GREGORY PHILLIPS and COMMISSIONER OF TAXATION
[2012] AATA 219
•17 April 2012
[2012] AATA 219
Division TAXATION APPEALS DIVISION File Number(s)
2010/1395
Re
GREGORY PHILLIPS
APPLICANT
And
COMMISSIONER OF TAXATION
RESPONDENT
DECISION
Tribunal M D Allen, Senior Member
Date 17 April 2012 Place Sydney The decision under review is affirmed.
.......[sgd]..........................................................
M D Allen, Senior Member
CATCHWORDS
INCOME TAX – capital gains tax – small business concession – was net asset value of company giving a mortgage to secure an advance to another company in the same group reduced by the amount secured – decision affirmed.
LEGISLATION
Income Tax Assessment Act 1997 Subdivision 152
Taxation Administration Act 1953 s 14ZZK
CASES
Commissioner of Taxation v Dalco (1990) 168 CLR 614
Federal Commissioner of Taxation v Byrne Hotels QLD Pty Ltd (2011) 196 FCR 524
Re Tingari Village North Pty Ltd and Federal Commissioner of Taxation (2010) 78 ATR 693
REASONS FOR DECISION
M D Allen, Senior Member
17 April 2012
By application made 9 April 2010 the Applicant sought review of the Respondent’s objection decision of 11 February 2010 to disallow the Applicant’s objection against his income tax assessment for the 2006 tax year.
In an amended assessment dated 14 September 2009 the Respondent assessed the Applicant’s taxable income at $1,853,630.00 including capital gains of $1,700,000.00 and imposed a shortfall penalty in the sum of $163,687.60 on the basis that the Applicant or his agent had failed to exercise reasonable care in the preparation of his original return.
Pursuant to s 14ZZK of the Taxation Administration Act 1953 the Applicant has the onus of proving that his assessment for the year ending 30 June 2006 was excessive. In order to discharge the onus of proof the Applicant must prove not only that the assessment is excessive but also prove what the true amount should be: Commissioner of Taxation v Dalco (1990) 168 CLR 614.
Although the Applicant was called to give evidence in this matter I found what evidence he did give to be of absolutely no assistance at all in resolving the issues before me. The Applicant, understandably, relied upon his advisors to formulate the series of transactions in question but appeared to have no real understanding of what was the ultimate effect of the documentation he was being asked to sign.
The Applicant is a director and shareholder of a series of interlocking companies. In 2005 he decided, on advice from his then accountants, to restructure the companies. The documents before me reveal that the following procedures took place viz.
The Applicant is a director and shareholder of P Price and Co Pty Ltd, a sole director and shareholder of GRP Nominees Pty Limited and a director of Phillips Fabrications Pty Limited.
In addition, the Applicant is a director of G and M Phillips Family Pty Ltd and the corporate trustee for the Phillips Family Trust. In the 2006 tax year the Applicant was in receipt of wages from Phillips Fabrications Pty Limited.
Prior to 30 January 2006 the Applicant was the sole shareholder in Phillips Fabrications Pty Limited. As part of the company restructuring devised by the Applicant’s accountants an independent valuation was obtained of the value of the Applicant’s shares in Phillips Fabrications Pty Limited. On 30 January 2006 those shares were sold to the Phillips Family Trust for the sum of $3,400,000.00.
As at 30 January 2006 P. Price and Co Pty Ltd was the owner of property situated at 6-8 River Road, West Parramatta. Phillips Fabrications Pty Limited carried on business at that site.
On 30 January 2006 P. Price and Co Pty Ltd entered into a mortgage with the Commonwealth Bank of Australia for the sum of $1,400,000.00. The security for the said mortgage was the land situated at 6-8 River Road, West Parramatta.
In addition, P. Price and Co Pty Ltd executed an equitable charge over all its assets in favour of the Commonwealth Bank and entered into a deed of guarantee in favour of the said bank.
The sum of $1,400,000.00 secured by the mortgage over the land owned by P. Price and Co Pty Ltd was advanced by the Commonwealth Bank to G and M Phillips Pty Ltd as trustee for the Phillips Family Trust.
Whereas the documentation needed to secure the advance to the Phillips Family Trust was executed on 30 January 2006 the sum advanced by the Commonwealth Bank was not credited to the Trust’s bank account until 1 February 2006.
Subdivision 152 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with relief granted to small businesses from the impact of the capital gains tax (CGT). The legislative provisions were succinctly summarised by Greenwood J in Federal Commissioner of Taxation v Byrne Hotels QLD Pty Ltd (2011) 196 FCR 524 at 539:
[83] … "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" (original emphasis). The integers involve identifying the "market values" of "CGT assets" and the sum of the excess of those values having regard to the "liabilities" of the entity that are "related to" the CGT assets. The sum of the s 152-15(a) net CGT asset values must be struck at a moment in time described in s 152-15 as "just before the CGT event". It follows that in determining a "liability of the entity" for the purposes of determining the "net value of the CGT assets" of an entity, it is necessary to establish whether the contended liability was a liability of the entity just before the CGT event.
[84] A "CGT asset" is defined by s 108-5(1), with an elaboration of the notion of "CGT assets", at s 108-5(2) so as to "avoid doubt". The notion of a "liability" or "the liabilities of the entity" is not defined either within Div 152 or by s 995-1 of the Act.
[Original emphasis]
There is no dispute in these proceedings that in relation to the threshold requirements for relief pursuant to Division 152 of the ITAA 1997 these requirements have been met by the Applicant. The issue in dispute is whether the net value of the capital gains tax assets of P. Price and Co Pty Ltd exceeded the sum of $5 million. This in turn depends upon the categorisation of the sum of $1,400,000.00 advanced by the Commonwealth Bank to G and M Phillips Pty Ltd.
For the Applicant it was submitted that upon the execution of the mortgage over the land owned by P. Price and Co Pty Ltd there existed a contingent liability on the part of P. Price and Co Pty Ltd thus reducing its asset position by the sum of $1,400,000.00 and hence below the sum of $5 million.
A CGT event, A1, is defined by s 104-10 of the ITAA 1997 as occurring if there is a change of ownership from one entity to another. It occurs at the time of the contract, if there is one, otherwise when the change of ownership occurs. In this matter the CGT event occurred on 30 January 2006.
It was submitted by the Respondent that whereas the CGT event occurred on 30 January 2006 the liability of P. Price and Co Pty Ltd to the Commonwealth Bank did not come into existence until 1 February 2006 when the sum of $1,400,000.00 was paid into the account of G and M Phillips Family Pty Ltd on behalf of the Phillips Family Trust.
On the authority of Commissioner of Taxation v Byrne Hotels QLD Pty Ltd supra the Applicant submitted that the contingent liability of P. Price and Co Pty Ltd under the mortgage to the Commonwealth Bank should be taken into account to reduce its assets and that in turn this led to the assets of the Applicant being reduced below the $5 million limit thus entitling him to a 50 per cent reduction in capital gains.
Superficially, if one simply holds that Byrne Hotels supra is authority for the proposition that contingent liabilities can be used to reduce value prior to a CGT event then the Applicant should succeed. However, that is not what the Court held.
All three members of the Court agreed that legal fees incurred for work done “just before time” were a liability within s 152-20 of the ITAA 1997 as the taxpayer had an existing obligation to pay such fees. It is to be noted the Court referred to “work done”. As Bennett J pointed out at 538, Byrne Hotels had no existing legal or equitable obligation to pay fees to its solicitors for work that had not yet been performed. Cf Greenwood J at 547, [133] to the same effect.
Bennett J dissented from the majority in that she would not have allowed fees payable to the real estate agent. Those fees did not become payable until the contract for the sale of the hotel had been executed but in her Honour’s judgment the vendor, Byrne Hotels, did not have a legal or equitable obligation to the real estate agent “just before time”, that is, immediately prior to the execution of the contract for sale.
Greenwood J with whom Dowsett J agreed would have allowed the real estate agent’s fees to be deducted from the net value of the asset, that is, the hotel.
However, at 546 Greenwood J makes it clear that it was not simply the presence of a contingent liability that gave rise to reduction in net value.
As his Honour stated at [125]-[126]:
[125] Just before the CGT disposal event, the taxpayer was a ready and willing seller and the buyer was a ready and willing buyer, intending to complete the transaction by settlement of each contract. It is true that one of the four provisional events had to fall in as a subsequent provisional event qualifying the obligation cast upon the taxpayer arising out of the contract with Jones Lang. Although the liability of the entity was, just before the CGT disposal event, a contingent one, the four events subsequent operated as a qualification on the obligation rather than matters which, properly construed, give rise to a conclusion about the nature of the relationship between the agent and the taxpayer such that no obligation concerning the benefits and burdens of the contract, subsisted.
[126] The source of the obligation is to be found in the mutual bundle of rights and obligations cast upon the parties by their exclusive agency contract, out of which the obligation to pay the agreed commission arose. The entity, just before the CGT event, was burdened with that obligation, according to its terms. It is important to remember that in determining whether the maximum net asset value test is satisfied, regard is to be had to the net value of the CGT asset of the taxpayer entity (apart from the other aggregation considerations in s 152-15) and the burden cast upon the entity by the obligations arising under the contract with Jones Lang was a contingent burden which properly falls within the notion of a "liability" in determining the net value.
[Original Emphasis]
In this matter the CGT event may have been dependent upon the Commonwealth Bank of Australia making the advance however at the time of the CGT event the advance had not in fact been made nor had any event arisen which might have led to the bank seeking to execute its rights under the mortgage as opposed to recourse against other entities which had offered securities to secure the advance.
Deputy Presidents McPherson and Hack in Re Tingari Village North Pty Ltd and Federal Commissioner of Taxation (2010) 78 ATR 693 at 707 referring to s 152-20 of the ITAA 1997 stated “As we read the section it requires that the relationship exist between the liabilities and assets of the entity in issue, not any assets held by other connected entities”. As stated above in this matter the advance was to one entity, namely, G and M Phillips Family Pty Ltd and the mortgage was over land owned by P. Price and Co Pty Ltd.
As the CGT assets of P. Price and Co Pty Ltd cannot be reduced by the sum advanced to G and M Phillips Family Pty Ltd the decision of the Respondent as relates to tax payable is affirmed.
So far as penalty is concerned I see no reason to interfere with the decision of the Respondent. In these proceedings the Applicant based his case upon the decision in Byrne Hotels supra. That decision was handed down on 11 October 2011. The Applicant’s objection was lodged with the Respondent on 13 November 2009. The Applicant had on 11 February 2009 been informed he would be the subject of an audit by the Respondent. On the authority available to the Applicant at both of those times the position for which he now contends was contrary to existing authority. In these circumstances I find that the return lodged by the Applicant was lodged without due care and attention.
If the Applicant considered that he had a reasonably arguable case such as the case he sought to advance in these proceedings he could have sought a private ruling from the Respondent.
The decision under review is affirmed.
I certify that the preceding 31 (thirty one) paragraphs are a true copy of the reasons for the decision herein of M D Allen, Senior Member.
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Associate
17 April 2012
Date of hearing 29 March 2012 Counsel for the Applicant Bradley Jones Solicitor for the Applicant Phillip Smith Counsel for the Respondent Heydon Miller Solicitor for the Respondent Rimma Miller
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Capital Gains Tax
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Small Business Concession
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Net Asset Value
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