Breakwell and Commissioner of Taxation (Taxation)

[2015] AATA 628

Breakwell and Commissioner of Taxation (Taxation) [2015] AATA 628 (25 August 2015)

Division	TAXATION & COMMERCIAL DIVISION
File Number	2014/4389
Re	Allan Breakwell
APPLICANT
And	Commissioner of Taxation
RESPONDENT
And	Breakwell Investments Pty Ltd
JOINED PARTY

DECISION

Tribunal	Senior Member R W Dunne
Date	25 August 2015
Place	Adelaide

The Tribunal affirms the decision under review.

....................[Sgd]....................................................

Senior Member R W Dunne

CATCHWORDS

TAXATION – capital gains tax – maximum net value asset test – entitlement to small business CGT concessions – inclusion of loans – whether statute-barred loan – objection decision under review affirmed.

LEGISLATION

Income Tax Assessment Act 1997 (Cth), subdivisions 152-A, 152-B, 152-C and 152-D

Limitation of Actions Act 1936 (South Australia), ss 35(a), 42(1)

CASES

Brooker v Pridham (1986) 41 SASR 380

The Stage Club Limited v Millers Hotels Proprietary Limited (1981) 150 CLR 535.

REASONS FOR DECISION

Senior Member R W Dunne

25 August 2015

INTRODUCTION

1. This is an application for review of a decision by the respondent to disallow in part a taxation objection lodged by the applicant against an amended assessment for the 2007/2008 year of income.  To the extent that the taxation objection was disallowed, it related to the inclusion in the amended assessment of a net amount arising from a capital gain pursuant to Division 152 of the Income Tax Assessment Act 1997 (“ITAA 1997”) following an audit of the taxation affairs of the applicant and his related entities. 

2. At the hearing, the applicant was self-represented and the respondent was represented by Ms G Walker (of counsel). The Tribunal received into evidence the T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975,[1] together with the following exhibits:

   ·copy of letter from Beger and Co, Lawyers, to Mr Breakwell dated 28 October 2014;[2] and

   ·letter from R A Veitch and Co, Chartered Accountants, to the Tribunal dated 14 November 2014.[3]

   [1] Exhibit R1.

   [2] Exhibit A1.

   [3] Exhibit A2.

   ISSUES BEFORE THE TRIBUNAL

3. The following are the issues that were before the Tribunal:

   (a)In relation to the sale of his finance broking business on 26 July 2007, does the applicant satisfy the maximum net asset value test contained in s 152-15 of the ITAA 1997 and is therefore able to access the small business concessions under Division 152 of the ITAA 1997?

   (b)If the applicant does not satisfy the maximum net asset value test, is the Pre-1998 loan of $1,144,934 to the applicant by The Allan Breakwell Family Trust statute-barred and as such should not be included as part of the maximum net asset value test as at 30 June 2008?

   LEGISLATION

4. The legislation that applies in this case is contained in the ITAA 1997 and relevantly reads:

   Subdivision 152-A

   152-10 Basic conditions for relief

   (1)A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

   (a)a CGT event happens in relation to a CGT asset of yours in an income year;

   (b)the event would (apart from this Division) have resulted in the gain;

   (c)at least one of the following applies:

   (i)     you are a small business entity for the income year;

   (ii)    you satisfy the maximum net asset value test (see section 152-15);

   (iii)    you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

   (iv)   the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

   (d)the CGT asses satisfies the active asset test (see section 152-35).

   …

   152-15 Maximum net asset value test

   You satisfy the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000:

   (a)the net value of the CGT assets of yours;

   (b)the net value of the CGT assets of any entities connected with you;

   (c)the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).

   152-20 Meaning of net value of the CGT assets

   (1)  The net value of the CGT assets of an entity is the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of:

   (a)the liabilities of the entity that are related to the assets; and

   (b)the following provisions made by the entity:

   (i)     provisions for annual leave;

   (ii)    provisions for long service leave;

   (iii)    provisions for unearned income;

   (iv)   provisions for tax liabilities.

   …

   152-35 Active asset test

   (1)A CGT asset satisfies the active asset test if:

   (a)you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period specified in subsection (2); or

   (b)you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years during the period specified in subsection (2).

   (2)The period:

   (a)begins when you acquired the asset; and

   (b)ends at the earlier of:

   (i)     the CGT event; and

   (ii)    if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows--the cessation of the business.

   Subdivision 152-B

   Small business 15-year exemption

   152-105 15-year exemption for individuals

   If you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

   (a)the basic conditions in Subdivision 152-A are satisfied for the gain;

   (b)you continuously owned the CGT asset for the 15-year period ending just before the CGT event;

   (c)if the CGT asset is a share in a company or an interest in a trust--the company or trust had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset;

   (d)either:

   (i)     you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

   (ii)    you are permanently incapacitated at the time of the CGT event.

   Subdivision 152-C

   Small business 50% reduction

   152-205 You get the small business 50% reduction

   The amount of capital gain remaining after applying step 3 of the method statement in subsection 102-5(1) is reduced by 50%, if the basic conditions in Subdivision 152-A are satisfied for the gain.

   Subdivision 152-D

   Small business retirement exemption

   152-320 Meaning of CGT retirement exemption limit

   (1)  An individual’s CGT retirement exemption limit at a time is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the individual under this Subdivision.

   (2)  If the individual was one of at least 2 CGT concession stakeholders of a company or trust, and the company or trust made a choice for the individual, only the individual’s percentage (see subsection 152-315(5)) of the assets’ CGT exempt amounts is taken into account under subsection (1) for that choice.

   BACKGROUND

5. The applicant and Breakwell Investments Pty Ltd were at all material times beneficiaries of The Allan Breakwell Family Trust (“ABFT”).  The ABFT was in turn a beneficiary of the East Terrace Unit Trust (“ETUT”).  The ETUT operated a finance broking business which it sold on 26 July 2007 for $500,000, giving rise to a capital gain in that amount.  The ETUT chose to disregard the capital gain from the sale of the business by applying the small business concessions contained in Division 152 of the ITAA1997.  In the result, the applicant was only able to claim relief by applying the maximum net asset value test in s 152-15 of the ITAA1997.

6. On 31 January 2012, the respondent advised the applicant that he and his related entities, which included ETUT, ABFT and Breakwell Investments Pty Ltd, were the subject of a comprehensive risk review in relation to their taxation affairs.  On 11 June 2013, the respondent issued a position paper in relation to the eligibility of the ETUT to apply for the small business concessions.  The paper concluded that ETUT was ineligible for any of the small business concessions in relation to the capital gain derived from the sale of the broking business.  On 21 November 2013, an amended assessment was issued to the applicant for the 2007/2008 year of income.  An amended assessment was also issued to Breakwell Investments Pty Ltd.  On 17 January 2014, the applicant lodged an objection against his amended assessment.

7. Ultimately, the applicant and the respondent agreed for the purposes of this review that the following assets and liabilities would be included in the maximum net asset value test calculation:

MAXIMUM NET VALUE ASSET TEST CALCULATION
THE ALLAN BREAKWELL FAMILY TRUST
ASSETS
Units in Breakwell Unit Trust	$	5,000
Gables of St Morris (at market value say $200K)	$	200,000
Pooraka Property (as per CV 1/7/07)	$	2,175,000
Motor Vehicle	$	90,000
Loan to Allan Breakwell (Post-1988 only)	$	1,229,628
Loan to Allan Breakwell (Pre- 1998)	$	1,144,934
LIABILITIES
NET ASSETS	$	4,844,562
BREAKWELL INVESTMENTS PTY LTD
ASSETS
Tax refund	$	110,112
LIABILITIES
NET ASSETS	$	110,112
GREENHILL ROAD TRUST
ASSESTS
Property at Wayville (as per CV 1/7/07)	$	2,725,000
LIABILITES
Adelaide Bank Mortgage	$	1,241,989
NET ASSETS	$	1,483,011
ACCESS CAPITAL UNIT TRUST
ASSETS
Access Capital business value	$	500,000
Cash/debtors	$	47,096
LIABILITIES
Overdraft	$	73,934
NET ASSETS	$	473,162
10% SHARE – JV WITH BREAKWELL UNIT TRUST
ASSETS (held by Allan Breakwell)
Property at Nailsworth (as per CV 1/7/07)	$	165,000
TOTAL NET ASSETS	$	7,075,847

1. The contentious issue in the maximum net asset value test calculation involved a loan of $2,374,562 from the ABFT to the applicant as at 30 June 2008.  As can be seen from the calculation above, this loan comprised a Pre-1998 loan of $1,144,934 and a Post-1998 loan of 1,229,628.

   EVIDENCE OF THE APPLICANT

2. It was the applicant’s evidence that the loan to him of $2,374,562 was from The Allan Breakwell Family Trust as at 30 June 2008.  He confirmed that this loan was made up of a Pre-1998 loan of $1,144,934 and a Post-1998 loan of $1,229,628.  The Pre-1998 loan was in relation to the business of an entity within the Breakwell group.  He said he had been paying various loans of other entities within the group and that the Pre-1998 loan could have been to repay a debt of another entity in the group that had become insolvent.

3. The applicant referred to the letter he had received from Mr Peter Jakobsen at Beger and Co, Lawyers.  He also referred to a Practice Statement issued by the respondent on 15 February 2006, date of effect 4 December 1997 (which is PS LA 2006/2(GA)).

4. In relation to the possible evidence of his accountant (Mr R A Veitch of R A Veitch and Co, Chartered Accountants), he referred to the letter to the Tribunal from Mr Veitch.  When asked about the nature of Mr Veitch’s evidence and what he had said in his letter, the applicant said that it would only be given to back-up the statements that he would be making in giving his evidence.  When asked whether there would be a need to call Mr Veitch, the applicant confirmed that Mr Veitch’s evidence would be no better or more extensive than what he was saying in his own evidence.

5. In cross-examination by Ms Walker, the applicant said that he had always been the trustee of the ABFT.  Mr Veitch was the accountant for the Breakwell group and he was happy with the comprehensive structure that Mr Veitch was providing in supplying his services.  Mr Veitch had prepared draft financial statements and taxation returns for the group for the applicant to finalise.  In doing so, the applicant said that he had provided instructions to Mr Veitch in writing from time to time to finalise the financials and taxation returns.  After Mr Veitch finalised the documents, the applicant said that he would sign the taxation returns and the financial statements.  When asked specifically by Ms Walker, the applicant said that he had signed the financial statements for the ABFT in respect of the period from 2003 to 2007.

6. Ms Walker referred the applicant to the Compilation Report of the Greenhill Road Trust.[4]  He said that he would receive a Compilation Report with the financial statements for all of the entities in his group, including the ABFT.  The applicant explained that the Greenhill Road Trust was a related entity of the ABFT.  The trustee of the Greenhill Road Trust was Greenhill Road Nominees Pty Ltd and he was the “sole owner” of that company. 

   [4] Exhibit R1, T15 p 258.

   CONSIDERATION

   In relation to the sale of his finance broking business on 26 July 2007, does the applicant satisfy the maximum net asset value test contained in s 152-15 of the ITAA 1997 and is therefore able to access the small business concessions under Division 152 of the ITAA 1997?

7. The issue in this case and the basis for the disputed 2007/2008 amended assessment of Mr Breakwell (and similarly Breakwell Investments Pty Ltd) is whether the capital gain arising on the sale of the applicant’s finance broking business through the ETUT can be reduced or disregarded under Division 152 of the ITAA 1997, if the applicant and his related entities satisfy the maximum net asset value test in s 152-15.  In particular, just before the sale of the finance broking business, did the sum of the net value of the assets of the applicant and his related entities exceed $6,000,000?

I have perused the maximum net asset value test calculation appearing at paragraph 7 of these reasons.  I note that the loan of $2,374,562 from the ABFT to Mr Breakwell as at 30 June 2008 comprised two components, namely a Post-1998 loan of $1,229,628 and a Pre-1998 loan of $1,144,934.  Clearly, if the whole of the loan of $2,374,562 is included in the maximum net asset value test calculation, the sum of the net value of the assets of the Breakwell group will exceed $6,000,000, and the test in s 152-15 of the ITAA 1997 will not be satisfied.

1. Mr Breakwell’s evidence was that the Pre-1998 component of the loan was made by the ABFT to him and was used for business purposes.  Alternatively, this component could have been a loan made to Mr Breakwell to enable him to pay a debt of one of the entities that was or is still an entity in his group.  However, Mr Breakwell did not have any records dating back to 1998 and beyond relating to the Pre-1998 loan and he was unable to provide evidence to show that the Pre-1998 loan was used by him for business purposes.  In these circumstances, if the Pre-1998 loan is included as part of the maximum net asset value test calculation, the sum of the net value of the CGT assets of Mr Breakwell and his related entities will exceed $6,000,000.  He is, therefore, unable to satisfy the maximum net asset value test in s 152-15 of the ITAA 1997.

   If the applicant does not satisfy the maximum net asset value test, is the Pre-1998 loan of $1,144,934 to the applicant by The Allan Breakwell Family Trust statute- barred and as such should not be included as part of the maximum net asset value test as at 30 June 2008?

2. It is Mr Breakwell’s contention that the Pre-1998 loan is statute-barred and, as such, it has a nil value and must be excluded from the maximum net asset value test calculation.  If this is done, the sum of the net value of the CGT assets of Mr Breakwell and his related entities will amount to $5,930,913.  In these circumstances, the maximum net asset value test in s 152-15 will be satisfied and the capital gain on the sale of his finance broking business will be disregarded under Division 152.  To enable the Pre-1998 loan to be excluded from the maximum net asset value test calculation, Mr Breakwell asserts that that loan component is statute-barred.  He has referred to the advice from Beger and Co and to the decision of King CJ in Brooker v Pridham[5]. There, King CJ refers to s 35 of the South Australian Limitation of Actions Act 1936, which relevantly reads:

   “35 Actions on simple contract and in tort

   The following actions namely:

   (a)actions founded upon any simple contract express or implied, or upon any award where the submission is not by specialty;

   …

   shall, save otherwise provided in this Act, be commenced within six years next after the cause of action accrued and not after.”

   [5] (1986) 41 SASR 380.

3. In his decision in Brooker, King CJ said:[6]

   “… The essential question is whether the claims of the shareholders’ deposit account creditors, whom the appellant represents, were statute barred on 15^th September, 1972, the date upon which the company went into voluntary liquidation.

   The first stage in answering that question is to determine when the cause of action which is said to have been barred, arose. Section 35 of the Limitation of Actions Act provides that an action founded upon any simple contract shall be commenced ‘within six years next after the cause of action accrued and not after’.  It is trite to say that where there is a simple loan of money, the debt is due and payable immediately and from day to day from the time of the making of the loan, and that the cause of action therefore arises immediately upon the loan of the money.”

   [6] (1986) 41 SASR 380 at 382.

4. Later, King CJ said:[7]

   “… A balance sheet can be an acknowledgement of debt (The Stage Club Limited v. Millers Hotels Pty. Ltd.), and individual creditors comprised in the aggregate sums shown therein can be identified by extrinsic evidence:  Jones v. Bellgrove Properties Ltd.  The acknowledgment operates, of course, at the date at which the Balance Sheet speaks, namely the end of the relevant financial period.  I see no reason why the ordinary rule should not apply, namely that the acknowledgment implies a promise to pay.  I do not think that the difference between the date of signature of the Balance Sheet and the date at which is speaks precludes the ordinary implication.”  …

   [7] (1986) 41 SASR 380 at 385.

5. Again, in Brooker, Olsson J referred to s 42(1) of the Limitations of Actions Act 1936, which reads:

   “42  Effect of oral acknowledgement

   (1)  In any action of debt or other action in the nature of an action founded upon simple contract no acknowledgment or promise by words only shall be deemed sufficient evidence of a new and continuing contract whereby to take any case out of the operation of this Act, or deprive any party of the benefit thereof, unless that acknowledgment or promise is made or contained by or in some writing to be signed by the party to be charged thereby or by his agent.

   …”

6. Olsson J later said:[8]

   “This brings me to the question of whether the contents of annual financial statements of a corporate body, duly signed by authorised signatories, are capable of constituting a sufficient acknowledgement for the purposes of s. 42.

   …

   The law on that subject is conveniently summarized (albeit in a somewhat different statutory context) in the various judgments in The Stage Club Limited v. Millers Hotels Proprietary Limited.  They certainly indicate that financial statements can at least amount to an acknowledgement of debt, leaving aside for the moment any question of an implied promise to pay.” …

   [8] (1986) 41 SASR 380 at 393.

7. In her closing submissions, Ms Walker referred to the decision of the High Court in The Stage Club Limited v. Millers Hotels Proprietary Limited.[9]  In that case, the High Court (Gibbs CJ, Murphy J, Aickin J, Wilson J and Brennan J) looked at the situation where directors of a company signed balance sheets of the company in pursuance of their duty as directors.  Gibbs CJ said:[10]

   “… There is no doubt that the directors signed the balance sheets in pursuance of their duty as directors, but that does not mean that they did not sign as agents for the company.  The directors of a company are its agents, and the balance sheet is a statement by the company of the state of its assets and liabilities.  The directors who sign a balance sheet do so as agents of the company.”

   [9] (1981) 150 CLR 535.

   [10] (1981) 150 CLR 535 at 543.

1. Having regard to what Gibbs CJ said, I am of the view that the trustee of a family trust who signs a balance sheet will do so as an agent of the trust.

2. In Stage Club Ltd, Wilson J also considered the signing of balance sheets by directors of a company.  He said:[11]

   “… I can see no reason in the present case to doubt that the balance sheets were written documents signed by the Club’s agent.  Such a conclusion is consistent with every one of the balance sheet cases determined in England during the present century, for in none of those cases is there any suggestion that the signature of directors does not bind the company save where a particular director is disqualified by interest.”

   [11] (1981) 150 CLR 535 at 562.

3. In applying s 42(1) of the Limitations of Actions Act 1936, Ms Walker submitted that an oral acknowledgment was not sufficient unless the acknowledgment was made or contained in some writing signed by the party or his agent. Where there is a written acknowledgment of debt, such a written acknowledgment avoids the operation of s 35(a) and restarts the acknowledgment period. Thus, there is an acknowledgment contained in writing to be signed by the party or his agent. The writing takes the acknowledgment out of s 35(a) and extends or restarts the limitation period from the date of the acknowledgment. She submitted that the writing in the present case was the acknowledgment in the financial accounts (balance sheets) and are acknowledgments for s 42(1) purposes. She said consideration of the financial statements for the financial period from 2002 onwards is appropriate. The applicant said that he was giving instructions to his accountant regarding the financials for 2003 onwards. Ms Walker submitted that these were relevant acknowledgments in the period of time. She further submitted, on behalf of the respondent, that the Pre-1998 loan was not statute-barred by virtue of the operation of s 42(1) of the Limitation of Actions Act 1936 and is continually referred to in the balance sheets of the ABFT, in the ordinary course, by Mr Breakwell.

4. In his closing submissions, Mr Breakwell acknowledged that the Practice Statement (PS LA 2006/2(GA)) was not relevant to the issue of a statute-barred loan in the present case.  He agreed that the Statement related to Division 7A loans under the taxation legislation.  This is clearly correct.

5. Having regard to what the Supreme Court (King CJ, Mohr and Olssen JJ) said in Brooker and what the High Court said in The Stage Club, I am satisfied that the signing by Mr Breakwell of the balance sheets of the ABFT in the 2003 to 2008 financial years is sufficient acknowledgment in writing signed by him, as trustee of the ABFT, that the Pre-1998 loan was an asset of the ABFT. As such, it was not statute-barred under s 35(a) of the Limitation of Actions Act 1936.  In these circumstances, the Pre-1998 loan is properly included as an asset of the ABFT in the financial accounts of that Trust in the 2007/2008 year of income.  The Pre-1998 loan was a debt of the ABFT on 30 June 2008 and must be properly included in the net assets of that Trust in the maximum net asset value test calculation for or in respect of the 2007/2008 year of income.

6. After the hearing, Mr Breakwell sought permission to make submissions in writing to clarify his oral submissions before me.  Permission was granted and the respondent was given the opportunity to make further submissions in reply.  Mr Breakwell argued that, in the balance sheet of the ABFT, the Pre-1998 loan had no market value.  I disagree.  By signing the balance sheets of the ABFT, including the balance sheet as at 30 June 2008, he acknowledged that the Pre-1998 loan had the market value recorded in the balance sheets. 

7. Mr Breakwell said he was asked by Ms Walker (which occurred in cross-examination) if he signed off on all his financial statements. He acknowledged that he replied, as a general rule, he would. However, in relation to The Allan Breakwell Family Trust financials, he said the trust balance sheets were not normally signed by him. This does not accord with his evidence. When specifically asked about the ABFT, his evidence was that he had signed the financial statements for that Trust in respect of the period from 2003 to 2007. In these circumstances, in relation to the balance sheet of the ABFT as at 30 June 2008, he would have acknowledged the amount of the Pre-1998 loan component. This signing of the 2007 balance sheet is writing which would take the acknowledgement out of s 35(a) of the Limitation of Actions Act 1936 and will restart the limitation period for six years from 1 July 2007.  In my view, the Pre-1998 loan is not statute-barred.  It is an asset of the ABFT as at 30 June 2008 and must be included as part of the maximum net asset test calculation.             

8. Mr Breakwell also made reference to the signing of the Compilation Reports of the trusts that he had an interest in.  These reports were expressed in such a way that, if they required signing as part of the structure of R A Veitch and Co, it was by Mr Veitch.  The Compilation Reports should not require signing by the applicant.

   DECISION

9. For the reasons outlined above, the Tribunal affirms the decision under review.

I certify that the preceding 32 (thirty -two) paragraphs are a true copy of the reasons for the decision herein of Senior Member R W Dunne

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Administrative Assistant

Dated 25 August 2015

Date(s) of hearing	2 July 2015
Date final submissions received	17 July 2015
Applicant	In person
Counsel for the Respondent	Ms G Walker
Advocate for the Respondent	Ms R Smith
Solicitors for the Respondent	ATO Review and Dispute Resolution