applicants sought judicial advice under s.63 Trustee Act 1925 regarding the interpretation of a creditors trust deed. Section 63 allows a trustee to obtain advice from the Court, which gives protection to the trustee. One purpose of s.63 is to allow a trustee to obtain judicial advice about commencing or defending legal proceedings. Judicial advice was only available to the plaintiffs in their capacity as trustees, and not as former administrators.
Facts
Thirteen companies were members of a GST Group. Their creditors resolved the companies enter into a deed of company arrangement (DOCA) whereby they would be subsequently subject to one creditors trust deed, and the DOCA would then be effectuated. At the time of the administrators' appointment, each of the companies was jointly and severally liable for GST, as there existed a representative member.
This was unknown to the administrators at the time of the creditors meeting. The ATO had not lodged multiple proofs of debt at that time for unpaid GST, nor alerted the administrators to the representative appointed.
The plaintiffs sought advice as to whether they were able to treat multiple proofs lodged by the ATO as being a single liability of the Trust, and pay the multiple claims for the group GST lodged by the ATO as being one debt payable to the ATO. The ATO lodged its multiple claims only after the trust deed was executed.
The plaintiffs submitted:
- According to the DOCA, if the companies were to be treated as a single entity then claims for the same liability against each of them should be regarded as a single claim; and
- If the ATO proved only once this would ensure a better and fairer return to creditors under the Trust Deed.
Judgment
White J held:
- In the distribution of the trust fund, each claim by creditors against a company was to be treated equally along with claims of other creditors;
- Having regard to the DOCA, where all Claims against companies are to be "pooled", the proper construction is that each separate Claim is to be treated as a claim against the notional single entity;
- There was nothing in the trust deed or DOCA to suggest that Claims were extinguished or merged into other Claims;
- A fundamental principle of admission of proofs in administration of insolvent companies is that there cannot be recovery that exceeds the amount of liability. In the circumstances, the full amount of the ATO debt was able to be recovered even through lodgement of multiple proofs.
Therefore his Honour found the plaintiffs were not justified in treating multiple proofs lodged by the ATO as being a single liability, and the ATO was entitled to lodge multiple proofs of debt for the same underlying GST debt.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.