Commissioner of Taxation v Byrne Hotels Qld Pty Ltd

[2012] HCATrans 141

[2012] HCATrans 141

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane   No B58 of 2011

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

BYRNE HOTELS QLD PTY LTD

Respondent

Application for special leave to appeal

FRENCH CJ
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT BRISBANE ON FRIDAY, 8 JUNE 2012, AT 9.59 AM

Copyright in the High Court of Australia

MR N.J. WILLIAMS, SC:   May it please the Court, I appear with MS M.M. BRENNAN for the applicant.  (instructed by Australian Government Solicitor)

MR F.L. HARRISON, QC:   May it please the Court, I appear with my learned friend, MR D.W. MARKS, for the respondent.  (instructed by McCullough Robertson Lawyers)

FRENCH CJ:   Yes, Mr Williams.

MR WILLIAMS:   Yes, thank you, your Honour.  If a small business sells an asset used in its business, whether or not it accrues a taxable capital gain, and the amount of such tax are affected by whether it satisfies the maximum net asset value test, which is set out at page 38 of the application book at line 15 ‑ ‑ ‑

FRENCH CJ:   So this is all about the category of things which can be treated as liabilities for the purposes of the net asset test, as it were, just before disposal?

MR WILLIAMS:   That is so.  The test focuses on a particular time, as your Honour the Chief Justice has just observed, and this is at about line 15 on page 38 in the chapeau of the section, just before the CGT event, here the entry into the contract of sale.  That indicates, as Justice Bennett observed at page 51 of the book at about line 1:

that the legislature intended to exclude from the MNAV test the effects of the CGT event arising on or after the CGT event.

Now, whether or not a contemplated sale will be commercially viable will often, perhaps usually, turn on whether or not capital gains tax is payable and if so, on the amount of the tax.  In a case such as this the tax payable could have been the corporate rate of 30 per cent, it could have been the 50 per cent concessional rate of 15 per cent or nothing at all, although here since the maximum net asset value test controls access to both the concessional 50 per cent rate and the availability of rollover relief, the outcomes here were either 30 per cent or nothing.

The rollover relief provisions are set out in the authority book behind the first tab, the legislation tab, and they are at the end of that material from about page 187 of the print, “Subdivision 152‑E – Small business roll‑over” relief.  These provisions govern the acquisition of replacement assets.  Your Honours will see on the following page section 152‑405, the basic principles, and the first of those in 152‑405(1) is that the rollover relief can be claimed if the basic conditions are satisfied.

FRENCH CJ:   What we are concerned about in this case is whether or not the condition for the engagement of these concessions were satisfied.

MR WILLIAMS:   That is so, but the point that I am making here is that the MNAV test is the gateway to both the 50 per cent concession and this important rollover relief provision, which your Honours will see in subsection (3), permits the acquisition of a replacement asset in a subsequent year with no capital gains tax if the MNAV test is satisfied.  The short point that I am seeking to make is that these are very important provisions for small business, and the predictability and certainty of their operation is paramount because business decisions will be affected critically by the operation of 30 per cent, 15 per cent or nothing, and predictions on the application of that in respect of acquisition of new assets, replacement assets for assets that are being sold.

Now, the short definition, going back to the application book, which is set out at the top of page 39 of the book, the short definition there set out of net value of CGT assets involves the question of whether:

the market values of those assets exceeds the sum of the liabilities of the entity that are related to the assets.

Now, applying that short definition from the top of page 39 will involve, if the decision of the Full Court here is undisturbed, the application of the construction that is set out at page 68 of the book in the judgment of Justice Greenwood from paragraph 127 to 128 at page 68 of the book.  That will involve assessing inchoate or contingent liabilities relating to the asset to ascertain whether they comprise the – using the language of paragraph 127:

kind of burdens arising out of performance over a reasonably lengthy time of a contract pre‑dating the CGT disposal event.

So it will not simply be a contingent real estate ‑ success fee real estate contracts.  It will cover all forms of success based fees which are commonplace these days, including even ‑ ‑ ‑

FRENCH CJ:   Is that language critical to the actual outcome in this case?

MR WILLIAMS:   It is, your Honour, because it reflects – in effect, it summarises the reasoning from paragraph 125 on the preceding page, the reasoning that led the majority to the view that they adopted.  It is the period of time over which the work was performed and the nature of the obligations – at the top of paragraph 126, “the mutual bundle of rights and obligations” coming from the contract, “the burden cast upon the entity” toward the foot of that paragraph, page 68, at about line 10; here, “burden” being substituted in effect for “liability”, burden being a much wider term, “by the obligations arising under the contract”.  It is going to be an evaluative judgment in each case as to the length of time and the kinds of burdens that will be involved in ascertaining whether the transaction is going to attract CGT or not.

KIEFEL J:   It sounds a little like a floodgates argument.

MR WILLIAMS:   It is not so much floodgates, your Honour.  The difficulty is that because it is a test that applies to small business it does by its nature arise frequently and the dividing line is one that will arise frequently.  It is not a matter of saying that there will be a wide array of transactions brought in, it is rather that there will be a wide array of transactions which will be rendered uncertain.

KIEFEL J:   Here the question was really whether a contingent liability comes within an undefined term of liability.  The Full Court’s approach which gave a very wide meaning to the term “liability” does not of itself cut across the objective of certainty which the legislation obviously seeks by having the assessment at one point in time.  There is no method for adjustment later, is there?

MR WILLIAMS:   No.

KIEFEL J:   It is a one point in time assessment of market value?

MR WILLIAMS:   That is so.

KIEFEL J:   So a wide view of liability does not appear to cut across that objective.

MR WILLIAMS:   The complaint that we make is not so much about the width of the view, but about the uncertainty.  It is Justice Bennett’s approach for which we contend.  That can be found at pages 52 to 53 of the book.  Justice Bennett accepted that contingent liabilities, some contingent liabilities, could fall within the term ‑ that is back on the previous page ‑ but her Honour’s approach is really seen at page 52, starting at about paragraph 63 and going through the middle of paragraph 63:

there was no existing contractual obligation –

just prior to the CGT event –

which the real estate agent could enforce the payment of the commission –

The highest it could be put is in the three dot points from the foot of 52 and over to the top of 53, and in paragraph 64:

As at the “just before” time, Byrne Hotels was not, by virtue of its contractual arrangement with the real estate agent, subject to an obligation that could be classified as a liability for the purposes of s 152‑20(1).

Now, her Honour accepted that legal fees, fees in respect of work which had been performed but not yet built, were nevertheless liabilities within the section because that ‑ ‑ ‑

KIEFEL J:   They are not contingent?

MR WILLIAMS:   No, they are not.  They are not contentious here, but that shows that, nevertheless, it is a wide view that is adopted.  The point at issue is the uncertainty of the view that the majority has adopted looking at it as it does at an evaluative judgment about the kinds of burdens, the period of time over which it has been performed, is a real estate agent’s contract that is entered into three days or a week before the sale included or excluded?  In our submission, that will be a matter of evaluative judgment and that uncertainty is, at the least, undesirable in respect of a provision such as this.

KIEFEL J:   On the other hand, it might be argued that because this is a benefit provided by the legislation to small business and because there is only one point in time for the assessment with no ability to adjust later when liability becomes fixed, that you ought to take a wide view of liability at the point of assessment.

MR WILLIAMS:   Well, it is not, in our submission, so much a question of the width of the view as of the question of the certainty.  Liability, in our submission, should be restricted in the way that ‑ ‑ ‑

KIEFEL J:   But what effect does the uncertainty have?  That there might on occasions be a windfall for the small business operator, the taxpayer?

MR WILLIAMS:   No, the uncertainty is much greater than that.  A taxpayer who, for example, engages a real estate agent and is presented with a sale possibility the following weekend will have to evaluate in deciding whether there is 30 per cent liability, 15 or zero, whether or not that is sufficient to come within the majority’s reasonably lengthy period of time test.  There will be other evaluative judgments in the case of an agreement involving a commercial agent of a different kind but based on a success fee or a solicitor to do the legal work but only to bill if there is success in respect of it.

So the problem is the uncertainty that it creates in administration for the ATO, and obviously that is why I am here, and in administration for the small business and small business advisers in ascertaining whether or not the contemplated transaction will attract a tax or not, because 30 per cent, 15 per cent will often, probably usually, be critical to whether the transaction proceeds or not.  Especially as that is so when one is dealing with the categories of rollover relief that I emphasised earlier on where replacement of assets is being contemplated, perhaps not occurring within the same year, occurring the following year or things of that kind.  These are critical judgments for small business.  A difference of 15 or 30 per cent in the cost of an asset will usually be decisive as to whether a course will be pursued or not. 

Now, the respondents rely upon the amendment of the provision in opposition to the grant of special leave.  Upon examination, the amendment supports the Commissioner, in our submission.  The amendment is behind tab 2 in the bundle of authorities and it is at page 12.  Well, perhaps I should start at the foot of page 11, behind tab 2, item 23.  The existing subsection was repealed and a new subsection substituted.  The subsection in chapeau has some slight drafting differences, but they are merely matters of form.  The (a) paragraph your Honours will recognise, which is the critical one, is in precisely the same form as the one considered by the Full Court in the present case.  But additional provision is made in paragraph (b) dealing with accounting provisions:

(i)provisions for annual leave;

(ii)provisions for long service leave –

Truly an inchoate liability that depends on the employee staying the period before it will crystallise, seven or ten years.  At nine years it is unknown whether it crystallises or not, but specific provision made for a range of these matters.  The reason that was done, or the legal basis on which it was done is in the explanatory memorandum behind the next tab.  It is at page 19 of the explanatory memorandum, at the foot of page, paragraph 1.24:

The maximum net asset value test allows the net asset value of an entity to be reduced by provisions for annual leave, long service leave, unearned income and tax liabilities.  These amounts are not included as liabilities because they are not present legal obligations, but are relevant to the value of the business, having regard to commercial business valuation methods.

So the assumption, the construction on which the amendment has proceeded is that for which the Commissioner contends and is, in substance, the opposite of that which the majority ‑ ‑ ‑

FRENCH CJ:   Another view of it is that the amendment, as it were, places paragraph (a) in an altered statutory context and so you have a different constructional argument in relation to (a) available to you.

MR WILLIAMS:   It is certainly the case that context is to be considered at the outset in construction, but what a court or, more likely, a tribunal and, before that, taxpayers and their advisers will have to deal with if the Full Court decision stands unaltered is that it will be necessary to try to reconcile the majority decision here which proceeded from a particular construction of what “liability” meant with an amendment that proceeded from the opposite assumption.  So that compounds the uncertainty and further supports the grant of special leave.  Your Honours, unless there are matters you wish to raise, those are our submissions.

FRENCH CJ:   Thank you, Mr Williams.  Mr Harrison, we will not need to trouble you.

Division 152 of the Income Tax Assessment Act 1997 (Cth) contains concessional provisions in favour of small business in relation to capital gains tax liabilities arising on the sale of an asset.  The Commissioner applies for special leave to appeal from a decision of the Full Court of the Federal Court in which that court construed the term “liabilities of the entity that are related to the assets”.  The Act applies such liabilities to the calculation of the “net value of the CGT assets” of the taxpayer and “connected entities” “just before the CGT event”.  If the maximum net asset value calculated by reference, inter alia, to such liabilities did not exceed a prescribed amount, the taxpayer was entitled to the concessions.

The Commissioner submitted that the Full Court erred in including within the scope of relevant liabilities contingent liabilities including a real estate agent’s commission payable only after sale of the taxpayer’s business.  The Commissioner also submitted that the term “liability” in this context did not extend to an obligation only enforceable if the CGT event, namely the sale of the asset, occurred.

Without endorsing the full ambit of the Federal Court’s description of a relevant contingent liability as “comprising the kind of burdens arising out of the performance over a reasonably lengthy time of the contract predating the CGT disposal event”, this Court is of the opinion that the approach of the Full Court is otherwise unattended by sufficient doubt and the prospects of success on an appeal insufficient to warrant the grant of special leave.

We note also the 2007 amendment to section 152-20(1) of the Income Tax Assessment Act which may raise different constructional considerations.  Special leave will be refused with costs.

The Court will now adjourn to reconstitute.

AT 10.21 AM THE MATTER WAS CONCLUDED