F I S C A L
W A T C H
CGT – Small business tax concession –
Maximum net asset test
The CGT provisions provide small
business owners with concessions in
relation to capital gains made on the
disposal of certain assets which may lead
to no tax being payable on those capital
gains.
One of the alternative tests for the
availability of the concessions is that
the taxpayer must satisfy the maximum
net asset value test. In working out the
maximum net asset value of the assets
of a taxpayer, you deduct the taxpayer’s
liabilities relating to those assets (amongst
other things) from the sum of the market
value of those assets.
The question of what liabilities are related
to an asset for the purpose of these
provisions has recently been considered
by the Full Court of the Federal Court.
At the time of the events in this case, the
maximum net asset value test threshold
was $5 million (it is currently $6 million).
In determining a liability of the taxpayer
for the purposes of determining the net
value of the CGT assets of the taxpayer,
it is necessary to establish whether the
contended liability is a liability of the
taxpayer just before the CGT event. The
critical date for the CGT event is the date
of the contract for the disposal and not
completion of that contract.
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This issue was critical in this case because
the taxpayer was either above or below the
threshold depending upon whether or not
certain liabilities could be deducted from the
market value of those assets.
The taxpayer in this case worked out their
maximum net asset value by deducting
the agent’s commission and certain legal
and accounting fees related to the sale of
assets from the market value of the assets.
Although such expenditure clearly could be
taken into account in working out the capital
gain or capital loss arising from the disposal,
the issue was whether or not they could be
deducted as a liability of the taxpayer just
before the disposal.
Due to its quantum, the critical expense was
the agent’s commission. However in relation
to this commission, no obligation arose for
the taxpayer to pay that commission until
the sale completed which of course was not
just before the CGT event. There was some
conjecture on the Bench as to the whether
or not the liability for the commission could
then have arisen just before the CGT event.
1
However Justice Greenwood (within
whom Justice Dowsett concurred)
held that “the liabilities of the entity”,
not being a defined term, must bear its
broad understanding. Therefore that
expression included contingent liabilities
such as the kind of burdens arising out of
performance of a contract pre-dating the
CGT disposal event over a reasonably
lengthy time. The agency agreement
which pre-dated the CGT event involved
a provisional obligation on the taxpayer
to pay a commission subject to certain
events being satisfied, including the agent
being the effective cause of the sale.
Therefore the agent’s commission
could be included in the liabilities to be
deducted from the market value of the
assets of the taxpayer.
In relation to the legal fees incurred on
the asset sale, some of these involved
work after the CGT event and therefore
this part of the fees were not allowed to
be deducted in calculating the net asset
value.
October 2011
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CGT – Deceased’s main residence
The law at present allows a period
of grace to sell a deceased’s main
residence without there being any
CGT consequences in relation to
the disposal. The period of grace is
2 years from the date of the death of
the deceased.
An exposure draft has been issued that
proposes to give the Commissioner of
Taxation a discretion to extend this 2 year
period. The Explanatory Memorandum
(EM) indicates that, although the
following examples are not exhaustive,
the Commissioner would be expected to
exercise discretion in situations where:
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•
the ownership of a dwelling
or a will is challenged
•
the complexity of a deceased
estate delays the completion of
the administration of the estate
•
a trustee or beneficiary is unable to
attend to the deceased estate due
to unforeseen or serious personal
circumstances arising during the 2 year
period. Examples include the taxpayer
or a family member having a severe
illness or injury
•
settlement of a contract of sale over the
dwelling is unexpectedly delayed or falls
through for circumstances outside the
beneficiary or trustee‘s control.
2
The EM also indicates that in exercising
this discretion, the Commissioner is
expected to consider whether and to
what extent the dwelling is used to
produce assessable income and the
period that the trustee or beneficiary held
the ownership interest in the dwelling.
The amendments will operate
retrospectively and will apply in relation to
CGT events that happen in and from the
2008-09 income year. Also the time limit
on amendment to income tax returns will
not apply so that taxpayers can seek the
exercise of the Commissioner’s discretion
as if the law had been in force at the time.
October 2011
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NSW duty assessment –
Sale of reversionary interest of land –
Effect of long term lease on value disregarded
The NSW Duties Act has a specific
anti-avoidance rule that enables the
Commissioner when determining the
dutiable value of dutiable property,
to disregard any interest, agreement
or arrangement (other than an
encumbrance) granted or made in respect
of the dutiable property that has the effect
of reducing the dutiable value.
An interest, agreement or arrangement
may not be disregarded if the Chief
Commissioner is satisfied that it was
not granted or made as a part of an
arrangement or scheme with a purpose
of reducing the duty otherwise payable
on the dutiable transaction. In considering
whether or not he or she is so satisfied
the Chief Commissioner may have regard
to the following matters:
•
the duration of the interest,
agreement or arrangement before
the dutiable transaction
•
whether it involves an associated
person
•
whether there is any commercial
efficacy to it other than the reduction
in duty, and
•
any other matters the Chief
Commissioner considers relevant.
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The NSW Court of Appeal had to consider
this rule in a case where there was a sale
of the freehold interest in land which was
subject to a concurrent lease for 300 years
that had been granted by the vendor to
another company some 20 months earlier.
The lease was on terms requiring payment
of a large premium, but a nominal rental.
Duty had been paid on the concurrent
lease on the premium. The purchaser paid
duty on the basis of the reduced value of
the reversionary freehold caused by the
presence of the 300 year lease. The Chief
Commissioner applied the anti avoidance
rule to assess duty as if the freehold land
was not affected by the 300 year lease.
The NSW Court of Appeal held that these
provisions in the NSW Duties Act invited
a comparison between the dutiable value
of the dutiable property and its dutiable
value if the relevant interest had never been
granted. In this case, the comparison that
has to be made is between the value of the
freehold reversionary estate (that is, the
estate subject to the lease) and the freehold
estate if the concurrent long lease had never
been granted. If the dutiable value calculated
on the latter basis is greater than the actual
dutiable value of the dutiable property, the
effect of the grant of the concurrent long
lease is to reduce the dutiable value of the
dutiable property.
3
The Court therefore found that the
Chief Commissioner, in determining
whether or not to be satisfied that an
interest, agreement or arrangement
was not granted or made as a part of an
arrangement or scheme with a collateral
purpose of reducing the duty otherwise
payable on the dutiable transaction,
must first form a judgment as to what
dutiable transaction would have occurred
but for granting or the making of the
interest, agreement or arrangement. If
the comparison between this counterfactual and the actual dutiable transaction
indicates that duty payable has been
reduced, the Chief Commissioner must
then consider whether a reduction of duty
was a collateral purpose (not necessarily
a dominant purpose) of the granting or
the making of that interest, agreement
or arrangement, taking into account the
specified matters.
The Court held the subjective purpose
of the parties could be taken into account
although it noted that if the Court was
wrong on that point the purpose of the
parties objectively determined in this case
indicated a reduction of duty was in fact
collateral purpose of the granting of the
long term lease.
This indicates that care must be taken
when dealing with interests in land
where long term leases are involved. It
is not sufficient that the purchaser of the
reversionary freehold interest and the
lessee of the long term lease are different
parties.
October 2011
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Assessment contrary to
private ruling not invalidly issued
In a recent case, the Full Court of the
Federal Court had to consider the
validility of an assessment issued by the
Commissioner that the taxpayer claimed
to be contrary to a private ruling and
therefore was infected with jurisdictional
error.
The Court noted that a private ruling
can only bind the Commissioner in
respect of the arrangement ruled upon.
Therefore the taxpayer may only rely
upon the ruling if the taxpayer acts in
accordance with the terms of the ruling.
However if the taxpayer enters into
different arrangements, or does not act
in accordance with the ruling because of
changed circumstances, then it is clear
that the private ruling does not bind the
Commissioner.
The Court held that this meant that
without a factual investigation, it could
not be said that, the assessment was
inconsistent with the private ruling and
therefore made by the Commissioner in
breach of the relevant provisions of the
Tax Acts. The Court determined that
the appropriate place to deal with this
issue was therefore through the objection
and appeal processes under the relevant
legislation and not by way of a declaration
as to the invalidity of the assessment.
For further information contact:
Alan Jessup
Partner
+61 2 9253 9911
[email protected]
Aaron Chan
Senior Associate
+61 2 9253 9988
[email protected]
Contact us
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Important Disclaimer: The material contained in this publication is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness
or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions
resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. PB004 10/11