Newsletter
October 2010 Newsletter
Debts Result in CGT Small Business Concessions being Denied
The AAT has confirmed that debts of $3.8m that a taxpayer was owed by related business and investment entities were unquestionably ‘CGT assets’ of the taxpayer that had to be taken into account under the maximum net asset value test. As a result, the taxpayer far exceeded the then $5m threshold and therefore could not qualify for the small business concessions in relation to the capital gain made on the sale of land and improvements from which he operated a car radio business.
In doing so, the AAT dismissed the taxpayer’s argument that the debts were not CGT assets as they ‘… could not yield anything more than (at most) an interest return and that the most which could be obtained in respect of the capital amount of the debts was their face value’. It also dismissed the taxpayer’s argument that the debts were not CGT assets as they were not used in a business — noting that the money had been originally borrowed under a bill facility in relation to the operation of the business and had then been on-lent by the taxpayer to the related entities. Finally, it found that there was no evidence that the debts were worth less than their face value.
The AAT also confirmed that the Commissioner had correctly calculated the assessable capital gain in that he had appropriately apportioned the sale proceeds of over $9m between the pre-CGT property, the post-CGT property and the improvements that comprised the business premises. It also found that the Commissioner had properly accounted for the (then) NSW vendor’s tax liability as part of the cost base of the capital improvements (in a manner that was probably favourable to the taxpayer).
Finally, the AAT confirmed that the 25% shortfall penalty for false and misleading statements was appropriate, despite the taxpayer indicating that the failure was due to the taxpayer’s previous agent. In this regard, the AAT noted that in penalty matters the actions of both the taxpayer and the tax agent are to be considered, and that tax agents are presumed to be aware of the law and for this matter a higher standard is expected of them.
TIP: If a taxpayer is a small business entity, the taxpayer does not need to satisfy the net asset value test. However, the CGT asset that gives rise to the gain must be an active asset, ie it is used, or is held ready for use, in the taxpayer’s (or an affiliate’s or connected entity’s) business.
Re Cannavo and FCT [2010] AATA 591, Ref Nos 2009/5626, 2010/2838, Block DP, 10 August 2010