Hookey and Commissioner of Taxation (Taxation)

[2018] AATA 1509

Hookey and Commissioner of Taxation (Taxation) [2018] AATA 1509 (8 June 2018)

Division:TAXATION & COMMERCIAL DIVISION

File Numbers:         2017/2307-9

Re:Scott Hookey

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Deputy President B W Rayment

Date:8 June 2018

Place:Sydney

The reviewable decision is affirmed.

..................................[sgd]....................................

Deputy President B W Rayment

CATCHWORDS

TAXATION – assessable capital gain – whether applicant is entitled to reduce that capital gain by application of the small business CGT concession –  decision affirmed.

LEGISLATION

Legislation

Family Law Act 1975 (Cth)
Income Tax Assessment Act 1997 (Cth), Division 152,

Taxation Administration Act 1953 (Cth), ss 14ZZK,14ZZO

CASES

Commissioner of Taxation v Miley [2017] FCA 1396

Spencer v The Commonwealth (1906) 5 CLR 418

Zappia v Commissioner of Taxation [2017] FCAFC 185

REASONS FOR DECISION

Deputy President B W Rayment

8 June 2018

1. The applicant made an assessable capital gain in the 2008 income year when, by contracts dated 13 December 2008, he or entities which he controlled (that is, entities related to him) sold five child care centre businesses to ABC Development Learning Centres.

2. At issue is whether he is entitled to reduce that capital gain by application of the small business CGT concession in Division 152 of the Income Tax Assessment Act 1997. The amount of the reduction in question is $1,633,841.

3. The applicant bears the onus of proof in this case in accordance with s. 14ZZK of the Taxation Administration Act 1953. There are two limbs to the applicant’s case. First, he seeks to assert that the liabilities which should be taken into account to determine the net assets bring the net value below the sum of $6,000,000. Second, he submits that the value of the assets sold is less than the price at which they were sold and that the same consequence follows.

4. The applicant draws attention to the terms of the objection decision, which accepted some of the liabilities now asserted by the applicant as part of his case.  As was recognised by the parties arguing this matter, for reasons given in the judgment of Pagone J, with whom Robertson and Bromwich JJ agreed in Zappia v Commissioner of Taxation [2017] FCAFC 185, statements made by the Commissioner in the objection decision will not discharge the burden cast upon the applicant by s. 14ZZO of the Taxation Administration Act. Section 14ZZO and s. 14ZZK are in similar terms, save that one applies in a court and the other applies in this Tribunal, and statements made by the Commissioner in the objection decision do not establish the facts upon which tax was to be levied and do not bind the Commissioner on this review. The circumstance that the Tribunal is not bound by the rules of evidence does not appear to me to entail that Zappia ought not to be followed in this Tribunal. If statements made by the Commissioner in an objection decision are not admissions which can be relied upon against him in a court of law, they should not be treated differently in this Tribunal.

5. Six liabilities are contended for by the applicant. The first is the accrued interest on 90 per cent of an RAB Finance Pty Limited loan. This loan was taken out by a related entity predominately for purposes connected with the asset, secured by a registered mortgage upon the asset, and the asset was one of the CGT assets upon which the net assets were calculated. Ninety per cent of the amount of the principal borrowed was treated by both parties as a relevant liability. Interest accrued but unpaid on 13 December 2007 was disregarded in the Commissioner’s calculations and was asserted by the taxpayer to be a relevant liability. The applicant was a guarantor of the facility, and so far as he was concerned, the liability to pay interest (and principal as well) may properly have been regarded as a contingent liability. The Commissioner submits that the liability to pay interest is only a contingent one, and therefore to be disregarded. However, so far as the borrower was concerned, no contingency affected its liability to pay interest and I treat 90 per cent of the whole of that loan including interest as a relevant liability. The amount involved is $182,692. The Commissioner also submits that since there is no evidence that the lender exercised its option to make the whole of the principal immediately due and payable, the interest should be disregarded. Quite apart from the fact that there is no reason to distinguish between principal and interest from this point of view, I do not think the submission can be accepted on wider grounds. The word “liability” takes its ordinary English meaning in the Income Tax Assessment Act 1997. That meaning, as I understand it, does not require that moneys be immediately due and payable but simply that they be payable. On that view, interest which has already accrued would form part of the liabilities of the entity at the relevant date, and interest which has not yet accrued would not do so.

6. The second liability contended for by the applicant is an amount equal to the cost to complete the Kids Academy Spring Hill child care centre. This was not an asset sold on 13 December 2018, and it was then incomplete. It was valued on an “as if complete” basis on 2 July 2007. The applicant has sought to prove the cost to complete the centre by tendering the general ledger, which shows that a total of $166,981 was spent in January 2008 to complete the project and to make it a going concern. Therefore, argues the taxpayer, it had on 13 December 2007 a net value of the amount of the valuation less the sum of $166,981, which were the required set-up costs which had not already been spent as at 13 December. Mr Livingstone for the Commissioner argues that the proof of the cost to complete, by tendering the general ledger, is insufficient to discharge the taxpayer’s onus of proof. The submission may be tantamount to a suggestion that the amounts in question should be vouched as if the enquiry involved the taking of accounts. The fact that the taxpayer bears the onus of proof does not require the taxpayer to tender what would be regarded as the best evidence of a disputed fact. What ordinarily is required in this Tribunal is rationally probative evidence, rather than the best evidence. I need to find that evidence which is tendered is reliable. The reliability of the books of account was not put in issue or thrown into doubt, and the mere fact that they are in a sense secondary business records does not make them unreliable. The valuation is expressed to be prepared on an “as if complete” leasehold “going concern” basis. Mr Livingstone drew attention to what is said at s. 37 document T18, page 1518, within the valuation. The valuer was instructed that the landlord proposed to contribute $400,000 towards the fit out of the centre, with the tenant to contribute $432,644.50, calculated according to a budget schedule of set-up costs. The valuer suggested that the lender confirm the cost to complete with a quantity surveyor or other qualified consultant.

7. The precise relationship between the estimate of $432,644.50 and the sums spent in January 2008, of $166,981 does not appear in the evidence before me, and that relationship seems not to be of any moment. The items which make up the sum of $166,981 may or may not have been included in the budget provided six months earlier to the valuer. The theory on which I understand the evidence of expenditure in January 2008 to be tendered is that, accepting that the total value as built and on a going concern basis is as stated in the valuation, in order to actually reach the condition of owning and operating that child care centre, the applicant in fact needed to outlay the money actually outlaid one month after the valuation date in January 2008. As to the landlord’s contribution of $400,000, Mr O’Meara, for the taxpayer, pointed out that the landlord’s contribution was to fit-out (that is partitions, fixtures and the like) not the set-up costs for the centre’s operation. Therefore, he suggested, the funds earmarked for the landlord’s fit out costs would not defray the January 2008 expenditure. Mr O’Meara’s submissions appear to me to be correct.

8. Another submission made by Mr Livingstone was that the date on which the expenditure of $166,981 makes it irrelevant for valuation purposes. He referred to the remark made by Isaacs J in Spencer v The Commonwealth (1906) 5 CLR 418 at 440, that after the valuation date, “all circumstances subsequently arising are to be ignored. Whether the land becomes more valuable or less valuable afterwards is immaterial. Prosperity unexpected, or depression which no man would ever have anticipated, if happening after the date named, must alike be disregarded.”

9. The need to expend money in order to complete the centre and make it operational must on 13 December 2007 have been anticipated. If it were sold to a willing purchaser on 13 December, that person would have anticipated the need to lay out his or her own money to make the centre operational, and would likely have taken an estimate of that further expenditure into account in determining what he or she was prepared to pay. Likewise, it seems to me that a vendor willing but not anxious to sell, would take account of the amounts which it would no longer have to pay if the land was sold in December 2007. In my view, the adjustment in question ought to be made to the valuation in the taxpayer’s favour.

10. The third liability contended for by the taxpayer is the sum of $395,000 borrowed by Mr Hookey in July 2006, which was still outstanding on 13 December 2007. It was not discharged until 2010, having been varied in 2008. The loan agreement is in evidence in the s. 37 documents at T39-2361. The repayment date identified is July 2007 and as I understand the document, it required interest payments to be made monthly. The repayment date was altered to 30 April 2008 by a deed of 3 October 2008, in evidence at T39-2368, which sufficiently shows that the principal was not repaid prior to 13 December 2007. I do not understand the Commissioner to contest that the liability in question is one which is relevant to be taken into account, and I find that the continued existence of the liability as at 13 December 2007 is sufficiently established.

11. The fourth liability asserted by the taxpayer is an amount of $1,577,457 said to be owed as at 13 December 2007 to the Bank of Western Australia under a guarantee given by Mr Hookey of amounts owing by Renepo Gel Events Pty Limited. The amount owing as at December 2007 is said to be proved by the calculation made by Henry Davis York, solicitors for BankWest, on 10 July 2008 at T41-2429.  The calculations referred to the fact that interest at 19.01% was then applying, which suggests that the debt at 13 December 2007 might have been smaller, with interest up to December 2007 at the same rate some eight months earlier. That is not established, since there might have been payments between December 2007 and July 2008. The taxpayer also tendered the minutes of the second meeting of creditors of Renepo Gel Events Pty Limited, which made reference to an estimated amount owing by that company apparently as at the date of the meeting of 21 June 2007 at approximately $1.8 million. See T41-2441. If that is a correct estimate, then either Mr Hookey’s guarantee was limited in some way (which is not stated in the schedule of terms tendered – see T41-2408 , or payments in reduction of the debts or interest were made between June 2007 and July 2008.

12. As will be apparent from what I have written in the previous paragraph, while it is clear that there was an indebtedness of a substantial sum as at 13 December 2007, the precise amount of that indebtedness does not appear. The taxpayer did not advance an alternate case that the debt must have been at least some amount, and speculation as to what such an amount might have been will not discharge the taxpayer’s onus of proof. It will be recalled that the taxpayer not only has an onus of proof that the assessment was incorrect but also as to what the correct amount of tax was, and I am unable to be satisfied about that as to this asserted liability.

13. The fifth liability contended for by the taxpayer is the amount which Mr Hookey owed to NAB for amounts owing by All Building Weatherproofing Pty Limited. Mr Hookey had paid part of the amount demanded by NAB on 1 August 2007 so that he owed the Bank $466,475.79 on 13 December 2007. This amount was sufficiently proved by the terms of a Statement of Claim issued against Mr Hookey by the Bank especially at paragraph 23 (T41-2484). I am prepared to act on the bank’s allegations as sufficient proof of the indebtedness.

14. The sixth liability asserted by the taxpayer arises from the Family Law arrangements made by him with his former wife. Under the terms of settlement dated 26 July 2007, approved by a Registrar at T19-1596, a number of terms were agreed. By order 1, the husband was to pay to the wife the sum of $1,500,000. By order 2, the wife was to transfer to the husband a number of assets, including her interests in KA Penrith and KA Warnervale. Order 2 was not expressed to be the consideration for Order 1. When the transfer document was entered into, dated 7 November 2007, no consideration for any particular asset was specified, no doubt because transfers under the Family Law Act are free of stamp duty. The only consideration expressed was the Family Law settlement.

15. Mr Hookey asserts that a portion of the sum of $1,500,000 should be allocated to the Penrith and Warnervale centres. I am not satisfied of that fact, and nor am I satisfied that the sum of $1,500,000 was outstanding on 13 December 2007.  Whatever values may have been attributed by either or both of the parties to those assets does not appear, and more importantly, contributions may have been taken into account by the taxpayer or his wife, or both of them, in calculating the sum of $1,500,000. The fact that a transfer document was dated in November does not suggest that anything was still due in December. The amount accepted by the Commissioner of $408,871 is the only amount of which I am satisfied in relation this claimed liability.

16. The total of the liabilities I have accepted at [5], [9], [10] and [13] is $1,211,148. That amount will be deducted from the values to be attributed to the assets themselves, and I will next consider the second limb of the taxpayer’s case referred to above at [3].

17. The Commissioner says that the value to be attributed to the assets sold is that appearing on the apparently arms-length contracts entered into on 13 December 2007. The gross value of the other CGT assets is agreed. If that is so, then the taxpayer will not be entitled to a small business CGT concession.

18. The taxpayer sought to prove that the price agreed between the vendor and purchaser was not that which a willing purchaser would have had to pay to a vendor willing but not anxious to sell. On the contrary, the taxpayer says, the purchaser was not only willing to purchase but very anxious to do so, and prepared to pay above market value in order to add to its portfolio. The evidence which it calls in aid of that case includes a valuation prepared at the expense of the taxpayer for the taxpayers’ bank (the Nelson valuation) dated July 2007, about five months before the 13 December date. In the July valuation, the properties assessed (that is, four of the five centres) are valued at a total of about $3.2 million less than the purchase price stipulated in the contracts of sale. The valuation noted that a premium may be paid by a major chain operator such as ABC Development Learning Centres, Ramsay and Bourne, Macquarie Bank to acquire properties as part of a portfolio, however this had not been taken into account in the valuation. The qualification is important in this matter, because, as was known “just before” the relevant sale, ABC was indeed an interested purchaser. Just why major chain operators were prepared to pay more than others was not explored by any evidence before the Tribunal. It may be that such a purchaser would be able to take advantage of economies of scale, in order to derive more net income from the centres sold.

19. The taxpayer also recently obtained a retrospective valuation as at 13 December 2007 (the Cornerstone valuation) which, if correct, suggested that altogether ABC had overpaid about $3.5 million. The retrospective valuation by Cornerstone made no reference to the price actually paid by ABC in the contracts of sale, and advanced no explanation as to why it might have been prepared to pay more than the amount of the valuation. It was stated to be prepared as a “limited scope valuation report” for the purposes of tax planning, and was conducted without any analysis of the competition or market place, and stated that under APES 225, if a complete valuation had been performed, it was possible that the results may have been different. The qualifications, to which I have referred, together with the failure to refer to the prices paid by ABC, make it very difficult to rely upon the Cornerstone valuation in resolving the issue arising in these proceedings.

20. There was tendered by the taxpayer information about the failure of ABC soon after the completion of the subject sales, but there is nothing to suggest that the failure of ABC arose from any propensity to pay prices which were unrealistically high. ABC wrote down the value of its portfolio of assets by a total of $1.185 billion in November 2008, including a total sum of $682.2 million for impairment of childcare businesses. November 2008 was during the global financial crisis. The sum of $682.2 million was not shown to include particular amounts for the child care centres sold by Mr Hookey or his associates to ABC.

21. The Commissioner drew attention to a remark in another business record dated 25 July 2007, being a loan submission made on behalf of Kids Academy Hornsby Pty Ltd, in which the statement is made that the firm offer of ABC matched the offer that Ramsay and Bourne had given him. That remark is consistent with interest in the properties having been expressed by Ramsay and Bourne as well as ABC, and at a similar price.

22. A decision of Wigney J on appeal from this Tribunal in Commissioner of Taxation v Miley [2017] FCA 1396 contains a discussion of the proper valuation of a one third shareholding in a proprietary company where the other shareholders were also prepared to sell their shareholdings to the same purchaser, and the purchaser was prepared to pay, and did pay, a premium for the acquisition of the entire shareholding. His Honour held that it would be an error of law to disregard the price paid by that purchaser, and to treat the fact that all shareholdings were being transferred at once as a special circumstance, to be disregarded in the valuation of the minority interest being transferred. His Honour wrote at [81]:

    That is not to say that it is always necessary to employ the hypothesis of a willing seller and purchaser. That hypothesis is merely a useful and conventional method of arriving at a market value: Boland v Yates Property Corporation Pty Ltd [1999] HCA 64 ; (1999) 167 ALR 575 at [83] (per Gleeson CJ, citing Minister for Public Works (NSW) v Thistlethwayte [1954] AC 475 at 491). Where the asset in question has been the subject of a recent arm’s length sale, it is generally unnecessary to hypothesise. If the recent sale transaction can be said to be one between a willing but not anxious seller, and willing but not anxious buyer, the price that the buyer and seller actually agreed on may generally be taken to be the market price, or at least a reliable indictor, if not the best evidence, of the market price: Inez Investments Pty Ltd v Dodd (1979) 26 The Valuer 501 at 505; Rostam Pty Ltd v Valuer General; Shavran Pty Ltd v Valuer General [2011] NSWLEC 1387 at [13]; Commonwealth Custodial Services Ltd v Valuer General [2007] NSWCA 365 at [106], [115]; Alcan NT Alumina Pty Ltd v Commissioner of Taxation [2007] NTSC 9 ; (2007) 208 FLR 159 at 183.

1. Further, at [91], his Honour wrote:

   Even if the valuation of an asset is to be approached on the basis of hypothetical buyers and sellers, it is necessary to have regard to the realities of the market: “although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place”: Inland Revenue Commissioners v Gray [1994] STC 360 at 372. If there is, or is likely to be, a particular buyer who is likely to be willing to pay more for the asset in question than others because they are in a better position to exploit the particular attributes or potentialities of the asset, that buyer should not be excluded in considering the relevant market or market value.

2. In my opinion, the taxpayer has failed to establish that the contract price was not the market price of the learning centres. In order to do such a thing, it would have needed to lead evidence that the price paid by ABC was wholly erroneous, and affected by error. The prima facie effect of the negotiated price was to show that the market price was the amount agreed to be paid by ABC, and the taxpayer has not in my opinion displaced that prima facie position. I am not satisfied that ABC paid other than the market value for the properties.

3. In the result, therefore, the reviewable decision will be affirmed.

I certify that the preceding 25 (twenty -five) paragraphs are a true copy of the reasons for the decision herein of Deputy President B W Rayment

..................................[sgd].................................

Associate

Dated: 8 June 2018

Date of hearing:	16 April 2018
Counsel for the Applicant:	Mr M O'Meara
Counsel for the Respondent:	Mr L Livingston