Miley and Commissioner of Taxation (Taxation)
[2016] AATA 73
•15 February 2016
Miley and Commissioner of Taxation (Taxation) [2016] AATA 73 (15 February 2016)
Division
TAXATION & COMMERCIAL DIVISION
File Number(s)
2013/6008;
2013/6009
Re
Andrew Miley
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President S E Frost
Date 15 February 2016 Place Sydney Objection decisions in each case (in respect of both primary tax and administrative penalty) set aside; each objection allowed in full.
........................[sgd]. ...............................................
Deputy President S E Frost
CATCHWORDS
TAXATION AND REVENUE – income tax - capital gains tax – disposal of a CGT asset – maximum net asset value test - whether CGT liability should be reduced because maximum net asset value test met immediately before sale – determining market value of assets – determining market value of percentage of shares in a sale of all shares – meaning of ‘market value’ - construction of s 152- 20 Income Tax Assessment Act 1997––– whether selling price best evidence of market value at relevant date – discount for lack of control – maximum net asset value test met - decision set aside
LEGISLATION
Income Tax Assessment Act 1997, Pt 3-1, Div 115, s 116-30, Pt 3-3, Div 152, ss 152-15 and 152-20(1), Subdiv 960 – S, s 995-1
CASES
Abrahams v Commissioner of Taxation (1944) 70 CLR 23
Commissioner of State Revenue v Pioneer Concrete (Vic) Pty Ltd (2002) 209 CLR 651
Excellar Pty Ltd and Commissioner of Taxation [2015] AATA 282
Inez Investments Pty Ltd v Dodd (1979) 26 The Valuer 501Spencer v Commonwealth (1907) 5 CLR 418
REASONS FOR DECISION
Deputy President S E Frost
15 February 2016
INTRODUCTION
The applicant taxpayer, Andrew Miley, was one of three equal shareholders in AJM Environmental Services Pty Ltd (the Company). During the 2008 income year the three shareholders sold all their shares in the Company to an arm’s length purchaser (the Buyer). That sale gave rise to a potential capital gains tax (CGT) liability for Mr Miley, as a CGT event A1.
Because he had held his shares for more than 12 months Mr Miley was automatically entitled to a CGT discount of 50 per cent. However, he claims that he is entitled to a further 50 per cent discount (and therefore no CGT liability at all) because, he says, immediately before the sale he satisfied the maximum net asset value (MNAV) test by having less than $6,000,000 in assets.
The Commissioner does not agree. He says that the value of Mr Miley’s assets totalled slightly more than $6,000,000 and as a result the further 50 per cent discount was not available. The question for the Tribunal is whether Mr Miley satisfied the MNAV test or not.
If Mr Miley did not satisfy the MNAV test, a second question arises – whether or not he is liable to administrative penalty (which was assessed at the rate of 25 per cent).
THE MAXIMUM NET ASSET VALUE TEST
The MNAV test is satisfied if, as far as is relevant to Mr Miley’s circumstances, the net value of his CGT assets just before he sold his shares in the Company did not exceed $6,000,000: s 152-15 of the Income Tax Assessment Act 1997 – the ITAA.
The ‘net value’ of a person’s assets is the market value of those assets less specified reductions: s 152-20(1) of the ITAA. By s 995-1 of the ITAA, the term ‘market value’ has a meaning affected by Subdivision 960-S, but nothing in that Subdivision is relevant here.
THE SALE OF THE SHARES
Under the terms of a written agreement dated 7 March 2008 (Exhibit R3), Mr Miley and the two other shareholders in the Company sold their shares for $17,700,000. They also agreed that following the sale, they would transfer to the Buyer all the shares they held in a second company, AJM Property Holdings Pty Ltd (AJM Property). There was no further consideration payable by the Buyer for the transfer of the shares in AJM Property.
It is apparent from the Sale and Purchase Agreement, and I find, that the total consideration was divided equally between the three shareholders. It follows that Mr Miley was entitled to $5,900,000 for the sale of his 100 shares in the Company.
THE ‘MARKET VALUE’ OF THE SHARES
A major area of dispute between the parties concerns the ‘market value’ of those 100 shares just before Mr Miley sold them. The Commissioner says that the market value of the shares is the actual consideration paid by the Buyer for them. Mr Miley, on the other hand, says that the market value of the shares should be determined by reference to the well-known formulation of the expression in Spencer v The Commonwealth (1907) 5 CLR 418: see below, at [17].
If the Commissioner is correct, Mr Miley will not satisfy the MNAV test unless he can establish that just before he sold the shares in the Company, he had ‘made’ a ‘provision’ for his tax liabilities for the 2003 to 2007 years – even though those liabilities had not yet been assessed by the Commissioner.
If, on the other hand, Mr Miley is correct, he will satisfy the MNAV test if (but not only if) the valuation of the shares as proposed by his expert, Mr Halligan, is accepted. In fact, arithmetically, any valuation of the shares lower than about $5,810,000 will result in Mr Miley satisfying the MNAV test, irrespective of the answer to the tax liability ‘provision’ question.
THE COMMISSIONER’S SUBMISSIONS ON THE ‘MARKET VALUE’ OF THE SHARES
The Commissioner’s primary submission is that s 152-20(1), properly construed and with the assistance of the statutory context of Parts 3-1 and 3-3 of the ITAA, requires that:
(a)the amount recognised as the market value of a CGT asset to which the CGT event relates (and in respect of which Division 152 seeks to operate) is the same as the amount used in calculating whether the capital gain was made from a particular CGT event and the amount of that gain;
(b)the market value of a CGT asset in respect of which the CGT event happens is to be determined only when one of the four special situations, as described in s 116-30[1], occurs; and
(c)the market value of all other CGT assets is to be determined by reference to valuation evidence alone.
[1] The situations described in s 116-30 are (1) no capital proceeds; (2) capital proceeds not capable of being valued; (3) capital proceeds not equal to market value and parties not dealing with each other at arm’s length; and (4) capital proceeds not equal to market value and CGT event C2 occurs.
Fundamental to this submission is the proposition that there are two broad classes of assets whose values may need to be determined for the purposes of the MNAV test. The first class comprises the CGT asset or assets the subject of a CGT event. The second class comprises those CGT assets owned by the taxpayer but not subject to a CGT event.
The submission, as I understand it, is that the method of determining the ‘market value’ of assets differs as between the two classes. While the ‘market value’ of the second class is to be determined by reference to orthodox valuation principles – what price would a willing but not anxious seller be prepared to accept from a hypothetical willing but not anxious buyer – the ‘market value’ of the first class is said to be, as a matter of principle, the amount of the capital proceeds arising from the CGT event unless one of the statutory ‘market value substitution’ rules in s 116-30 applies.
A secondary submission of the Commissioner is that the most reliable evidence of market value of the 100 shares that Mr Miley sold is determined by the price that the unrelated willing purchaser did in fact pay for those shares.
Alternatively, should the Commissioner fail on both of the first two submissions, he submits that the valuation report of his expert, Mr Samuel, should be preferred to the report of Mr Miley’s expert, Mr Halligan.
MR MILEY’S SUBMISSIONS ON THE ‘MARKET VALUE’ OF THE SHARES
Mr Miley’s submission is based on what is described as the ‘Spencer hypothesis’, deriving from Spencer v The Commonwealth (1907) 5 CLR 418. In that case Griffith CJ said at 432:
In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring “What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?” It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.
Although specifically expressed to be referable to the valuation of land, there is no reason in principle why that formulation is not applicable to other forms of property. Indeed, both valuation experts[2] adopted the following as their definition of ‘market value’, in circumstances such as here involving the sale of shares:
the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm’s length.
[2] Mr Halligan (Exhibit A1), in the Glossary; Mr Samuel used the word ‘amount’ rather than ‘price’, and moved the expression ‘in an open and unrestricted market’ to the end of the definition.
Mr Miley also refers to the following statement of Williams J in Abrahams v Commissioner of Taxation (1944) 70 CLR 23 at 29:
It has been held, however, in the case of other Australian statutes which, like the Estate Duty Assessment Act, do not direct any particular method of estimating the value of the assets, that it is proper to estimate the value of shares held by a deceased in a company, the articles of association of which contain restrictions on transfer, in the same manner, and that the court should endeavour to ascertain (as in the case of property compulsorily acquired) the price which a willing but not anxious vendor could reasonably expect to obtain and a hypothetical willing but not anxious purchaser could reasonably expect to have to pay for the shares if the vendor and purchaser had got together and agreed on a price in friendly negotiation …
Mr Miley stresses the importance of the word ‘hypothetical’ in Williams J’s statement. He does so because of what the High Court has more recently said in Commissioner of State Revenue v Pioneer Concrete (Vic) Pty Ltd (2002) 209 CLR 651 at 667:
The determination of such an amount [that is, the unencumbered value of property on the open market] is a familiar task, to be carried out in accordance with the principles stated in Spencer v The Commonwealth. The subject of the valuation is the unencumbered estate in fee simple. In determining the value there is no warrant, either in the language of the statute or in principle, for departing from the hypothetical inquiry as to the point at which a desirous purchaser and a not unwilling vendor would come together. The purpose of making the inquiry hypothetical is to isolate the value of the estate or interest to be transferred from factors that are extraneous to the purpose for which such a value is to be ascertained. To introduce into the exercise a special condition for which, on a particular occasion, a particular vendor chose to stipulate, and to which a particular purchaser chose to agree, is to depart from the statutory requirement, which is to determine the value of that which was transferred.
Mr Miley’s submission is simply this: the market value of the CGT asset is to be determined by reference to the Spencer hypothesis. It is not necessarily equal to the amount paid by the actual purchaser.
DETERMINATION OF THE COMPETING SUBMISSIONS
There is nothing in the text or context of s 152-20(1) of the ITAA to support the Commissioner’s submission that the expression ‘market value’ means one thing for the CGT asset or assets the subject of a CGT event, but something different for other assets owned by a taxpayer.
For that submission to be accepted the drafting would have to be significantly different: instead of requiring a calculation of ‘the sum of the market values’ of a taxpayer’s CGT assets, the provision would have to require a calculation of ‘the sum of the capital proceeds of the CGT event plus the market value of all other assets’. That is not what it says, because that is not what it means.
Section 152-20(1) means precisely what it says, namely that you have to calculate the ‘market value’ of all relevant assets – including the ‘market value’ of the CGT asset that is the subject of the CGT event.
WHAT WAS THE ‘MARKET VALUE’ OF THE SHARES JUST BEFORE MR MILEY SOLD THEM?
It is often the case, but not always, that the actual selling price of an asset at a particular time represents its ‘market value’ just before that time.
For example, in Excellar Pty Ltd and Commissioner of Taxation [2015] AATA 282, Senior Member Lazanas found that the selling price of a particular parcel of land was the best evidence of its market value at the relevant date. In doing so she rejected the applicant’s argument, based on Spencer, that the actual selling price should be ignored, relying instead on the following statement of Carmichael J in the Supreme Court of New South Wales, in Inez Investments Pty Ltd v Dodd (1979) 26 The Valuer 501[3] at 505:
… where a valuation of a piece of real estate is sought as at a particular date the most relevant information for analysis is the sale of that very property, if there be one, at or close to that date. The matters requiring analysis are: the terms and conditions of the contract, and was it a voluntary sale of a not anxious seller to a not anxious buyer?
[3] The case concerned whether a valuer had been negligent in not investigating or taking into account the existence of a contract for sale of the particular property in question
The approach taken by Senior Member Lazanas in Excellar is entirely uncontroversial. It involved specific findings (at [47]) that the parties were willing and not anxious, and that the terms and conditions of the contract were not exceptional. An additional point of significance is that the subject matter of the contract was identical to the property whose ‘market value’ needed to be determined.
That is not the case here. The subject matter of the Sale and Purchase Agreement is the entire 300 shares in the Company. That agreement armed the Buyer with complete control of the Company, which the sale of Mr Miley’s 100 shares alone would not have done.
Mr Halligan, the valuer briefed by Mr Miley, placed emphasis on that fact. He approached the valuation of Mr Miley’s 100 shares from the starting point of the actual consideration received ($5,900,000). But he applied a discount to that figure because of the relative ‘lack of control’ enjoyed by Mr Miley as a result of his owning only one-third of the total shares in the Company.
In his valuation report Mr Halligan said:
[134] I adopt a discount for the relative lack of control of 16.7% for each company[4] based on the following.
[135] All other things being equal, the average price per share of a controlling shareholding will be higher than the average price per share of a non-controlling shareholding because of the value of control.
[136] The value of control relates to the value in having the power to make decisions that affect the amount, timing, and risk of the cash flows from an investment in the equity of the company, whether listed or unlisted. Those decisions might, for example, affect the company’s strategic, operating, taxation, investment, and dividend payment policies.
[4] Mr Halligan valued AJM Property separately from the Company, but the value he attributed to AJM Property was only $70,000: [131] of his report. The separate valuation of the two companies has no material impact on the calculation of the total net value of Mr Miley’s assets.
Mathematically, a discount of 16.7 per cent for lack of control is equivalent to a premium of 20 per cent for control[5].
[5] The discount is equal to 1 – (1 ÷ (1 + 0.2))
The Commissioner’s valuer, Mr Samuel, did not take the same approach as Mr Halligan. He concluded that a minority discount should not be applied for the following reasons[6]:
(a)the Valuation Date[7] precedes the date on which the Shares were in fact sold on the same terms as the shares held by all other shareholders in the AJM companies by only one day;
(b)a market value which contemplates the sale of the Shares in conjunction with all of the other shares would not allow for a minority discount;
(c)it would be illogical to determine the market value of the Shares at less than the amount that had been negotiated for the sale as at the Valuation Date. In other words, the circumstances as at the Valuation Date included that a hypothetical willing seller of the Shares would have been aware that the Shares could be sold at the same time as the shares owned by the other shareholders of the companies, thereby enabling the Shares to be sold for a price that included a control premium (as in fact the transaction price did).
[6] Paragraph 23 of his report (Exhibit R6)
[7] Mr Halligan valued the shares at 6 March 2008, the day before the actual sale of them
Mr Halligan’s reasoning appears to me to be sound and logical. Mr Samuel’s reasoning, on the other hand, seems to proceed on an assumption that the enquiry is one directed towards determining the market value of Mr Miley’s shares subject to special circumstances – namely, that the sale of Mr Miley’s shares should contemplate the sale of the shares owned by all the other shareholders. I think that is the wrong enquiry. That is an enquiry that suffers from the problem the High Court warned about in Pioneer Concrete: see [20] of these reasons.
I think the correct enquiry is directed towards determining the market value of Mr Miley’s 100 shares alone – not as part of a package comprising the entire 300 shares in the Company.
I accept the opinion Mr Halligan expresses in [135] of his report: see [30] of these reasons. I find that the consideration that Mr Miley received for his shares, which formed part of the consideration paid by the Buyer for all the shares in the Company, is more than a hypothetical willing but not anxious purchaser would have paid if it had purchased Mr Miley’s shares alone – and that is the basis on which the market value of Mr Miley’s shares should be determined. Therefore, while the actual consideration received by Mr Miley should not be ignored as an indicator of the market value of his shares just before the time of the CGT event (Inez Investments: [26] of these reasons), it is not determinative of that market value.
The market value of Mr Miley’s shares, arrived at by reference to the correct enquiry, is $5,900,000 less 16.7% of that amount, for lack of control. That equates to $4,914,700.
CONCLUSION
The 16.7 per cent discount to the consideration received by Mr Miley reduces the total net value of all of Mr Miley’s CGT assets just before the CGT event to an amount that is almost $1,000,000 less than the $6,000,000 maximum that is prescribed in s 152-15 of the ITAA. It follows that Mr Miley satisfied the MNAV test and he is entitled to the further 50 per cent CGT discount.
In the circumstances, and given such a significant reduction in the value of Mr Miley’s CGT assets on that basis, it is not necessary for me to deal with the other submissions advanced by the parties.
DECISION
The objection decisions are set aside. Instead Mr Miley’s objections are allowed in full.
I certify that the preceding 39 (thirty -nine) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost ...........................[sgd].............................................
Dated 15 February 2016
Date(s) of hearing 21 and 22 September 2015 Counsel for the Applicant Mr B Jones
Solicitors for the Applicant Michael Smith Solicitors Counsel for the Respondent Mr I Stanley Solicitors for the Respondent ATO Review and Dispute Resolution Group
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