VENTURI and COMMISSIONER OF TAXATION
[2011] AATA 588
•25 August 2011
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2011] AATA 588
ADMINISTRATIVE APPEALS TRIBUNAL )
) No. 2010/1378
TAXATION APPEALS DIVISION )
Re FRANK VENTURI Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal
Deputy President J Block and Senior Member S E Frost
Date25 August 2011
PlaceSydney
Decision
The objection decision under review is affirmed.
....................[sgd]......................
Deputy President J Block
CATCHWORDS
TAXATION – Income tax – Capital gain – Small business exemption – Maximum net asset value test – Active asset test – Objection decision affirmed.
Administrative Appeals Tribunal Act 1975 s 37
Income Tax Assessment Act 1997 ss 152-10, 152-15, 152-35, 152-20, 152-30, 152-405
Spencer v Commonwealth of Australia (1907) 5 CLR 418
Hobart Bridge Company v Tasmania (1945) 9 The Valuer 62
Eastaway v The Commonwealth (1950–1951) 84 CLR 328
Boland v Yates Property Corporation Pty Limited [1999] HCA 64
REASONS FOR DECISION
25 August 2011
Deputy President J Block and
Senior Member S E FrostPART A – PRELIMINARY AND BACKGROUND
1. The objection decision under review is the disallowance on 15 March 2010 by the Respondent of an objection by the Applicant against his tax assessment for the year ending 30 June 2006.
2. The Applicant was represented by Mr Andrew Sneddon, a tax consultant, while the Respondent was represented by Mr Heydon Miller of counsel, instructed by the Legal Services Branch of the Australian Taxation Office (ATO).
3. The Tribunal had before it the T documents and also Supplementary T documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975; they are numbered sequentially (and run to over 800 pages in aggregate) but are nevertheless delineated by references to either “T” or “”ST” as appropriate. In addition, the Tribunal admitted exhibits as follows:
·Exhibit A1: witness statement by the Applicant dated 30 March 2011;
·Exhibit A2: witness statement by Mr Morris Kaplan dated 30 March 2011;
·Exhibit A3: witness statement by Mr Bruce Hayman dated 31 March 2011;
·Exhibit A3 Annexure: the substantive valuation report of Mr Bruce Hayman and Mr Robert Hunter
·Exhibit A4: witness statement by Mr Gregory Stott dated 29 March 2011;
·Exhibit A5: trust deed in respect of the Sea Shell Unit Trust;
·Exhibit A6: “Market Valuation for Tax Purposes” Guideline published by the ATO;
·Exhibit R1: Fiduzu Pty Ltd financial statements (year ending 30 June 2006);
·Exhibit R2: witness statement by Mr Paul Lom including appendices A-C.
4. Oral evidence was given on behalf of the Applicant by each of the Applicant himself, Mr Kaplan, an accountant, Mr Hayman, a valuer, and Mr Stott, the Applicant’s accountant; oral evidence was given on behalf of the Respondent by Mr Lom, who is also an accountant. Mr Hayman gave his evidence, by consent, through the medium of video-link.
5. This application was listed for four days and being 6, 7, 8 and 9 June 2011. In fact oral evidence was completed in the first three days, and the matter was then adjourned to enable the parties to furnish detailed written submissions. A time-table allowing generous time periods for submissions was then arranged; we use the terms “AS” “RS” and “AS2” to refer respectively to the Applicant’s final submissions, the Respondent’s final submissions, and the Applicant’s final submissions in reply. We have drawn to some extent on the submissions and in particular on RS.
6. In addition to the submissions referred to in the preceding clause, the Tribunal received detailed statements of facts and contentions, and including amended statements of facts and contentions.
7. The evidence before the Tribunal indicates that there is in reality only one substantial issue between the parties, and that is as to whether for the purpose of small business relief claimed by him, the Applicant satisfied the maximum net asset value test. There was almost no mention of the active asset test at the hearing although this issue has been canvassed in the submissions. In order to succeed, the Applicant must under the relevant legislation satisfy both tests; we have come to the conclusion that he has not satisfied the maximum net asset value test, dealt with at length in the evidence, and so that a consideration of the active asset test is not necessary.
8. The background in respect of this matter is set out in paragraphs 4 to 17 of the Respondent’s Further Amended Statement of Facts and Contentions dated 31 May 2011 as follows:
4.On 30 June 2006 the Applicant sold two ordinary shares in Fiduzu Pty Ltd ("Fiduzu") for $4,930,000.
5.At that time the only other shareholder in Fiduzu was Venturi Investments Pty Ltd, a company associated with the Applicant. It owned one 'E' class share which gave the shareholder rights to dividends in the company at the discretion of the board of the directors of Fiduzu but no other rights.
6.The Applicant also owned one 'E' class share in Fiduzu which he sold to Venturi Investments Pty Ltd for $1 on the 30 June 2006. This transaction has not been included in the Applicant's income tax return for the 2006 Year.
7.Fiduzu owned all of the units in the Sea Shell Unit Trust (Trustee - SSUT Pty Ltd). In turn the Sea Shell Unit Trust owned all of the units in the Rocky Glen Unit Trust (Trustee - Venturi Investments Pty Ltd) and the Rocky Glen Unit Trust owned either 16.67% or 50% of the units in the Francher Unit Trust. An organisation chart provided by the Applicant (T9-206) shows the interest at 16.67% and the annual accounts for the Francher Unit Trust for the 2006 Year show the interest at 50% (T9-340).
8.Aside from its investment in the Rocky Glen Unit Trust, the major asset of the Sea Shell Unit Trust is a hotel (and associated assets) known as the East End Hotel at Gladstone, Qld. The major asset of the Rocky Glen Unit Trust is its investment in the Francher Unit Trust. The major assets of the Francher Unit Trust consist of the Hay Point Hotel Motel and the Hay Point Caravan Park and associated assets.
9.In his income tax return for the year ended 30 June 2006, which was lodged on 15 May 2007, the Applicant disclosed a total current year capital gains of $4,929,999 (T5-75).
10.The Applicant claims to be entitled to reduce the capital gain on the disposal of his shares in Fiduzu to nil on the basis set out in the following table (T9-207):
$
Sale of 2 shares in Fiduzu 4,930,000
Less cost base of 2 shares in Fiduzu 2
4,929,998
Less 50% exempt as owned more than 12 months 2,464,999
Less 25% exempt as an ‘Active Asset’ 1,232,500
1,232,499
Less Replacement asset rollover
(acquired prior to 30 June 2008) 1,232,499
Assessable Amount 0
11.On 24 October 2007, the Respondent advised the Applicant of an (sic) specific review in relation to claims for small business capital gains tax ("CGT") concessions under Division 152 of the Income Tax Assessment Act 1997 ("the 1997 Act"), seeking certain information in respect of the Applicant's claim for such concessions in the year ended 30 June 2006 (T7-82-85).
13.On 19 June 2009, the Respondent advised the Applicant of the outcome of the review that the Applicant's claim for small business CGT concessions had been disallowed on the basis that the Applicant had failed to satisfy the maximum net asset test as required by section 152-15 of the 1997 Act. On 17 July 2009, the Respondent issued an amended assessment increasing the Applicant's taxable income for the 2006 Year from $129,206 to $2,594,205 (T20-407).
14.On 4 August 2009, the Applicant lodged a notice of objection to the assessment (T21-409 to 414).
15.In his objection, the Applicant asserted that his maximum net asset value worth was $4,705,403 (T21-410) although this amount was stated as "approximately $4,335,000" in different section of the objection (T21-411) on the following basis:
(a.)In the valuation of the Hay Point property allowance should have been made for the allowance of GST input tax credits.
(b.)Improvements to the Hay Point Property
have (sic) been double counted by including both the cost of these improvements and their value in the valuation of the Hay Point property.(c.)The approach taken in valuations upon which the Respondent relied for the purposes of determining the Applicant's net assets were not appropriate and did not reflect valuation principles appropriate to the Hay Point property.
(d.) A valuation provided by the Applicant should be relied upon as a basis for determining the value of the Hay Point property.
16.On 15 March 2010, the Respondent disallowed the objection.
17.On 9 April 2010, the Applicant made an application to the Administrative Appeals Tribunal for a review of the Respondent's decision.
9. It is common cause that on 30 June 2006 (“the relevant date”) the Applicant sold two ordinary shares in Fiduzu Pty Limited (“the Company”) to Venturi Investments Pty Limited (“the Purchaser”), a company associated with the Applicant, for a purchase consideration of $4,930,000. T9-205 is a document dated 30 June 2006 entitled ‘Transfer of Shares’. It acknowledged that the Applicant transferred one ordinary share representing 100 per cent of his holding in the Company. In fact the Applicant had two ordinary shares and which constituted all of the issued ordinary shares in the Company. The Respondent accepts (and there is no dispute as to this aspect) that the Applicant intended to transfer both of the two ordinary shares held by him. The cost base of the two ordinary shares was $2.
10. T9-204 records the sale on the same day of one E class share (conferring rights to dividends but no other rights) in the Company by the Applicant to the Purchaser, who already owned the only other issued E class share. The assets owned by the Company and its relation with certain trusts (and being Sea Shell Unit Trust which is referred to as “Sea Shell”, Rocky Glen Unit Trust which is referred to as “Rocky Glen” and Francher Unit Trust which is referred to as “Francher”) is described in clauses 12, 13 and 14 of RS reading as follows:
12.Fiduzu Pty Ltd owned all of the units in the Sea Shell Unit Trust (Trustee – SSUT Pty Ltd). In turn the Sea Shell Unit Trust owned all of the units in the Rocky Glen Unit Trust (Trustee – Venturi Investments Pty Ltd) and the Rocky Glen Unit Trust owned 50% of the units in the Francher Unit Trust (Trustee ‑ Francher Pty Ltd).
13.Aside from its investment in the Rocky Glen Unit Trust, the major assets of the Sea Shell Unit Trust are a hotel (and associated assets) known as the East End Hotel at Gladstone, Qld, and loans to the Applicant and his wife and to the Rocky Glen Unit Trust. The major asset of the Rocky Glen Unit Trust is its investment in the Francher Unit Trust. The Rocky Glen Unit Trust owns 50% of the Francher Unit Trust. The major assets of the Francher Unit Trust consist of the Hay Point Hotel Motel and the Hay Point Caravan Park and associated assets and a loan to the Sea Shell Unit Trust.
14.This is summarized in the table below:
Entity Assets Fiduzu Pty Ltd * Sea Shell Unit Trust (trustee: SSUT Pty Ltd)
- Rocky Glen Unit Trust Investments
- East End Hotel
- Loans
* Rocky Glen Unit Trust (trustee: Venturi Investments Pty Ltd)
- Francher Unit Trust (50%) * Francher Unit Trust (trustee: Francher Pty Ltd) - Hay Point Hotel motel
- Lease of Hay Point Caravan Park
- Loan to Sea Shell Unit Trust
11. The Applicant has contended that clause 12 of RS was incorrect in relation to the ownership of Rocky Glen but it is not necessary for us to deal with this aspect further because there is no dispute as to the fact that in relation to the Applicant all of the entities referred to in clause 12 of RS are relevantly connected with the Applicant and must be taken into account for the purposes of a consideration of the maximum net assets test.
12. As set out previously in these reasons the purchase price of the two ordinary shares was $4,930,000. The documents before the Tribunal indicate that there was at one state a discrepancy (arising from documentation furnished by the Applicant) as to the percentage of units in Francher held by Rocky Glen. There was mention of both a 15 per cent and a 50 per cent unit holding and as to which see clause 7 of the Respondent’s Further Amended Statement of Facts and Contentions referred to in clause 8 above. There is no longer any discrepancy in that the parties are satisfied that the correct percentage is 50 per cent. (It is relevant to note that the Applicant personally owns a significant part of the other 50 per cent unit holding, with the McCarthy family owning the remainder). The effect of the legislation (and which will be referred to in some detail later in these reasons) is that the full value of Francher’s net assets must be taken into account. If the purchase consideration to which we have referred was a true consideration, the Applicant cannot for this reason alone satisfy the maximum net asset value test if the remaining 50 per cent excess of asset values over liabilities was in excess of $70,000, and it seems altogether likely that the amount involved was much greater. However the enquiry cannot end there, because the legislation compels a consideration of relevant market values. The Tribunal notes that there was evidence given by Mr Stott as to the fact that the amount of the purchase consideration was calculated by reference to the maximum net asset value test, and at a time when the threshold amount was $5 million. That evidence will be referred to in more detail later in these reasons.
13. The Applicant in his evidence was asked how the price was calculated. He said that he relied upon his accountant (Mr Stott) for this purpose. We refer but without including it in these reasons to an extract from the Transcript (TS) commencing with TS35 line 35 and ending with TS46 line 7. The evidence of the Applicant in this contest was unhelpful. It does however indicate that real values were considerably in excess of certain values as subsequently claimed.
14. The Applicant said that the sale was entered into in order to overcome a tax problem; the precise nature of that problem was not explained.
15. The Tribunal at an early stage, and when the Applicant was giving evidence, asked as to the extent to which stamp duty was paid; it did so for a particular reason, and that is if the Company was land-rich for Queensland duty purposes, (and on a prima facie basis it seems likely that it was) and if the transaction was reported (and if the Company was land-rich it should have been reported), the Queensland authority would have enquired as to land values, and so that the Tribunal could have been informed as to the values so accepted. The Tribunal was informed that the transaction was not so reported and that information of this nature was not available. It was told that duty was paid in the State of New South Wales and presumably (although there is no evidence to this effect) at marketable security rates calculated simply by reference to the purchase consideration.
16. Mr Stott in his evidence acknowledged that he was involved in the transaction, whereby the Applicant sold the two issued shares in the Company for $4,930,000; (TS129, lines 32 to 35). He was questioned about the constituents of this amount to which he said that he had relied on a spreadsheet to calculate the price. He said:
“As I said, I used a spreadsheet to calculate the figures from the accounting records, and we adjusted the values of the businesses to their – to market value, well, at least the East End Hotel we valued to its market value based on the valuation that’s in the T documents, the 8.8 million, and we added the numbers together.”
TS-129, lines 43 to 45
17. It was put to Mr Stott that in calculating the price of $4,930,000, he took into account the value of the unit trusts to the extent that the Company had an ownership interest directly or indirectly in them, namely 100 per cent of Sea Shell, 100 per cent of Rocky Glen and 50 per cent of Francher. He agreed (TS130, lines 24 to 27). Mr Stott was questioned as to whether in setting the price, regard had been had to the maximum net asset value test of $5 million. The following are his answers to questions on this issue:
Mr Miller:
Mr Stott, then setting the price at 493 – 4 million 930 thousand – did any thought – did you have in mind the fact that there was a $5 million threshold there that you had to be under?
Mr Stott:
Yes.
Mr Miller:
Did that exercise…?
Mr Stott:
That was an issue, yes.
Mr Miller:
So in setting your price, you had to set it below 5 million so you didn’t get ..... , so that you are able to enjoy the concessions that you thought you would be entitled to. Is that right?
Mr Stott:
The price in the – well, the value of the net assets needed to be under $5 million, yes.
Deputy President Block:
What about ‑ ‑ ‑?
Mr Stott:
The value of Mr Venturi’s assets – sorry?
Deputy President Block:
What about the selling price of the shares? Was it important that that be under 5 million?
Mr Stott:
Well, it wasn’t the same calculation, but yes, I thought it needed to be under 5 million as well, potentially for the concessions to apply, yes.
TS137, lines 30 to 45
18. We draw attention in particular to the fact that the purchase consideration was calculated so as to include one half of Francher only. It will be seen then that there is unrefuted evidence before the Tribunal as to the fact that the purchase consideration was calculated so as (it was thought) to attract the maximum net asset value concession. It seems likely that there was a miscalculation in that it was not appreciated that, for the purposes of the concession, Francher had to be taken into account at its full value. That the importance of the concession was uppermost in the minds of the Applicant, and those advising him, is reinforced by the valuations produced to the Tribunal and in particular the Hayman 2006 valuation (as defined later in these reasons), and the evidence of Mr Hayman referred to later in these reasons.
19.
Although the enormous volume of documentation before the Tribunal might suggest otherwise, there is in fact and in reality only one substantial issue between the parties, and that is as to whether the market value of the Hay Point Hotel and Motel (“the Hotel”) and the Hay Point Caravan Park (“the Caravan Park”), both owned by Francher, was at the relevant date $2,850,000, as referred to in the Hayman 2006 valuation (as defined later in these reasons), or $7,800,000 as referred to in the Hayman 2007 valuation (also as defined later in these reasons), or the amount of either of the valuations by Mr J D Dodds (also referred to later in these reasons). It is relevant to note that all four valuations were commissioned by the Applicant or the Company; they are described more fully later in these reasons,
The market value of the Hotel and Caravan Park, as stated in all of the valuations other than the Hayman 2006 valuation, was much higher than $2,850,000. It is relevant to note that whereas the Hayman 2007 valuation was apparently commissioned contemporaneously the Hayman 2006 valuation (which might be referred to more accurately as “the Hayman 2010 valuation”) was commissioned in 2010 and after the investigations which gave rise to this hearing had commenced. Put in succinct terms, the Applicant can succeed only if the Hayman 2006 valuation can be accepted and notwithstanding the fact that the value stated in it is so much less. As will be seen, the Hayman 2006 valuation is fundamentally flawed and cannot be accepted. In fact, and as events have transpired, the Applicant himself does not accept it, and has taken leave post the hearings and without evidentiary backing, to amend it and so as to increase it by approximately $1.5 million.
20. The documents before the Tribunal indicate some other areas of dispute between the parties. By way of example, the Applicant contends that his net asset amount should be reduced by certain liabilities, some of a contingent nature. The Tribunal proposes to deal with these other aspects in brief terms, noting that the amounts involved are such that they are minor when compared with the dispute as to the market value at the relevant date of the Hotel and the Caravan Park. Put in other words the Applicant must stand or fall by reference to the market value of the Hotel and Caravan Park at the relevant date. Although the other disputed amounts are not insignificant they will not alone or in combination be determinative.
PART B – THE LEGISLATION AND SOME COMMENTARY ON IT
21. We commence by setting out section 152-10 of the Income Tax Assessment Act 1997 (“ITAA” or “the Act”) which sets out the basis conditions for relief under Division 152 which reads relevantly as follows:
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;
Note: This condition does not apply in the case of CGT event D1: see section 152‑12.
(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;
Note: For determining whether an entity is a small business entity, see Subdivision 328‑C (as affected by section 152‑48).
(d) the CGT asset satisfies the active asset test (see section 152‑35).
Note: This condition does not apply in the case of CGT event D1: see section 152‑12.
22. Statutory references in these reasons which do not specify the Act should be treated as if they did.
23. It will be noted that (as set out previously), and in order to succeed, the Applicant must satisfy both the maximum net asset test under section 152-15 and the active asset test under section 152-35; section 152-15 read at the relevant date as follows:
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 $5,000,000:
(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)).
Note: Some assets are not included in the definition of net value of the CGT assets: see subsections 152‑20(2), (3) and (4).
24.The “net value of CGT assets” is defined in section 152-20. To the extent considered relevant, it reads as follows:
(1) 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.
(2) In working out the net value of the CGT assets of an entity
(a)disregard *shares, units or other interests (except debt) in another entity that is *connected with the first-mentioned entity or with a *small business CGT affiliate of the first-mentioned entity; and if the entity is an individual ..............”.
25. An entity is “connected with” another entity as set out in section 152-30; it is unnecessary to quote the section because there is no dispute as to the fact that the Company, Sea Shell, Rocky Glen and Francher were all relevantly connected with the Applicant.
26. For reasons set out previously it is not necessary for us to include the legislation in respect of the active assets test. For similar reasons we do not think it necessary to include the small business roll-over provisions contained in section 152-405; these provisions would be relevant if and only if the Applicant was entitled to small business relief in the first place. There is no dispute as to the fact that the Applicant derived a capital gain of $4,929,998 on his disposal of his ordinary shares in the Company. There is also no dispute as to the fact that he was entitled to the 50 per cent discount provided under Division 115.
27. To satisfy the maximum net asset value test, the Applicant must establish that just before the CGT event and in total, the net value of his CGT assets, the net value of the CGT assets of entities connected with him and the net value of the CGT assets of entities that are his small business CGT affiliates did not exceed $5 million (section 152-15). (The threshold is currently $6m but was $5m in respect of the year ending on the relevant date).
28. There is as we have noted, no dispute that Francher, Rocky Glen, Sea Shell and the Company are entities relevantly connected with the Applicant. The issue between the parties is as to the net value of the CGT assets of those other entities, which boils down, for the most part, to the market value of the Hotel and the Caravan Park owned by Francher just before the relevant date.
29. The meaning of “net value of the CGT assets” is set out in section 152-20. It is the amount by which the sum of the market value of relevant CGT assets exceeds the sum of the liabilities related to those assets. The taxpayer is required to disregard shares or units in other entities which are connected with the taxpayer or the taxpayer’s small business CGT affiliate (section 152-20(2)(a)). That provision is designed to eliminate double counting.
30. Under the Act, in its form for the 2006 year, the net value of the CGT assets was determined on an entity by entity basis, and negative net asset positions could not be taken into account: in other words, if the net value of the CGT assets of an entity was less than zero, it was treated as if it were in fact zero.
31. The Respondent contends (correctly) that only actual assets and liabilities are to be taken into account for the purposes of the maximum net asset value test. Mere expectancies or contingent liabilities are not taken into account.
32. RS includes Appendices 1 to 4 which indicate the Respondent’s contentions as to the assets and liabilities of each of the relevant entities. Clause 46 of RS contains a summary (which is sufficient for the purposes of this decision) reading as follows:
Appendices 1 to 4 set out the assets and liabilities of each of the entities as the Respondent considers them to be. These are shown under the heading “Assets & Liabilities” for each entity. Under the heading “Net Value of CGT Assets” the numbers in the previous column have been adjusted for various reasons are (sic) outlined in notes to the appendices and discussed further below. The results show that the Applicant clearly exceeds the maximum net asset value limit of $5,000,000.
Entity
Assets & Liabilities
Net Value of CGT Assets
Francher Unit Trust (Appendix 1)
$5,002,986
$5,002,986
Rock Glen Unit Trust (Appendix 2)
$1,947,510
$0
Sea Shell Unit Trust (Appendix 3)
$7,385,669
$5,589,639
Fiduzu Pty Ltd (Appendix 4)
$2,501,582
$1,339,399
$16,837,747
$11,932,024
33. It will be noted that the amount calculated by the Respondent is $11,932,024, which is far in excess of the statutory threshold of $5 million. The major issue between the parties is as to the market value at the relevant date of the Hotel and Caravan Park owned by Francher. and which will be dealt with in Part C below. There is no dispute as to most of the items and values; the exceptions are as follows:
(a)the value(s) of the Hotel and Caravan Park;
(b)the value of a loan made by Sea Shell to Rocky Glen and the corresponding value of Sea Shell;
(c)a provision for income tax of $310,601 (shown in the 2006 accounts as a provision for $356,205 but the actual amount assessed was $293,844) for the 2006 year for the Company; and
(d)an un-assessed income tax liability of $736,921 for the 2004 year for the Company (described as a liability of the purchaser in clause 34 of the Applicant’s Statement of Facts and Contentions). The amount for the 2004 year arose under an amended assessment which issued on 25 July 2008.
(e)In AS the Applicant claims to be entitled to deduct an income tax liability of the Company for the year ended 30 June 2005 of $45,604, and a liability for general interest charge in respect of the 2004 assessment of $75,046.
(f)The East End Hotel owned by Sea Shell has been valued at $88 million. There is no dispute as to this value, but the Applicant claimed to be entitled to deduct from this value a notional amount of $276,000 for selling expenses should the hotel be sold. (The Applicant later conceded that he is not entitled to deduct this amount).
(g)In relation to the Hotel and the Caravan Park, there are, as we have said, a number of different valuations. The Applicant claimed to be entitled to deduct from the value of these assets the anticipated selling costs of $130,000 should they be sold. (See clause 34 of the Applicant’s Statement of Facts and Contentions). (The Applicant later conceded that he is not entitled to this deduction).
(h)The Applicant contended that his “net value of CGT assets” amount was $2,953,822 (Contention 5, page 8, Applicant’s Statement of Facts and Contentions dated 13 October 2010). He later in AS altered this amount so as to increase it to $4,610,612 (page 40 of AS).
PART C – FRANCHER (IN BRIEF)
34. Appendix 1 to RS (which need not be included in these reasons) sets out the Respondent’s contentions, having regard to information furnished by the Applicant as to the assets and liabilities of Francher. The only substantial area of dispute is as to the value of the Hotel and Caravan Park. That appendix includes the Hotel at $5 million and the Caravan Park at $2,845,877. In respect of the Hotel, the value is calculated by reference to the valuation by Mr Dodds dated 29 March 2006 (T16 to T71), as adjusted by his email dated 19 April 2006 (T72).
35. The Respondent points out (correctly) that there are discrepancies between the amounts shown in the Applicant’s calculations when compared with the amounts shown in the Francher documents referred to in the preceding clause; the Respondent notes that the onus is on the Applicant to establish what the correct amounts are but, at the same time, accepts that these discrepancies are not material in the overall scheme of things.
36. One thing is abundantly clear that it that is that proper values are the market values of the Hotel and the Caravan Park just before the relevant CGT event, and which is of course the sale of shares in the Company which took place on the relevant date.
PART D – MARKET VALUE AND CASE AUTHORITY
37. In Spencer v Commonwealth of Australia (1907) 5 CLR 418, at page 432, Griffith CJ said:
“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 to pay for it on that day to a vendor willing to sell it for a fair price and not desirous to sell?’”
38. In the same case, Isaacs J at page 441 said:
“To arrive at the value of land at that date, we have, as I conceive, to suppose it is sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and the purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons most capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property.”
39. Other cases have considered methods of determining the market value of an asset including assets constituting a business or undertaking. In Hobart Bridge Company v Tasmania (1945) 9 The Valuer 62, in the Supreme Court of Tasmania, Morris CJ said at 63:
“The method is to ascertain the income being earned by the undertaking, form an opinion as to the probable income and profit, decide upon the appropriate rate of capitalisation of those profits having regard to the nature of the undertaking and then proceed to fix the value by the process of capitalising these profits. The method is an accepted one for valuing profit-earning undertakings.”
40. In Eastaway v The Commonwealth (1950–1951) 84 CLR 328 Dixon, Williams and Kitto JJ said at 340:
“The expert witnesses quite rightly sought to ascertain this value by examining the net profits made in the past in order to estimate what the probable future profits of the business would be. They should then have sought to ascertain what rate of profit would be a fair return on capital invested in such a business for the assumption is that a reasonable vendor would be willing to sell the business and a reasonable hypothetical purchaser would be willing to purchase it for a capital sum which would return this rate of profit. (Commissioner of Succession Duties v Executive Trustee and Agency Co of South Australia (1947) 74 CLR 358 at pages 361, 362).”
41. In Boland v Yates Property Corporation Pty Limited [1999] HCA 64, Callinan J said at [280]:
“There is no legal principle that purports to or could close for all times the categories of methods of valuation which might be acceptable in a particular case. ……..Valuation practice is, however, like legal principle practice, an evolving discipline.”
42. His Honour went on to say at [281]:
“As time has passed different types of businesses, different uses to which property may be put, changing financial markets, and more sophisticated and different methods of obtaining financial information and applying financial criteria call for flexibility, resourcefulness and different methods of making valuations. Two typical examples should suffice. Large “drive-in” shopping malls containing discount department stores, specialty shops, municipal libraries, restaurants, cafes, department stores, large supermarkets and numerous picture theatres were unknown when Spencer's case was decided. To value one, either when fully developed or in prospect, requires that the closest consideration be given to the income stream that such an establishment could be expected to generate and for how long it might do so. Similarly sophisticated techniques may be involved in the valuation of large city buildings or sites approved for their erection taking account of incentives offered to tenants and the incidence of tax payable by both parties. Often the owner of land which has been approved for a development will not undertake the development but will sell it to an investor or developer. The point is that the land with the approval attached to it becomes the prize and it would be unthinkable that the price for the prize would not be fixed in such a way as to reflect the return that the development when completed would yield. There is no reason to suppose that the price for the site of an approved but as yet undeveloped market should be very differently calculated.”
43. It is clear then that a valuer choosing to undertake a valuation by reference to income generating potential of a business must ascertain the income stream which the business may be expected to generate, and apply a fair rate of return to that income stream, to determine the amount that a purchaser would be prepared to pay for the business. The valuer must predict the likely future revenue stream as a basis for the valuation.
44. Mr. Lom stated in his Exhibit R2 at the top of page 4:
“Valuers generally review the historical earnings of a business, however the purpose of reviewing historical earnings is to enable them to estimate future earnings. As explained in Section 4.2.2 above, the value of a business is the net present value of future cash flows and the capitalization of earnings is only a proxy for the net present value of future cash flows methodology.”
PART E – FRANCHER CONTINUED AND VALUATIONS
45. As set out previously in these reasons, the Respondent has utilised values of $5 million for the Hotel and $2,845,877 for the Caravan Park. It does not follow that the Respondent has thereby assumed an onus to establish the correctness of these amounts and indeed any such suggestion is expressly denied.
46. The various valuations which are before the Tribunal are correctly described in clause 66 of RS as follows:
(a)Valuation dated 29 March 2006 prepared by JD Dodds of JD Dodds Property Valuers on behalf of Francher Pty Ltd for Bank of Western Australia Limited for “mortgage security purposes” showing a valuation of the Hay Point Hotel Motel of $7,940,000 and the Hay Point Caravan Park of $4,060,000 (see T3-16 to 69). Values are expressed to be exclusive of GST. This valuation underlies the valuation referred to in paragraph (b) below and is relied upon by the Respondent.
(b)An email dated 19 April 2006 from Mr Jeff Dodds of JD Dodds Property Valuers addressed to [Bank West] in which Mr Dodds says that the valuation of the Hay Point Hotel Motel referred to in the previous paragraph was on an as if complete basis and there was expenditure of $2,500,000 required to get the Hay Point Hotel Motel to this stage. Mr Dodds concludes that the current market value of the Hay Point Hotel Motel was $5,000,000 (see T4-72). This valuation should be read together with the valuation referred to in paragraph (a). It is relied upon by the Respondent as evidence supporting the value, adopted by the Respondent, of the Hay Point Hotel Motel. In relation to the valuation of the Hay Point Caravan Park the Respondent has adopted the book values for these assets. This is a conservative approach when these values are compared with the contemporaneous valuation of Mr JD Dodds dated 29 March 2006, referred to in (a) above, which valued the assets at $4,060,000.
(b)Valuation as at 3 September 2007 prepared by JD Dodds of JD Dodds Property Valuers on behalf of Francher Pty Ltd for Bank of Western Australia Limited for “mortgage security purposes” showing a valuation of the Hay Point Hotel Motel of $5,900,000 (see ST5-648-728, actual valuation ST5-690). This value does not appear to include the caravan park. Values are expressed to be exclusive of GST. This valuation is also relied upon by the Respondent as evidence supporting the value, adopted by the Respondent, of the Hay Point Hotel Motel.
(c)Valuation dated 21 November 2007 signed by Mr Bruce Hayman and Mr Robert Hunter of Power Jeffrey & Co and prepared under instructions from Mr Andrew Toten, Business Development Manager of Bank of Western Australia Limited for “mortgage security purposes” (see T8-86 to 179). The valuation for the property including the caravan park is $7,800,000 and excluding the caravan park is $5,300,000 (see T8-88). This valuation was based on an inspection of the property on the day of the valuation. Values are expressed to be exclusive of GST. This valuation is also relied upon by the Respondent as evidence supporting the value, adopted by the Respondent, of the Hay Point Hotel Motel. It is referred to here as the “2007 Valuation”.
(d)An undated valuation received from the Applicant on or about 13 October 2010. This valuation was signed by Mr Bruce Hayman and Mr Robert Hunter of Power Jeffrey & Co and prepared under instructions from the Applicant dated 31 August 2010. This valuation is an annexure to the witness statement of Mr Hayman (Exhibit A3). It is a retrospective valuation of the Hay Point Hotel Motel and Caravan Park as at 30 June 2006 based on an inspection on 21 November 2007 prepared for “financial accounting purposes”. It assesses the value at $2,850,000. The value is expressed to be exclusive of GST. This valuation is relied upon by the Applicant as evidence of the value of the Hay Point Hotel Motel and the Hay Point Caravan Park as at 30 June 2006. It is referred to here as the “Hayman 2006 Valuation”.
47. It should be noted that:
(a)The Dodds valuations referred to in clauses 66(a) and 66(b) of RS were prepared and furnished by him acting for Francher.
(b)Mr Hayman figures in two valuations and being those set out in Clauses 66(c) and 66(d) of RS.
(c)The 2007 valuation referred to in clause 66(c) of RS, and referred to as “the Hayman 2007 valuation”, was prepared by Mr Hayman and Mr Hunter in November 2007 and therefore some 17 months after the relevant date.
(d)The Hayman 2006 valuation was produced in October 2010, years after the relevant event and moreover some considerable time after the Hayman 2007 valuation. It is expressed to be a retrospective valuation based on an inspection on 21 October 2007 and prepared for “financial accounting purposes”. As to what is meant by this unusual appellation is unclear. The two Hayman valuations were prepared in accordance with an inspection which was, almost certainly, the same inspection for both, bearing in mind the date of the inspection. The Hayman 2006 valuation was deliberately made so as to eliminate the prospects for the future and, having regard to Mr Hayman’s evidence, was made by him in compliance with specific instructions to value in this manner.
48. The Hayman 2006 valuation, (which as we have said might be more accurately termed the Hayman 2010 valuation), valued the Hotel and Caravan Park at a combined and aggregate amount of $2,850,000, and in accordance with MYOB accounts provided by the Applicant for the nine month period ending on the relevant date.
49. Although the Hayman 2006 valuation was said to have been made on a going concern basis, there was no attempt to estimate future profits. In cross-examination, Mr Hayman said that these prospects could not be taken into account for the Hayman 2006 valuation because the optimism could not be proved. Mr Hayman was referred to the similarities between the valuation considerations taken into account in the Hayman 2006 valuation and the Hayman 2007 valuation, and said that in 2006 these things were unproven as at 30 June 2006 (TS98, line 5 to TS100, line 20).
50. Mr Hayman acknowledged that he did not attempt to assess the potential of the businesses because those were his instructions; to rely only on the nine months historical financial information contained in the MYOB reports (TS100, line 22 to 43).
51. Mr Miller on behalf of the Respondent objected to the production of the Hayman 2007 valuation on various grounds; the Tribunal decided that it would be safest to admit it but subject naturally to appropriate criticism and comment. One thing is abundantly clear and that is that the fact that Mr Hayman did not attempt to assess the potential, and relied only on nine months of historical information contained in MYOB accounts, indicates that it is not a reliable valuation of the Hotel and Caravan Park on a going concern or market value basis. As we have said, such a valuation is worthless where it makes no attempt to consider the potential, since it is one of the major factors which would weigh with a purchaser contemplating its purchase.
52. Mr Lom in his evidence was critical of the Hayman 2006 valuation inter alia for the reasons set out in clause 71 of RS which reads as follows:
In Appendix 1 to Mr Loom’s (sic) witness statement (“the Lom Report”), where he reports on the Hayman 2006 Valuation, he criticizes it saying that the instructions given to Mr Hayman for the valuation “led to the valuer arriving at a conceptually incorrect valuation” (paragraph 7.2 of Mr Lom’s report). The reasons that Mr Lom gave included:
(a)The valuation “only looked to the past and disregarded the effect of recent changes in the business, in particular the caravan park. The estimated annual profit of $370,000 does not reflect a balanced assessment of the future maintainable earnings of the business, which is the sum that should be capitalized when using this methodology” (paragraph 7.3 of the Lom Report).
(b)The valuation should have been based on the externally prepared financial statements rather than the internally prepared MYOB accounts (paragraph 7.7 of the Lom Report).
(c)In reality the valuation only valued the existing Hay Point Hotel and Motel burdened with overhead to operate a larger business without ascribing any value to the Hay Point Caravan Park. In relation to the caravan park if it was not included in the valuation the demountable cabins should have been treated as surplus assets and valued separately (paragraph 7.20 of the Lom Report).
(d)There appeared to be 10 surplus gaming authorities for poker machines and they should have been valued separately (paragraph 7.21 of the Lom Report).
53. The evidence of Mr Lom referred to above was not challenged, although in cross-examination he was questioned about his experience in the gaming industry and the hotel and motel industry, and his experience in preparing valuations generally. Mr Lom acknowledged limited experience in the industry but said he had undertaken many expert reports dealing with valuations (TS180 and 181). We consider that this line of question embodied a misapprehension as to Mr Lom’s role which was not to value the businesses concerned but to comment on the methodologies employed. Mr Lom was also referred to Australian Taxation Office guidelines on market valuation, and it was put to him that, based on these guidelines, Mr Lom had to be an expert in the industry he was valuing (TS181 to 182). Again, this misconceived Mr Lom’s role as a valuer of the businesses concerned and, in any case, he pointed out that he was licensed by ASIC to do independent expert reports across all industries.
54. A valuation on a “going concern” basis requires an estimate of future profits as a basis for determining what a possible purchaser would pay for the asset. The Hayman 2006 valuation does not meet this test and cannot be accepted as a genuine valuation of the market value of the Hotel and Caravan Park at the relevant date.
55. Mr Hayman was also, in respect of the Hayman 2006 valuation, not required to value the Hotel and Caravan Park separately. He said that he was not asked to do this and there was not enough information to allow this to be done, despite the fact that he was able to do so when he prepared the Hayman 2007 valuation. He said that the costs of both the Hotel and Caravan Park were merged and could not be separated or estimated and, in any event, the Caravan Park had, in his opinion, no significant value despite the fact that at least $1.5 million had been spent on it. (TS102, line 21 to TS103, line 24). However, Mr Hayman was unable to explain why he could not rely upon estimates (TS110, line 45 to TS112, line 12). As to why a separation was feasible for the Hayman 2007 valuation but not for the Hayman 2006 valuation is unclear and in fact we do not believe that there was any valid reason why the two assets could not, as had occurred in the past be, valued separately.
56. It was put to Mr Hayman that there may have been surplus assets in the form of poker machine authorities, and land part of the Hotel that was not necessary for the Hotel operations, that could have been valued separately, and in addition to the valuation of the Hotel and the Caravan Park. The possibility of this surplus was referred to in his Hayman 2006 valuation (at page 7 of Exhibit A3 Annexure). Mr Hayman was reluctant to answer these questions; he said that he did not believe that they were surplus (TS90, line 26 to TS93, line 2, particularly TS92, lines 25 to 32). It was put to Mr Hayman that the only information he had was what he had been given by the Applicant, and that he was instructed only to rely on the MYOB accounts. Mr Hayman did not seek to offer any explanation as to the poker machines.
57. It was pointed out to Mr Hayman in cross-examination that the MYOB accounts he relied upon for the Hayman 2006 valuation showed Caravan Park revenues for the nine months to 30 June 2006 of $230,890. His attention was drawn to the draft financial statements for the year ended 30 June 2007, relied upon by him for the Hayman 2007 valuation, which showed comparatives for the 2006 year, and which he acknowledged would be reliable, with Caravan Park revenues of $582,109. Mr Hayman suggested that the information included as Caravan Park revenues in the 2006 column of the draft financial statements for the 2007 year would not have been prepared by the end of the 2006 year, and he claimed that it would not have been available to him as at 30 June 2006, and he made this claim despite the fact that he prepared the Hayman 2006 valuation five years later. He did acknowledge, however, that the higher number would have had a major impact on his valuation were that number relied upon by him (TS107, line 27 to TS109, line 27).
58. It was put to Mr Hayman that his valuation was based on a shaky foundation and that the higher revenue for the Caravan Park would have an impact on his valuation. The following extract from the transcript of the hearing outlines Mr Hayman’s response:
Mr Miller:
So that sort of doubles – almost doubles the value of the property, doesn’t it?
Mr Hayman:
It certainly has a potential to have a major impact, yes.
Mr Miller:
Which means that, again, your report is based on a very shaky foundation?
Mr Hayman:
My report is based on the information that was provided to me, or would have been available to me, at the date of the retrospective valuation. I had no reason to believe or suspect that the information was flawed in any way, shape or form.
Mr Miller:
I know you didn’t have any reason to suspect it. I’m not suggesting that. I’m just saying it’s bad information. It appears that way, doesn’t it?
Mr Hayman:
Quite possibly so.
TS109, lines 26 to 35
59. Similarly, it was put to the Applicant that the Hayman 2006 Valuation was flawed. The following is an extract from the transcript of the hearing which culminated in the Applicant’s admission concerning this valuation:
Mr Miller:
So if Mr Hayman relied on the smaller number, when I put it to you that the later number is correct, then his valuation is clearly suspect, isn’t it?
Applicant:
It depends which set of accounts he went on. Because, as you correctly pointed out, he had these in his possession in 2010 when he did the valuation.
Mr Miller:
But if his report says that it worked off the MYOB numbers, which it does ‑ ‑ ‑?
Applicant:
Well, he may well have included my MYOB numbers in his report but if in fact he had the correct accounts, which are the ones you have pointed out at T8-174, he would have questioned it if he was not going on the correct ones.
Mr Miller:
Did he question it?
Applicant:
No.
Mr Miller:
He did not come back to you and say, “What is the right number”?
Applicant:
I said that these are the correct numbers.
Mr Miller:
The MYOB numbers are the numbers you told him were the correct numbers?
Applicant:
The MYOB ones are the ones that he asked for in a roneoed list of documents that he wanted me to send to him. Now, which ones he relied on, you will have to ask him that.
Mr Miller:
But I think his report says that he did?
Applicant:
However, you are correct. It is double the MYOB ones because these ones obviously have been adjusted to include SUTs contribution. Perhaps this wasn’t – what happens with accomodation [sic], it can take months after the event to get a cheque in or an EFT in, so therefore this could well include – this wouldn’t include all of their accomodation [sic] moneys in the account because it can take up to two or three months to get money for the week ending 30 June. You might not receive that so this number, that is why my accounts are prepared six months after the – seven months after the end of the financial year for that reason.
Mr Miller:
But nonetheless, if he has relied on the MYOB numbers, the report is flawed?
Applicant:
Yes. I am telling you, that is half of that.
Mr Miller
Yes. So that means the report must be flawed?
Applicant
I am not challenging your cognisance.
TS59, line 24 to TS60, line 11
60. In AS the Applicant purported to adjust the Hayman 2006 valuation; that adjustment is set out in page three of Appendix 3 to AS. In accordance with that adjustment, the Hayman 2006 valuation increased from $2,850,000 to $4,310,000.
61. It must be remembered that the increase (and it is a substantial increase) is not supported by any evidence of any kind. The Applicant at the hearing presented evidence by Mr Hayman that the value of the Hotel and Caravan Park was $2,850,000. He cannot without evidence then seek to rely on any other calculation. There was no evidence by Mr Hayman or anyone else as to any such changes. It is hardly necessary to point out that submissions are not evidence.
62. In relation to the Hayman 2007 valuation, Mr Lom said that there were some flaws in it and that when they were eliminated he considered that the combined property and assets would have a market value of approximately $6.5 million, rather than the value of $7.8 million suggested in the valuation.
63. None of the various valuations (other than the Hayman 2006 valuation) approached the $2.85 million sworn to by Mr Hayman in the Hayman 2006 valuation.
64. The Applicant was asked about whether there had been an offer in June 2006 from a Mr John Brown for the Hotel and Caravan Park of $5 million. The Applicant denied that there had been such an offer which went past due diligence, and said that he would have accepted $3 or $4 million at that point (TS21 lines 20 to 26). The Applicant was taken to T12-299 which was a memorandum on from Donnelly Brokers, Hotel and Motel Brokers, and which stated that the John Brown offer was not accepted by the Applicant because it was not high enough (third paragraph of T12-299). The Applicant confirmed that he had said in his witness statement that the memorandum from Donnelly Brokers was correct. The Applicant then said of the Donnelly Brokers memorandum, “What he says is basically correct but that statement is obviously not correct, is it?” The Applicant then said that he would have accepted $3.5 million at that point. This is despite the fact that only nine months earlier he had paid $4 million for the combined business and invested in excess of $2 million in it. The evidence of the Applicant as to this aspect (and other aspects) cannot be believed.
65. In AS the Applicant refers to an offer of $5 million for the Hotel and Caravan Park but does not identify the source (page 26). He says it was not proceeded with by the offeror. The only evidence dealt with at the hearing related to the one referred to in the preceding clause. That evidence indicates that the offer was rejected by the Applicant.
66. The Applicant has sought in AS2 to include information as to relevant offers but which must be rejected because there was no such evidence at the hearing.
67. There does not appear to be any dispute as to the assets and liabilities of Rocky Glen and the fact that it must be taken into account at nil.
68. In respect of Sea Shell there is also apparently no dispute other than:
(a)that in respect of the valuation of a loan in an amount of $3,253,291 made by Sea Shell to Rocky Glen; and
(b)whether Sea Shell was a debtor or a creditor of the Company, and the answer to which will depend on whether a trust distribution was paid before or after the CGT event, although it is likely that it was paid after that event; the amount involved is not sufficiently relevant to warrant detailed consideration.
69. Mr Kaplan in his evidence said that his valuation of the loan by Sea Shell to Rocky Glen had a value of $4,362. His evidence may fairly be described as arithmetical in nature; he put it on the basis that if a debtor has assets of X but owes a creditor 3X the value of the loan is merely X. That methodology takes no account of the fact that the debt may be worth more because of the personal covenant by the debtor, but the evidence of Mr Kaplan is without value for an entirely different reason; as he freely admitted it depended entirely on the validity of the Hayman 2006 valuation, and we have found that that valuation cannot be accepted. As appears from AS, the Applicant himself no longer appears to believe in it. The Applicant in AS (Appendix 4) now says that it should be valued at $734,362, but there is no evidence other than that of Mr Kaplan who valued it at a fraction of that amount. The Applicant has repeatedly sought to include contingent amounts, such as selling expenses referable to assets, which have not been sold and of course he cannot do so. He also sought to take into account tax provisions; this might have been competent in later years but only because of a legislative change which did not apply in respect of the 2006 year.
PART F – SUMMARY AND CONCLUSION
70. There are, as we have said, other issues between the parties, but we consider that it is not necessary to deal with them because they have little overall impact.
71. We have said that Mr Kaplan’s evidence was acceptable so far as it went, but subject to its inherent defects and limitations. Mr Stott appeared to us to be an honest witness, although we found it surprising that he had no notes or papers of any kind as to how the purchase consideration was arrived at. He was honest enough to admit that the purchase consideration was arrived at in order to obtain the small business exemption, while apparently not appreciating that to take Francher into account as to half only, was legally incorrect. It would seem that he did not appreciate that this was so when the transaction was done. The Applicant was vague about a number of aspects and in particular his evidence as to offers for the Francher property cannot be believed. Mr Hayman had his instructions and he stuck to them regardless of inherent defects and regardless of the fact that he had issued a much higher valuation previously (in accordance with the Hayman 2007 valuation), and regardless of the fact that the ground rules for both were much the same. His evidence was not acceptable and apparently not even to the Applicant who in AS sought to increase his valuation. Mr Lom was an honest and careful witness.
72. As we read AS2, the Applicant appears to be contending that it is for the Respondent to establish the values at the relevant date of the Hotel and Motel. That contention is of course misconceived. The onus is, as it always had been, with the Applicant. Having regard to the fact that we have rejected Mr Hayman’s evidence and his Hayman 2006 valuation, the Applicant has failed to discharge the onus which he bears and this is so despite the fact that the Respondent has taken a view as to applicable values of the Hotel and the Caravan Park. As set out previously, we have four valuations, two by Dodds and two by Hayman, and all commissioned by the Applicant or the Company; all valuations except the Hayman 2006 valuation indicate that the values were far higher, and such that the Applicant could never pass the maximum net asset test. It is significant in our view that the Hayman 2006 valuation was commissioned and obtained after the investigations, which gave rise to the assessment to which the Applicant objects. The Applicant received advice that he would receive the exemption if he sold the two shares for $4,930,000 but must have become aware at some time thereafter that this advice was wrong; it is that factor which must have resulted in the commissioning of the Hayman 2006 valuation and on a basis which did not, by any stretch of the imagination, result in a market value valuation. It is significant in our view that there was clear evidence that the Applicant refused an offer of a considerably larger amount.
73. The manner in which this case has been conducted and run is perhaps best described as idiosyncratic; in this context:
(a)The Applicant sold his shares in the Company for an amount of $4,930,000, and his accountant admitted that this amount was calculated so as to obtain the small business concession; as set out previously they appear to have misconceived the nature of the legislation in that they took Francher into account at one half only. The Applicant and his advisers appear to have been unaware of the stamp duty considerations to which we have referred.
(b)In 2010 Mr Hayman was commissioned to prepare a valuation of the Hotel and Caravan Park combined; he is told that he must value them by reference to MYOB accounts showing revenue for nine months and without regard to future prospects. It is not surprising that he felt the need to qualify them as financial accounting, although the meaning of this term in this context was unclear.
74. It seems to us that the sale of the share was undertaken with one end in mind, and that was to obtain the concession, and notwithstanding the fact that the Applicant’s net asset position was far higher than the then applicable statutory maximum.
75. The Respondent has in RS made some calculations which commence on the basis that the purchase price was a true price for the issued shares in the Company, but on the basis (which is true) that Francher was included as to half only. It follows that if the remaining half was worth in excess of $70,000, the Applicant would fail even on this basis. The Applicant acknowledged in AS that the valuation of the Hotel and Caravan Park should be higher than that shown in the Hayman 2006 valuation. The Applicant said in page three of Appendix 3 of AS that the market value should be reflected as $4,310,000 which is higher by $1,460,000 than the Hayman 2006 valuation. On this basis the valuation of Francher would be higher by $1,460,000. On this basis the net asset value (with Francher taken into account in full) would be $5,663,500, and thus well in excess of the statutory limit. If either valuation by Dodds or the Hayman 2007 valuation is correct, the excess is much higher again.
76. We have found that the Applicant did not satisfy the maximum net asset value test, and so that a consideration of the active asset test is not necessary.
77. The Applicant has failed to discharge the onus he bears of proving that the assessment of his income tax liability for the year ended 30 June 2006 was excessive.
78. The volume of paper in this case is so enormous that one could be pardoned for thinking that the case is necessarily complex; it is not. The central issue relates to the market value of the Hotel and the Caravan Park at the relevant date, and we have for the reasons set out previously rejected the Hayman 2006 valuation and the evidence by Mr Hayman in support of it.
79. Accordingly the objection decision under review must be affirmed.
I certify that the 79 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President J Block and Senior Member S E Frost.
Signed: .............[sgd]................................................................
Casey Comans, AssociateDate/s of Hearing 6, 7, 8 June 2011
Date of Decision 25 August 2011
Representative for the Applicant Mr Andrew Sneddon
Counsel for the Respondent Mr Heydon Miller
Solicitor for the Respondent Mr Ed Chiaw
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Capital Gain
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Small Business Exemption
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Maximum Net Asset Value Test
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Active Asset Test
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