ALtNOT PTY LTD and COMMISSIONER OF TAXATION
[2013] AATA 140
•15 March 2013
CATCHWORDS – TAXATION – CAPITAL GAINS TAX – whether assessment excessive - whether applicant meets
maximum net asset value test to qualify for small business concessions – whether assets above $5,000,000 – point in time test – wife of sole director of applicant not an entity connected with it and so assets not to be included in test – realty interest of applicant’s sole director to be included – his real property not “being used” solely for personal use and enjoyment just before the CGT event.
Federal Commissioner of Taxation v Byrne Hotels Qld Pty Ltd [2011] FCAFC 127
Hospital Benefit Fund of Western Australia Inc v Minister of Health, Housing and Community Services [1992] FCA 599; (1992) 39 FCR 225; 111 ALR 1; 28 ALD 50; 16 AAR 566
Income Tax Assessment Act 1997, ss 4-5, 4-10, 102-5, 102-20, 104-5, 104-10, 108-5, 152-5, 152-15, 152-20, 152-25, 152-30, 152-40, 152-305, 995-1
Taxation Administration Act 1953, s 14ZZK
Chambers 21st Century Dictionary, 1999, reprinted 2004, Chambers
DECISION AND REASONS FOR DECISION [2013] AATA 140
ADMINISTRATIVE APPEALS TRIBUNAL )
) 2011/4873
GENERAL ADMINISTRATIVE DIVISION )
ReALTNOT PTY LTD
Applicant
AndCOMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal: Deputy President S A Forgie
Date: 15 March 2013
Place: Melbourne
Decision:The Tribunal decides to:
(1)set aside the respondent’s objection decision dated 15 September 2011 in so far as it disallows the applicant’s objection against the inclusion of the CGT assets of Mrs Pauline Roberts in applying the maximum net asset value test under s 152-15 of the Income Tax Assessment Act 1997;
(2)remit the objection decision to the respondent to reassess the applicant’s liability to CGT on the basis that the CGT assets of Mrs Pauline Roberts are not taken into account in applying the maximum net asset value test under s 152-15 of the Income Tax Assessment Act 1997; and
(3)otherwise affirm the respondent’s objection decision.
(sgd) S A Forgie
Deputy President
REASONS FOR DECISION
On 15 September 2011, the Commissioner of Taxation (Commissioner) disallowed the objection made by Altnot Pty Ltd (Altnot). Altnot had objected to the Commissioner’s amended assessment in which he increased its net capital gain for the income year ending 30 June 2007 from nil to $1,000,000 and increased its taxable income from nil to $995,535. The issues that remain in dispute between Altnot and the Commissioner turn on whether it is eligible for the small business concessions provided by Subdivision 152-C (the 50% active asset reduction) or Subdivision 152-D (the business retirement concession) of the Income Tax Assessment Act 1997 (ITAA97). In order to be eligible for either of those concessions, Altnot had first to satisfy the requirements of Subdivision-A of Division 152.
There are two issues remaining in dispute between Altnot and the Commissioner.[1] Both are relevant in determining whether Altnot satisfies the maximum net asset value test under s 152-15 that the sum of the various amounts shown in that provision do not exceed the sum of $5,000,000. The first issue is whether Mrs Roberts’ CGT assets, including a half share worth some $600,000 in a Queensland property, are counted in applying that test because she is connected with Altnot. I have decided that she is not connected with it and her CGT assets are not taken into account. That means that Altnot has satisfied its burden of proof under s 14ZZK(b)(i) of the Taxation Administration Act 1953 that the assessment is excessive in that regard. The second issue is whether Mr Roberts’ interest in a property in Queensland is disregarded on the basis that, just before the relevant CGT event, it was “being used … for the personal use and enjoyment of …” Mr and Mrs Roberts within the meaning of s 152-20(2)(b)(i). I have decided that, although ready for use, it was not being used in that way at that point in time.
[1] On behalf of the Commissioner, Mr Nicholas indicated at the hearing that he was no longer contending that the CGT assets of the Oil Property Trust are to be counted under s 152-15(b) because it was connected with Altnot at the relevant time.
I have set aside the objection decision in so far as it relates to the inclusion of Mrs Roberts’ CGT assets in the amended assessment and remitted it to the Commissioner to reassess CGT payable by Altnot as a result. Otherwise, I have affirmed the Commissioner’s objection decision.
BACKGROUND
There was no dispute between the parties regarding the facts in this case and I will set them out in this section of my reasons.
Altnot Pty Ltd and the carwash business
Altnot is a private company which previously owned 50% of a business known as the Clearwater Carwash operating in South Yarra (carwash business). Mr Jonathan Roberts who is, and has been at all relevant times, its sole director, owns 50% of Altnot’s shares. On 30 March 2007, Altnot entered a contract to sell its interest in the carwash business and made a capital gain of $1,029,449.
Toorak Oil Company Pty Ltd and the Oil Property Trust
Toorak Oil Company Pty Ltd (TOC) is a company of which Mr Roberts was sole director. Mr Roberts and his wife, Mrs Pauline Roberts, each own 50% of the shares in TOC. TOC is the trustee of the Oil Property Trust (OPT). Mr and Mrs Roberts are named as the Appointors of the Trust. They are also named as Specified Beneficiaries to the Trust.
The Queensland property
Mr and Mrs Roberts jointly own a property in Queensland. They bought it on approximately 10 August 2000 and have used it for private holidays for themselves and their family. Over the years, they have also leased the house to unrelated parties for extended periods of time. On the basis of the income tax returns they had lodged for the income years ending 30 June 2001 to 2007 inclusive, the number of weeks for which the house was rented after it was first made available for rental on 10 August 2000 and the income received by Mr and Mrs Roberts was:[2]
[2] Supplementary documents lodged under s 37 of the Administrative Appeals Tribunal Act 1975 (ST documents) at ST1, 2, 3, 4, 5, 6 and 7 at 254, 257, 260, 263 266, 269 and 272 in relation to Mr Roberts and ST 8, 9, 10, 11, 12, 13 and 14 at 275, 278, 281, 284, 287, 290 and 293 in relation to Mrs Roberts.
| Income year | Weeks rented | Rental income/-net rent | |
| 2001 | 4 | Jonathan Roberts | $8,322/-$12,421 |
| Pauline Roberts | $8,323/-$12,420 | ||
| 2002 | 52 | Jonathan Roberts | $11,182/-$12,811 |
| Pauline Roberts | $11,183/-$12,811 | ||
| 2003 | 52 | Jonathan Roberts | $19,863/-$11,534 |
| Pauline Roberts | $19,864/-$11,539 | ||
| 2004 | 52 | Jonathan Roberts | $19,187/-$6,431 |
| Pauline Roberts | $19,187/-$6,431 | ||
| 2005 | 52 | Jonathan Roberts | $14,179/-$2,433 |
| Pauline Roberts | $14,179/-$2,433 | ||
| 2006 | 52 | Jonathan Roberts | $18,395/-$3,577 |
| Pauline Roberts | $18,394/-$3,576 | ||
| 2007 | 31 | Jonathan Roberts | $9,333/-$4,595 |
| Pauline Roberts | $9,332/-$4,596 | ||
On 15 December 2006, Mr and Mrs Roberts decided that they no longer wished to lease the house and that they would use it solely for themselves. As their letting agent had received deposits for rentals up to 31 January 2007, they honoured those rentals and the house has not been let after that date.
The income tax returns for 2007 income year
Altnot lodged its income tax return for the 2007 income year on the basis that it was entitled to reduce any capital gain it had derived from the sale of the carwash business by $1,000,000 under the small business retirement exemption provided for in s 152-305 of ITAA97. That left it with a net capital gain of $29,449.
The Commissioner’s audit and amended assessment for 2007 income year
The Commissioner issued a notice of amended assessment on the basis that Altnot was not entitled to reduce its capital gain under s 152-305 of ITAA97 and the net value of its CGT assets exceeded $5,000,000. Therefore, Altnot’s taxable income was increased by $995,535 after the Commissioner had allowed for tax losses amounting to $4,465.
The Commissioner did not determine that Altnot was liable to pay a penalty as he took the view that it had taken reasonable care in making the statements and had adopted a reasonably arguable position. A shortfall interest charge and general interest charge was imposed but, on behalf of Altnot, Mr Parker indicated that the shortfall interest charge was not in contention.
LEGISLATION
Although there are only two very confined questions to be answered in this case, I think it important to see them in context. For that reason, I will briefly outline the broad structure of the regime that taxes a net capital gain by including it in a taxpayer’s assessable income and by reducing that assessable income where a taxpayer has incurred capital losses. The provisions have since been amended but I have set them out as they applied up to the income years in issue in this case.
Assessable income includes net capital gain
Section 102-5(1) of ITAA97 provides that a taxpayer’s assessable income includes any capital gain for the income year. The section goes on to set out how a taxpayer works out whether he or she has a net capital gain. There are five steps in all but I am concerned in the main with Step 4:
“If any of your *capital gains (whether or not they are *discount capital gains) qualify for any of the small business concessions in Subdivisions 152-C, 152-D and 152-E, apply those concessions to each capital gain as provided for in those Subdivisions.”
No capital gain or capital loss without a CGT event
I will begin, though, with a step that precedes those five steps. That is to work out the capital gains and capital losses during an income year. A taxpayer can only make a capital gain or incur a capital loss if a CGT event happens.[3] Section 102-20 provides:
“You can make a *capital gain or *capital loss if and only if a *CGT event happens. The gain or loss is made at the time of the event.”
[3] ITAA97; s 100-20(1)
Section 104-5 identifies CGT events by describing each event, pinpointing the time of that event and providing for the way in which the capital gain or capital loss that results is calculated. The relevant item in this case is event A1:
| CGT event | |||
| Event number and description | Time of event is: | Capital gain is: | Capital loss is: |
| A1 Disposal of a CGT asset | when disposal contract is entered into or, if none, when entity stops being asset’s owner | capital proceeds from disposal less asset’s cost base | assets reduced cost base less capital proceeds |
| [See section 104-10] | |||
A “CGT asset” is broadly defined in s 108-5(1) as “(a) any kind of property; or (b) a legal or equitable right that is not property.” Section 108-5(2) goes on to specify certain interests and goodwill as CGT assets but there is no question that the assets in this case are CGT assets.
Section 104-10 expands upon the circumstances described in event A1. A taxpayer disposes of a CGT asset in the circumstances specified in s 104-10.[4] Section 104-10(2) provides:
“You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur:
(a)if you stop being the legal owner of the asset but continue to be its beneficial owner; or
(b)merely because of a change of trustee.”
Section 104-10(7) provides that event A1 does not happen in certain circumstances. Those circumstances do not arise in this case.
[4] ITAA97; s 995-1(1)
The time of the event is dealt with in s 104-10(3):
“The time of the event is:
(a)when you enter the contract for the *disposal; or
(b)if there is no contract – when the change of ownership occurs.
Example:
In June 1999 you enter into a contract to sell land. The contract is settled in October 1999. You make a capital gain of $50,000.
The gain is made in the 1998-99 income year (the year you entered the contract) and not the 1999-2000 income year (the year that settlement takes place).
Note 1:If the contract falls through before completion, this event does not happen because no change of ownership occurs.
Note 2:…”
Section 104-10(4) sets out when a taxpayer makes a capital gain and when a capital loss. It reflects event A1 in s 104-5. Section 104-10(5) sets out those that may be disregarded but they are not relevant here.
Step 4: if any capital gains qualify for small business concessions, apply concessions to each
As I have said, Step 4 set out in s 102-5(1) requires a taxpayer to apply to each capital gain any small business concessions in Subdivisions 152-C, 152-D and 152-E for which that capital gain is qualified. Those subdivisions are part of Division 152 and I must first find their reference point in that Division before looking at any particular Subdivision that may be relevant. Their reference point is Subdivision 152-A for it sets out the basic conditions that must be met before consideration can be given to whether a taxpayer can take advantage of the small business concessions specifically provided for in those Subdivisions.
There are instances in which a small business entity will not be able to take advantage of the small business concessions even if it meets these basic conditions. Those instances depend on whether the CGT event is a CGT event J2 or J3. As the CGT event in this case is event A1, the further qualification mentioned in the note to s 152-5 and provided for in specific small business concessions does not apply.
A.First basic condition: limit on the net value of assets owned by the small business entity and related entities
In general terms, the first basic condition that must be satisfied is that the net value of the net assets of a small business entity and its related entities does not exceed $5,000,000.[5]
[5] ITAA97; s 152-5(a)
A.1 Maximum net asset value test
Section 152-15 provides:
“You satisfy the maximum net asset value test if, just before the *CGT event:
(a)the sum of the following amounts does not exceed $5,000,000:
(i)the *net value of the CGT assets of yours;
(ii)the net value of the CGT assets of any entities * connected with you;
(iii)the net value of the CGT assets of any *small business CGT affiliates (not counting any assets already counted under subparagraph (ii)); and
Note:Some assets aren’t included in the definition of net value of the CGT assets; see subsections 152-20(2) and (3).
(b)if you are a partner in a partnership and the CGT event happens in relation to a *CGT asset of the partnership – the net value of the CGT assets of the partnership does not exceed $5,000,000.”
A.2The maximum net asset value test’s elements: net value of the CGT assets
Section 152-20 sets out the meaning of “net value of the CGT assets” of an entity. It begins with the general proposition in s 152-20(1) 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 the liabilities of the entity that are related to the assets.”
A.3 The maximum net asset value test’s elements: assets that may be disregarded
A.3.1 The net value of the CGT assets of the entity
Section 152-20(2) provides for those assets that are to be disregarded in working out the net value of the CGT assets of an entity. Only that specified in s 152-20(2)(b) is relevant:
“In working out the net value of the CGT assets of an entity:
(a)…
(b)if the entity is an individual, disregard:
(i)assets being used solely for the personal use and enjoyment of the entity, or the entity’s *small business CGT affiliate;…
(ii)-(v)…”
A.3.2The net value of the CGT assets of an entity that is, or is connected with, the taxpayer’s small business CGT affiliate
When working out the net value of the CGT assets of an entity that is the taxpayer’s small business CGT affiliate or connected with the taxpayer’s small business CGT affiliate, reference must be made to s 152-20(4).[6] It provides:
“Disregard assets of that entity that are not used, or held ready for use, in the carrying on of a *business (whether alone or jointly with others) by:
(a)you; or
(b)an entity *connected with you (unless the connection with you is only because of your *small business CGT affiliate).
Example:
You and your husband decide to sell a florist’s business that you jointly carry on. Your husband also wholly owns a company that carries on a newsagency business. You yourself have no other involvement with the newsagency business.
You need to work out whether you satisfy the maximum net asset value just before the sale. For this purpose, you disregard the newsagency company’s assets. This is because, even though the company is ‘connected’ with you, in that your small business CGT affiliate (ie your husband) owns it (see section 152-30), this connection arises only because your husband controls the company.”
[6] ITAA97; s 152-20(3)
A.4 What is a “small business CGT affiliate”?
Section 152-25 sets out what is meant by a “small business CGT affiliate”:
“(1) A person is a small business CGT affiliate of yours if:
(a)you are an individual and the person is your *spouse or *child under 18 years: or
(b)the person acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you.
(2)Another partner in a partnership in which you are a partner is not your small business CGT affiliate only because the partner acts, or could reasonably be expected to act, in concert with you in relation to the affairs of the partnership.”
A.5 What is meant by “connected with” the entity?
Section 152-30 prescribes the circumstances in which an entity is connected with another. It does so by reference to the criterion of control. Section 152-30(1) sets out the basic proposition:
“An entity is connected with another entity if:
(a)either entity controls the other entity in the way described in this section; or
(b)both entities are controlled in that way by the same third entity.”
Section 152-30(2) specifies the required degree of control by reference to the characteristics of the other entity. Only s 152-30(2)(c) is relevant in this case but I will set out the whole subsection to set it in its context:
“An entity (the first entity) controls another entity if the first entity, its *small business CGT affiliates or the first entity together with its small business CGT affiliates:
(a)except where the other entity is a discretionary trust – beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive at least 40% (the control percentage) of any distribution of income or capital by the other entity; or
(b)if the other entity is a company – beneficially own, or have the right to acquire beneficial ownership of, shares in the company that carry between them the right to exercise, or control the exercise of, at least 40% (the control percentage) of the voting power in the company; or
(c)if the other entity is a discretionary trust:
(i)are the trustee or trustees of the trust (other than the Public Trustee of a State or Territory); or
(ii)have the power to determine the manner in which the trustee or trustees of the trust exercise the power to make any payment of income or capital to or for the benefit of beneficiaries of the trust.
Note:There are further rules relating to discretionary trusts in subsections (4) to (6C).”[7]
[7] Issues relating to a discretionary trust do not arise in this case.
B. Second basic condition: CGT asset must be an active asset
The second basic condition that must be satisfied before taking Step 4 is that the CGT asset be an active asset. There is no dispute about this but, to put the provisions in context, I note that:
“A *CGT asset is an active asset at a given time if, at that time, you own it and:
(a)use it, or hold it ready for use, in the course of carrying on a *business; or
(b)it is an intangible asset that is inherently connected with a business that you carry on (for example, goodwill or the benefit of a restrictive covenant); or
(c)it is used, or held ready for use, in the course of carrying on a business by:
(i)your *small business CGT affiliate; or
(ii)another entity that is *connected with you.”[8]
[8] ITAA97; s 152-40(1)
In so far as a share in a company is concerned, s 152-40(3) provides:
“A *CGT asset is also an active asset at a given time if, at that time, you own it and:
(a)it is … a *share in a company that is an Australian resident at that time … ; and
(b)the total of:
(i)the *market values of the active assets of the company …; and
(ii)any *capital proceeds that the company … received, during the 2 years before that time, from *CGT events happening to its active assets and that the company … holds in the form of cash or debt pending the acquisition of new active assets;
is 80% or more of the market value of all assets of the company …
Note:Paragraph 152-35(b) requires a CGT asset to have been an active asset over a period of time. For a share in an Australian resident company to meet this requirement, the company would have to satisfy the 80% test in this subsection throughout the same period.”
C.Third basic condition: relates to assets that are shares or interests in trusts
This condition arises if an asset is a share or interest in a trust. It does not arise in this case.
CONSIDERATION: whether regard had to the net value of Mrs Roberts’ CGT assets
The starting point must be the “you” to whom these provisions apply. Although the word is defined in s 4-5, it is defined in terms of its applying to entities generally regardless of whether they are individuals or not.[9] It must, though, be a reference to those entities as taxpayers for s 4-10(1) immediately sets the scene by providing that:
“You must pay income tax for each year ending on 30 June …”
[9] ITAA97; s 995-1(1)
The remaining provisions in s 4-10 go on to provide how “your income tax” is worked out and, in general terms, the remaining provisions of ITAA97 are directed to the same end. When reference is made to entities other than the taxpayer words other than “you”, or a derivative of it, are used e.g. an “entity”, a “discretionary trust”, a “company” and so on.
This is an obvious statement but I want to state it because the “you”, and so the taxpayer, is a key figure in working out the relationships. That is a fact that can be lost sight of when unravelling provisions that, ultimately, begin and end with the taxpayer and it is a point emphasised on behalf of Altnot by Mr Parker. In this case, the taxpayer is Altnot.
In order to decide whether it satisfies the maximum net asset value test, s 152-15(a) requires me to add up: (1) the net value of its CGT assets; (2) the net value of the CGT assets of any entities connected with Altnot; and (3) the net value of the CGT assets of any of Altnot’s small business CGT affiliates that have not already been counted under (2).[10]
[10] I note that the Commissioner has referred to s 152-15(b) in his written submissions but it seems to me that he must mean to refer to s 152-15(a). Section 152-15(b) is satisfied in this case because it seems to have been accepted that the net value of the CGT assets of the partnership in which Altnot was engaged in the carwash business did not exceed $5,000,000. That is consistent with its selling its half share in the business for $1,050,000.
Identifying the entities connected with Altnot: the submissions
On behalf of the Commissioner, Mr Nicholas submitted that Mrs Roberts is a person connected with Altnot within the meaning of s 152-30(1)(a) because she controls Altnot. She does that because Mr Roberts, who is her small business CGT affiliate, beneficially owns shares in Altnot and those shares carry with them the right to exercise, or control the exercise of 40% of the voting power in Altnot.
I am not comfortable with the way the submission is cast. It seems to me that I have to identify each amount specified in s 152-15(a) separately. That means that I must first look at whether Mrs Roberts is an entity connected with Altnot for the purposes of s 152-15(a)(ii) and, if so, work out the net value of her CGT assets. Having done that, I must then work out whether she is a small business affiliate of Altnot or of other entities connected with Altnot’s small business CGT affiliates.
Putting that proposition into the broader context, I must first work out who are the entities connected with Altnot. Having done that, I add up the value of their net CGT assets for the purposes of s 152-15(a)(ii). Having done that, I work out three more things for the purposes of s 152-15(a)(iii). The first requires me to identify Altnot’s small business CGT affiliates and then to work out the net value of their CGT assets. The second requires me to identify the small business CGT affiliates of those entities I have identified as being connected with Altnot. Having done that, the third is to add up the net value of the CGT assets I have identified minus any that I have already counted for the purposes of s 152-15(ii).
Identifying the entities connected with Altnot
Subject to some qualifications that have no relevance here, an “entity” may be anything from an individual to a body corporate, a body politic, a partnership, unincorporated association or body of persons, a trust, a superannuation fund or an approved deposit fund.[11] Mr and Mrs Roberts are entities in the sense that they are individuals. TOC and the trust of which it is trustee are also entities.
[11] ITAA97; ss 995-1(1) and 960-100(1)
A. Is Mr Roberts connected with Altnot? - yes
Mr Roberts is connected with Altnot under s 152-30(1) because he controls Altnot within the meaning of s 152-30(2)(b). As he beneficially owns 50% of the shares and those shares carry with them the right to control at least 40% of the voting power in the company, he has a controlling percentage in Altnot as provided in that section. Therefore, Mr Roberts is connected with Altnot and so the net value of his CGT assets is taken into account under s 152-15(a)(ii) for the purposes of the maximum net asset value test set out in that section.
B. Is Mrs Roberts connected with Altnot? - no
Mrs Roberts does not own any shares in Altnot and so she is not connected with Altnot under s 152-30(1) by means of s 152-30(2)(b) as is her husband. Sections 152-30(2)(a) and (c) are not applicable. Section 150-30(2)(a) is not applicable because she does not have any interest in Altnot that carries with it the right to receive at least 40% of any distribution of income or capital in that company. Section 150-30(2)(c) does not apply because Altnot is not a discretionary trust.
Mrs Roberts is not connected with Altnot within the meaning of s 152-30(1)(b). While Altnot is controlled in the sense used in s 152-30(2) by Mr Roberts, Mrs Roberts is not.
It follows that Mrs Roberts is not connected with Altnot. The net value of her CGT assets is not taken into account under s 152-15(a)(ii).
Who are the small business CGT affiliates of Altnot?
I have been unable to identify anyone as Altnot’s small business CGT affiliate under s 152-25(1). Paragraph 152-25(1)(a) is not relevant because Altnot is not an individual. Paragraph 152-25(1)(b) is not relevant because neither Mr nor Mrs Roberts acts, or could reasonably be expected to act, in accordance with Altnot’s directions or wishes or in concert with it. Mr Roberts has a controlling percentage in Altnot for the purposes of s 152-30(2)(b) but Altnot has no such authority or sway over the way in which either Mr or Mrs Roberts acts.
Who are the small business CGT affiliates of Mr Roberts?
Mrs Roberts is a small business CGT affiliate of Mr Roberts because he is an individual and she is his spouse. That comes about under s 152-25(1)(a).
Does s 152-15(a)(iii) take account of the net value of CGT assets of Mrs Roberts?
Section 152-15(iii) seems to me to have two parts. The first part refers to “the net value of the CGT assets of any *small business CGT affiliates of yours” (emphasis added) i.e. of the taxpayer and so of Altnot. I have identified nobody as meeting that description.
The second part refers to “the net value of the CGT assets of … entities connected with your small business CGT affiliates …” (emphasis added). Mrs Roberts is a small business affiliate of Mr Roberts but, even if Mr Roberts were a small business affiliate of Altnot (and he is not), s 152-15(a)(iii) does not take into account the net value of the CGT assets of an entity that is a small business affiliate of one of Altnot’s small business affiliates. It only takes into account the net value of the CGT assets of an entity “connected with” one of the taxpayer’s small business affiliates. For the reasons I have given, Mrs Roberts is not connected with Mr Roberts. Therefore, the net value of Mrs Roberts’ CGT assets is not taken into account under s 152-15(a)(iii) for the purpose of the maximum net asset value test.
CONSIDERATION: whether value of Queensland property excluded
The value of the Queensland property remains relevant because Mr Roberts owns a 50% interest in it. His interest is a CGT asset and its net value is taken into account under s 152-15(a)(ii) in determining whether Altnot satisfies the maximum net asset value test.
As Mr Roberts is an individual, the issue turns on whether the house was “… being used solely for the personal use and enjoyment of the entity, or the entity’s *small business CGT affiliate”.[12] As Altnot must satisfy the maximum net asset value test “just before the *CGT event”,[13] that is the time at which the house must be used for the purpose described.
[12] ITAA97; s 152-20(2)(b)(i)
[13] ITAA97; s 152-15
The submissions
Mr Parker submitted that the expression “just before” should be given its ordinary meaning. Just before Altnot entered the contract that became the CGT event in March 2007, Mr and Mrs Roberts had decided that the house was to be used solely by them and their family. The last tenant had left at the end of January 2007.
Mr Nicholas’s submissions on this aspect made the same points as those made in the Commissioner’s Statement of Facts and Contentions:
“30. The Commissioner contends that for the purpose of applying s 152-20(2)(b)(i) of the 1997 Act, the inquiry as to the use for which the asset in question was ‘being used’ – as to whether the asset is of ‘a private or personal nature’ – cannot be limited to a consideration of the use for which the asset was being used just before the CGT event. That is especially so bearing in mind the phrase ‘just before’ means ‘immediately before’. That is, in effect, an instant before the CGT event.[14]
31.The Commissioner contends that under s 152-20(b)(i) the use for which an asset was ‘being used’ is to be ascertained by having regard to the use to which the entity has put the asset over the period from when the entity acquired the asset to when the CGT event occurred, including the use for which the asset was being used just before the CGT event occurred. It is only by having regard to the use of the asset over its whole period of ownership up to the CGT event that the use for which the asset was being used can be properly characterised.
32.…
33.On the applicant’s construction of s 152-20(2)(b)(i), the property would not be counted in working out the net value of their CGT assets because the property was not made available for rent for 2 months before the CGT event, notwithstanding that the property had been available for renting from 10 August 2000, and had been rented for part of the 2001 income year …, all of the 2002 to 2006 income years, and 31 weeks of the 2007 income year. … The same result would follow on the applicant’s view even if Mr and Mrs Roberts had only ceased using the property as a rental property the day before the CGT event. Parliament could not have intended s 152-20(2)(b)(i) to operate to produce such a result.”[15]
[14] “See FCT v Byrne Hotels Qld Pty Ltd [2011] FCAFC 127 at [56].”
[15] References to table reproduced at [7] above omitted. Respondent’s Statement of Facts and Contentions dated 2 October 2012
What is meant by “being used … for the personal use and enjoyment of the entity”?
The ordinary meanings of the word “use”, when used as a verb as it is in s 152-20(b)(i) include that of “to put to a particular use”.[16] When used as a noun, its relevant ordinary meaning would seem to be “a practical purpose a thing can be put to.”[17] The word “being” is a participle used to express continuous action. Therefore, when s 152-20(b)(i) refers to a CGT assets’ “being used … for the personal use and enjoyment of the entity …”, it is referring to a CGT assets’ being put to a practical purpose with some continuity. I will come back to what I mean by “some continuity”. For the moment, I note that Division 152-A itself draws a distinction between something that is “being used” and something that is “held ready for use”. It uses the latter term, for example, in the sense of a CGT asset’s “not … held ready for use” in s 152-20(4). A CGT asset that is being held ready for use is not “being used” in the sense in which that expression is used in s 152-20(2)(b)(i).
[16] Chambers 21st Century Dictionary, 1999, reprinted 2004, Chambers (Chambers)
[17] Chambers
The particular practical purpose which s 152-20(1)(b)(i) requires is one that meets the description of being “…for the personal use and enjoyment of the entity …”. In this case, there is no question that use by Mr and Mrs Roberts of the Queensland property as a holiday home for themselves and their family would be for their “personal use and enjoyment”. There is no need to explore further the boundaries of the concept of “personal use and enjoyment” in this case.
Section 152-20(1)(b)(i) requires that the CGT asset is “being used solely” for the purpose that meets the description of “… for the personal use and enjoyment of the entity …”. Therefore, it requires that the CGT asset be used only or exclusively[18] for that use. On the evidence that I have, the Queensland property could not have met that description at any time up until the end of January 2007. Until that time, it was being leased. During the years 2002 to 2006, it was being used solely as a lease property as it was rented for 52 weeks in each of those years. In 2001, it was leased for four of the 52 weeks.
[18] Chambers
The question I need to answer arises in the 2007 income year. It does not arise in relation to the whole year, though, for s 152-15 specifies the time at which a taxpayer must satisfy the maximum net asset value test. It is the time “just before the *CGT event”. There is no other way to interpret that moment of time than to say it is the moment that is just before the CGT event. As Greenwood J, with whom Dowsett J agreed, in Federal Commissioner of Taxation v Byrne Hotels Qld Pty Ltd[19] said in the context of the maximum net asset value test in s 152-15 (described as “MNAV” in the passage) and the assessment of liabilities related to those entities under s 152-20(1):
“ Section 152-15 requires that the MNAV test be assessed ‘just before’ the CGT event. This means that, for the purposes of s 152-20(1), the taxpayer is required to calculate liabilities that are related to the CGT assets ‘just before’ the CGT event. The section is deliberately aimed at a ‘moment in time’. The wording of ‘just before’ indicates that the legislature intended to exclude from the MNAV test the effects of the CGT event arising on or after the CGT event. The test is whether a particular obligation, as at the ‘just before’ time, is a liability. That is, whether at that time the obligation involves any kind of property or a legal or equitable obligation that is not property. If a contingent liability fits that definition, it is to be accounted for. If, however, as at the ‘just before’ time, an obligation cannot be classified as a liability, irrespective of whether a liability arising only as a consequence of the CGT event is subsequently incurred, it cannot be accounted for under s 152-20(1).”[20]
[19] [2011] FCAFC 127; Dowsett, Bennett and Greenwood JJ
[20] [2011] FCAFC 127 at [56]
At one level, the concept of a point in time test might seem somewhat at odds with a test that incorporates an element of continuity. I do not think that it is, though. There will be some CGT assets which will be in use, and so “being used” for the personal use and enjoyment of the entity just before the CGT event but that does not mean that only those that are actually in use for the purpose at that time have that necessary element of continuity or even that those that are actually in use at that point in time have that necessary element of continuity. A holiday house provides an example. The owners of the house may not be in residence just before the CGT event and so may not be using it at that moment but that does not mean that the house, which is the CGT asset, is not being used by them as a holiday house at that time. Equally, the fact that they are in residence just before the CGT event may not mean that the house is being used solely for their personal use and enjoyment. Whether it is being used as a holiday house solely for their personal use will depend on a conglomerate of matters. They include such matters as the pattern of use by the owners and others leading up to that time, the amount of time for which it is used as a holiday house and how the owners view it.
Looking at the past and future in this way in the context of an issue that must be decided at a point in time is consistent with authority. In the case of Hospital Benefit Fund of Western Australia Inc v Minister of Health, Housing and Community Services,[21] the Full Court of the Federal Court was also concerned with a point of time test. It emphasised that the Tribunal was obliged to consider the same question as that considered by the decision-maker whose decision is under review and so at the same point of time. That, however, did not confine it to the evidence at that precise moment provided the evidence related back to the point of time in issue. The Tribunal could look at prospective developments as they appeared at that date because, the decision-maker whose decision was under review had been required to take account of predictable developments.
[21] [1992] FCA 599; (1992) 39 FCR 225; 111 ALR 1; 28 ALD 50; 16 AAR 566; Wilcox, Burchett and French JJ.
The decision to be made in this case is about an activity at a particular point in time and not one requiring account to be taken of predictable developments as such. The principle is no different, though. In order to make a decision about what was happening at a particular point in time, I must first ask what was happening in the time surrounding that particular point in time so that I look at the point of time in its context. I must then ask myself the question required by s 1520-20(2)(b)(i): was the house “… being used solely for the personal use and enjoyment of …” Mr and Mrs Roberts.
Looking at the facts with these principles in mind, I am not satisfied that the Queensland property is “being used … for the personal use and enjoyment of …” Mr and Mrs Roberts. I accept that it is no longer being used as a rental property for that ended three or four months before the CGT event occurred. That fact, however, does not automatically mean that it is being for their personal use and enjoyment. It was available for their personal use and enjoyment but, until they started to use the Queensland property once more as their holiday house, it cannot be said that it is “being used” as such. There is no sense of continuity inherent in the word “being” as in “being used” and there can be none until they use it. All that can be said is that it is ready for use, available for use and has been used as such in the past but it is not being used. Therefore, I am not satisfied that the Queensland property is a CGT asset disregarded under s 152-20(2)(b)(i) from the maximum net asset value test.
DECISION
For the reasons I have given, I:
(1)set aside the respondent’s objection decision dated 15 September 2011 in so far as it disallows the applicant’s objection against the inclusion of the CGT assets of Mrs Pauline Roberts in applying the maximum net asset value test under s 152-15 of the Income Tax Assessment Act 1997;
(2)remit the objection decision to the respondent to reassess the applicant’s liability to CGT on the basis that the CGT assets of Mrs Pauline Roberts are not taken into account in applying the maximum net asset value test under s 152-15 of the Income Tax Assessment Act 1997; and
(3)otherwise affirm the respondent’s objection decision.
I certify that the preceding sixty one paragraphs are a true copy of the reasons for the decision herein of
Deputy President S A Forgie,
Signed: (sgd)..............................................................
Leah Berardi Associate
Date of Hearing 25 February 2013
Date of Decision 15 March 2013
Solicitor for the Applicant Mr Michael Parker
Hall & Wilcox Lawyers
Counsel for the Respondent Mr Peter Nicholas
Solicitor for the Respondent Mr Edward Yiu
ATO Legal Services Branch
The Tribunal had to decide whether changes a health insurer had made to its rules to impose a five year waiting period before certain hospital benefits could be obtained imposed an unreasonable or inequitable condition affecting the rights of any contributors. That was a decision made under the National Health Act 1953 and it was a decision made at the point of time that the changes were made to the rules. In that case, the Full Court said at [1992] FCA 599; (1992) 39 FCR 225; 111 ALR 1; 28 ALD 50; 16 AAR 566 at 234; 11; 59; 575:
“ In the present case, the question before the primary decision-maker (the delegate of the minister) was whether, at the time it took effect, the change imposed an unreasonable or inequitable condition, not whether, in light of developments over the ensuing three years until the tribunal hearing, the effect of the rule change was to occasion a state of unreasonableness and inequity to contributors. Of course, in considering the position as at the date of the rule change, the tribunal is not confined to the historical position. It is entitle to receive evidence as to prospective developments in relation to IVF, as they appear at the date of the rule change. The reason is that, in evaluating the effect of the change as at that date, account may be taken of predictable developments. But the evidence must be related back to the date of the change.”
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