07 Oct 14 Taxpayers not entitled to small business CGT concessions - Scanlon
The AAT has affirmed the Commissioner's objection decisions dismissing the taxpayers' objections to assessments in which the Commissioner denied the taxpayers the benefit of the small business CGT concessions under Div 152 ITAA 1997. The Commissioner's assessments were based on the conclusion that the taxpayers had failed to meet the maximum net asset value test in s 152-15.
The taxpayers disposed of their shares in a company called L & R Health Care Centre Pty Ltd ("the company"). They did so pursuant to an offer that was initially made in a letter from the purchaser delivered on or about 22 November 2006. On or about 24 November 2006, the taxpayers signed the letter from the purchaser indicating that they were in agreement with the offer made in the letter. The offer was said to be subject to certain conditions precedent. In December 2006, one of the taxpayers caused the company to resolve to provide eligible termination payments (ETPs) to each of the taxpayers, both of whom were employees of the company. The total of the ETPs was $2,750,000. A Share Purchase Agreement was executed on 8 January 2007, in which the purchaser agreed to pay
- a total of $4,750,000 for the taxpayers' shares
- $6,500,000 in discharge of a loan owed by the company
and to ensure that the company paid the ETPs to the taxpayers.
The value of all payments amounted to $14,000,000.
The AAT considered a number of issues, including:
- whether the taxpayers each satisfied the maximum net asset value test in s 152-15, that is, whether each of their CGT assets, being their share in the company, did not exceed $5,000,000 just before the CGT event, and that includes:
(i) establishing when CGT event A1 occurred in each case;
(ii) whether the company had a liability to pay the ETPs to the taxpayers just before the time of CGT event A1;
(ii) if the company had the liability referred to in (ii) above, whether it was related to the assets of the company; and
(iv) whether the taxpayers' right to receive their respective ETPs should be disregarded because the right was used solely for their personal use and enjoyment;
- whether the amount of the ETP received by each of the taxpayers should be included in their capital proceeds for CGT purposes; and
- were the taxpayers liable to an administrative penalty in the event that the AAT were to find that they did not satisfy the maximum net asset value test and that the ETP received by each of them ought to have been included in their capital proceeds for CGT purposes.
The AAT held that CGT event A1 happened when the taxpayers signed the letter of offer on or about 24 November 2006. Accordingly, just before that time, there was no liability on the company to pay the ETPs. Even if that were wrong, and there was such a liability, it did not relate to the assets of the company (being the goodwill). Nor were they "using" the rights to receive the ETPs, such that the rights could be excluded from the net asset value of the CGT assets to be taken into account for the purposes of the maximum net asset value test. Further, the ETPs formed part of the capital proceeds for the disposal of the shares in the company.
The AAT concluded that the taxpayers had failed to meet the maximum net asset value test in s 152-15.
The AAT also rejected the taxpayers' arguments against the Commissioner's imposition of administrative penalties for failure to take reasonable care.
Scanlon and FCT  AATA 725 (AAT, Fice SM, 3 October 2014).