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19 Apr 12 CGT small business concession not available – Phillips

The Administrative Appeals Tribunal has affirmed the Commissioner’s decision that the net value of the CGT assets of a company was not to be reduced by an amount secured by a mortgage given by the company to secure an advance to another company in the same group. Since the net value of the company’s CGT assets therefore remained above the then threshold of $5 million in s 152-15 ITAA 1997 (since increased to $6 million), the small business CGT concession in Subdiv 152-C (small business 50% reduction) was not available.

The taxpayer was a director and shareholder of a series of interlocking companies. In particular, the taxpayer was the sole shareholder in Phillips Fabrications Pty Limited. As part of a company restructuring devised by the taxpayer’s accountants, an independent valuation was obtained of the value of the taxpayer’s shares in Phillips Fabrications Pty Limited. On 30 January 2006 those shares were sold to the corporate trustee of the Phillips Family Trust for the sum of $3,400,000.00.

Another company of which the taxpayer was a director and shareholder, P Price and Co Pty Ltd, mortgaged land which it owned for the sum of $1,400,000. That amount was advanced by the mortgagee bank to the trustee of the Phillips Family Trust.

In an amended assessment issued to the taxpayer, the Commissioner included capital gains amounting to $1,700,000 and imposed a shortfall penalty. The taxpayer’s objection was disallowed, and the matter went to the Tribunal.

The primary issue in dispute was whether the net value of the CGT assets of P Price and Co Pty Ltd exceeded the sum of $5 million. This in turn depended upon the categorisation of the sum of $1,400,000 advanced by the bank to the trustee.

The Tribunal referred to the definition of “net value of the CGT assets” in s 152-20, which provides that the net value of the CGT assets of an entity is the amount (if any) by which the sum of the market values of those assets exceeds the sum of (among other things) the liabilities of the entity that are related to the assets. The Tribunal noted that the definition requires that the relationship exist between the liabilities and assets of the entity in issue, not any assets held by other connected entities. In this case, the CGT assets of P Price and Co Pty Ltd could not be reduced by the sum advanced to the trustee. The Commissioner’s amended assessment was affirmed, both as to tax payable and to penalty.

Re Phillips and FCT [2012] AATA 219 (Administrative Appeals Tribunal, M D Allen, Senior Member, 17 April 2012).

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