Issued
2007
Decision
13 Jun 2007
Appeal Status
Appealed

Trustee liable for post bankruptcy tax debt

2007 case note – following bankruptcy a trustee may not trade and incur debts with impunity from liability for GST - contingent liability tax, personal liability.

Case
The Commissioner of Inland Revenue v Philip John Duncan
Legal terms
Trustee, contingent liability tax, bankruptcy, personal liability for GST

Summary

A Trustee may not after being bankrupted, continue to trade and incur debts with impunity from liability for GST. If he chooses to do so he incurs a fresh liability that is not provable in his bankrupt estate.

Facts

In proceedings brought by the Commissioner to recover the output tax and associated penalties, both the District Court and High Court held in favour of Mr Duncan, the Respondent. This was an appeal against the decision in the High Court.

The Commissioner had claimed that the Respondent, as trustee of a property development trust, was personally liable pursuant to section 57(3) of the Goods and Services Act 1985 for the GST debt of a trust. The Respondent denied personal liability and relied upon section 87 and section 114 of the Insolvency Act 1967, alleging that he had been bankrupted and the debt should have been proved in his bankruptcy.

The trust had made input tax claims before the Respondent was bankrupted but the output tax was incurred during the period of his bankruptcy.

The District Court held that, at the date of the Respondent's adjudication, the relevant output liabilities were contingent liabilities for the purposes of section 87(1) as tax would always have been payable, it was just a matter of when and how much.

In the High Court Chisholm J upheld the decision of the District Court but on different grounds. He overturned the District Court's finding that the output tax was a contingent liability of the Respondent at the date of bankruptcy. However, he went on to hold that the output tax arose out of obligations incurred before adjudication. Those obligations were the obligations that the Respondent incurred to the financier of the project to develop and sell the property.

Decision

For the purposes of section 87(1), the Respondent's potential liability for output tax was not, at the date of his adjudication, a contingent liability. At the date of adjudication the Respondent was under no commitment to pay the output tax liabilities which later came to charge.

Secondly, the output tax liabilities were not debts and liabilities to which the Respondent became subject to by reason of any obligation incurred before the time of his adjudication. Therequires that the relevant debt or liability be to the party to whom the pre-adjudication obligation was owed.

As a consequence the output tax liabilities were not provable in the Respondent's bankruptcy.

The Respondent could have resigned as trustee or left the development in the hands of the financier which would have been liable for the output tax as it sold the units. He elected to continue to trade after bankruptcy and there is no injustice in holding that he must meet the liabilities.

The appeal was allowed and judgment was entered for the Commissioner.

Goods and Services Act 1985, Insolvency Act 1967