CASE 2/2010

Members:
PE Hack SC DP

Tribunal:
Administrative Appeals Tribunal, Brisbane

MEDIA NEUTRAL CITATION: [2010] AATA 455

Decision date: 18 June 2010

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Deputy President PE Hack SC

Introduction

1. In October 2003, the applicant contracted to sell a tavern in a Queensland provincial city for $5.875m. These proceedings concern the capital gains tax (CGT) consequences of that sale. The applicant contends that there was no net capital gain from the sale because it is entitled to a small business CGT concession. The respondent, the Commissioner of Taxation, contends that the applicant cannot avail itself of the concession because its assets exceed the $5m limit then in place to obtain the concession.

Legislation

2. It is as well to start by outlining the statutory framework^[1] The law is as it was as at 24 October 2003, the date of the CGT event. . Division 152 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) provides for concessional reduction of capital gains in prescribed circumstances. Division 152 creates four mechanisms for the reduction of capital gains made by small businesses. The operation of Subdivision 152-A, which deals with the basic conditions for relief, is explained in s 152-5 of the ITAA 1997 in this way:

"This Subdivision sets out some basic conditions for relief. If the basic conditions are satisfied, then a small business entity may be able to reduce its capital gains using the small business concessions in this Division.

The 3 major basic conditions are:

• (a) a limit of $5,000,000 on the net value of assets that the business and related entities own;
• (b) the CGT asset must be an active asset;
• (c) if the asset is a share or interest in a trust, there must be a controlling individual just before the CGT event and the entity claiming the concession must be a CGT concession stakeholder in the company or trust.

…."

3. Substance is then given to the operation of Subdivision 152-A by s 152-10 (1) which is in these terms:

• "(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) you satisfy the maximum net asset value test (see section 152-15);
  • (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

."

The Commissioner accepts that the applicant satisfies paragraphs (a), (b) and (d) of the sub-section; the contest concerns satisfaction of the "maximum net asset value test". That test is explained in s 152-15 in these terms:

"You satisfy the maximum net asset value test if, just before the *CGT event:

• (a) the sum of the following amounts does not exceed $5,000,000:
  • (i) the *net value of the CGT assets of yours;
  • (ii) the net value of the CGT assets of any entities *connected with you;
  • (iii) the net value of the CGT assets of any *small business CGT affiliates of yours or entities connected with your small business CGT affiliates (not counting any assets already counted under subparagraph (ii)); and
• Note: Some assets aren't included in the definition of net value of the CGT assets : see subsections 152-20(2) and (3).
• (b) …"

4. There is no disagreement between the parties about the identity of "entities connected with you" and there is no necessity to consider that definition. By virtue of s 152-20 the net value of the CGT assets of an entity,

"is the amount (if any) by which the sum of the market value of those assets exceeds the sum of the liabilities of the entity that are related to the assets."

5. The rules for working out the net value of CGT assets are set out in ss 152-20(2), (3) and (4) as follows:

• "(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
  • (b) if the entity is an individual, disregard:
    • (i) assets being used solely for the personal use and enjoyment of the entity, or the entity's *small business CGT affiliate; and
    • (ii) a *dwelling of the individual, or an *ownership interest in such a dwelling, if the individual uses the dwelling to produce assessable income to any extent but does not satisfy paragraph 118-190(1)(c) (about deductibility of interest); and
    • (iii) a right to, or to any part of, any allowance, annuity or capital amount payable out of a *superannuation fund or an *approved deposit fund; and
    • (iv) a right to, or to any part of, an asset of a superannuation fund or of an approved deposit fund; and
    • (v) a policy of insurance on the life of an individual.
• (3) Subsection (4) applies in working out the net value of the CGT assets of an entity that is:
  • (a) your *small business CGT affiliate; or
  • (b) *connected with your small business CGT affiliate.
• (4) Disregard assets of that entity that are not used, or held ready for use, in the carrying on of a *business (whether alone or jointly with others) by:
  • (a) you; or
  • (b) an entity *connected with you (unless the connection with you is only because of your *small business CGT affiliate).

Example :	You and your husband decide to sell a florist's business that you jointly carry on. Your husband also wholly owns a company that carries on a newsagency business. You yourself have no other involvement with the newsagency business.
	You need to work out whether you satisfy the maximum net asset value just before the sale. For this purpose, you disregard the newsagency company's assets. This is because, even though the company is 'connected' with you, in that your small business CGT affiliate (ie your husband) owns it (see section 152-30), this connection arises only because your husband controls the company."

6. It is also necessary to have regard to the expression "small business CGT affiliate". The effect of s 152-25(1)(b) of the ITAA 1997 is that a person is a small business CGT affiliate of the applicant if "the person acts, or could reasonably be expected to act, in accordance with [the applicant's] directions or wishes, or in concert with [the applicant]."

7. Given the arguments of the parties, some of the general provisions regarding CGT need to be considered including some provisions of Division 104 of the ITAA 1997. That Division, in the words of s 104-1,

"…sets out all the CGT events for which you can make a capital gain or loss. It tells you how to work out if you have made a gain or loss from each event and the time of each event."

The need to identify the time of a CGT event is described in s 100-20(3) of the ITAA 1997 as follows:

"The specific time when a CGT event happens is important for various reasons: in particular, for working out whether a capital gain or loss from the event affects your income tax for the current or another income year.

If a CGT event involves a contract, the time of the event will often be when the contract is made, not when it is completed."

8. It is common ground that the transaction in issue in these proceedings constitutes CGT event A1. Section 104-10 of the ITAA 1997 deals with CGT event A1 in these terms:

• " 104-10 Disposal of a CGT asset: CGT event A1
  • (1) CGT event A1 happens if you *dispose of a *CGT asset.
  • (2) You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur:
    • (a) if you stop being the legal owner of the asset but continue to be its beneficial owner; or
    • (b) merely because of a change of trustee.
  • (3) The time of the event is:
    • (a) when you enter into the contract for the *disposal; or
    • (b) if there is no contract - when the change of ownership occurs."

The background

9. The applicant was the proprietor of the Tavern. It initially leased the premises. Subsequently a related entity, Relatedco 1 Pty Ltd (as trustee of the Family Trust) acquired the freehold and improvements from which the Tavern was operated. On 24 October 2003 shares in the applicant were held,

• • 75% by Relatedco 1 (as trustee);
• • 15% by Relatedco 2 Pty Ltd as trustee of the Relatedco 2 Trust;
• • 5% by Relatedco 3 Pty Ltd as trustee of the Relatedco 3 No 1 Trust; and
• • 5% by the male director of the applicant.

10. The male director and the female director were husband and wife. They were the parents of the son director. They were the only members of each of Relatedco 1 and another company, Relatedco 4 Pty Ltd. The male director and the son director were the directors of the applicant at all material times. There were two distinct parts of the Tavern's operations - a hotel which was managed by the son director and a motel which was managed by the male director and the female director. The son director was one of the Tavern's duty managers and the nominee of the applicant for the purposes of the Queensland liquor licensing and gaming legislation.

11. It is common ground that each of the male director, the female director, Relatedco 1 and Relatedco 4 were entities "connected with" the applicant and that the net value of their CGT assets are to be brought into account in determining whether the applicant satisfies the maximum net asset value test.

12. The sale was not one sought out by the applicant. In about July 2003 the male director was contacted by a real estate agent enquiring whether there was an interest in selling the Tavern. He was not particularly interested at that time but agreed to execute the document required by the Queensland legislation governing the appointment of real estate agents. The male director executed that document on behalf of the applicant on 14 July 2003. In the months thereafter, the applicant was persuaded to sell the business of the Tavern and the freehold (via Relatedco 1). It retained accountants to compile financial reports required by the potential purchaser to consider the purchase and in early October 2003 engaged solicitors to act for it in connection with the sale.

13. Contracts by the applicant to sell the hotel business and by Relatedco 1 to sell the freehold were executed on 24 October 2003. After that date the applicant paid $15,606.88 to its solicitors in respect of fees and disbursements in connection with the sale and an amount of $23,450.00 to its accountants in relation to the sale. Commission of $353,125.00 was paid to the real estate agents on completion of the sale in January 2004.

14. The applicant lodged its income tax return for the year ended 30 June 2004 in April 2005. The return was assessed as lodged and a notice of assessment issued on 21 April 2005. The return did not disclose any net capital gain as the applicant' accountants took the view that, while there had been a capital gain of $4,125,955, that gain was reduced by half by operation of the small business 50% reduction provided for by Subdivision 152-C of the ITAA 1997 and that the balance was to be disregarded by the purchase of a replacement asset and the application of the small business CGT roll-over concession under Subdivision 152-E of that Act. Whether the applicant was entitled to those concessions depends upon whether it satisfies the maximum net asset value test, at the time $5 m. No other aspect of its entitlement is in issue.

15. The Commissioner commenced an investigation into the matter in November 2007. In September 2008, the applicant, by its accountants, provided a calculation of net assets that demonstrated total net assets of $4.992m. On 5 March 2009, the Commissioner concluded that the total net assets exceeded $5m and were $5.469m. An amended assessment was made, evidenced by a notice of amended assessment dated 10 March 2009, which increased the applicant' taxable income by $4,125,955^[2] The quantum of the amount is not in issue. . On 13 March 2009, the Commissioner made an assessment of shortfall penalty based upon a conclusion that the applicant had failed to take reasonable care and was thus liable for the imposition of penalty at the rate of 25%. The applicant objected on 30 April 2009 to the amended assessment, the assessment of penalty and to the failure of the Commissioner to adequately remit general interest charge^[3] The applicant now accepts that this latter aspect of the matter is not capable of review in the Tribunal. . The objection was wholly disallowed on 25 September 2009 and proceedings commenced in the Tribunal on 2 November 2009.

The issues

16. What is, and what is not, in issue is best described by reference to the following table setting out the net value of the CGT assets of the relevant entities.

Entity	Applicant	Respondent	Difference
The applicant	$4,176,118	$4,417,612	$ 241,494
Relatedco 4	$43,983	$43,983	$0
Relatedco 1	$ 25,427	$ 187,927	$ 162,500
The male director	$ 0	$ 483,221	$ 483,221
The female director	$ 0	$ 263,787	$ 263,787
The son director	$ 0	$ 72,722	$ 72,722
Totals	$4,245,528	$5,469,252	$1,223,724

17. There are, in essence, five issues that arise. The first, which explains the differences in value attributed to the assets of the applicant and Relatedco 1, is whether the costs of sale - legal fees of $15,606.88, accountancy fees of $23,450 and real estate commission of $353,125.00^[4] The commission was split between The applicant ($190,625) and Relatedco1 ($162,500) however nothing turns on the identity of the entity liable. - were liabilities for the purposes of determining whether the applicant satisfied the maximum net asset value test "just before the CGT event". The next is whether the son director was a small business CGT affiliate of the applicant. The Commissioner says that he was, the applicant contends to the contrary. Then there is the question of whether the assets of the male director, the female director and the son director were CGT assets (as the Commissioner contends) or whether, as the applicant says, they were assets that were not used, or held ready for use, in the carrying on of the business of the applicant. Next, there is an argument put in the alternative by the applicant, by which it contends that the value of assets of the male director, the female director and the son director comprising inter-entity loans should be valued, not at the face value of the loans, but rather at a value discounted to take into account the net asset value of the debtor entity. Finally, and if these matters are determined adversely to the applicant, there is the question whether it failed to take reasonable care in providing information to the Commissioner.

The notice of objection

18. There is a preliminary question: whether the grounds of notice of objection lodged by the applicant to the amended assessment are sufficient to encompass the arguments that are sought to be raised in these proceedings. Mr Harrison QC, who appeared for the applicant, contended that the arguments were encompassed within the existing grounds. Ms Brennan, counsel for the Commissioner, contended that an order of the Tribunal pursuant to s 14ZZK(a) of the Taxation Administration Act 1953 (Cth) (the Administration Act) was required but did not oppose the making of such an order. In these circumstances there is no utility in determining the issue; I will simply give leave to the applicant to rely upon the arguments raised notwithstanding the terms of its notice of objection dated 30 April 2009.

The liabilities

19. At one time it was considered that revenue statutes were to be construed according to particular rules but that view no longer prevails. The plurality judgment in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue^[5] [2009] HCA 41; (2009) 239 CLR 27 at [57]. confirms that no different rules of construction apply to tax statutes; they are to be considered by the application of settled principles, described in these terms^[6] Ibid at [47]. :

"This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the text itself …Historical considerations and extrinsic materials cannot be relied on to displace the clear meaning of the text …The language which has actually been employed in the text of legislation is the surest guide to legislative intention …The meaning of the text may require consideration of the context, which includes the general purpose and policy of a provision …, in particular the mischief …it is seeking to remedy."

The fact that the statute is a taxing statute is part of the context and thus relevant to the task of construction.

20. Mr Harrison QC put the argument for the applicant in alternative ways. First he submitted that, in the absence of a statutory definition of liabilities, the term ought be given its natural and ordinary, and wide, meaning, one encompassing not only presently existing liabilities but also inchoate, future or contingent liabilities. He provided examples where the term had been construed in that way. The alternative argument was that the "time" of a CGT event did not govern the meaning of "just before" in s 152-15 of the ITAA 1997. The only requirement, it was said, was that the liabilities had to be "related to" the asset.

21. The starting point is the statutory context. The purpose of Division 152 of the ITAA 1997 is described in s 152-1 in these terms:

"To help small business, if the basic conditions for relief are satisfied, capital gains can be reduced by the various concessions in this Division."

The evident purpose of this part of the Division is to ascertain who is, and who is not, a "small business". The legislature has made that judgment dependant upon the net market value of the entity, and those closely associated with it, "just before" the CGT event. By focussing the timing of the enquiry in this way the legislature evidently intended to bring into account the sale price of the asset whose disposal created the CGT event. In those circumstances it seems counter-intuitive, to say the least, that costs as closely connected to the sale as commission and conveyancing costs, should be ignored in determining whether the entity's net asset value exceeded $5m.

22. I propose to deal first with the timing argument. The essence of the submission advanced on behalf of the applicant was that s 104-10(3)(b) (the time of the event provision) was not an aid in determining when the event actually occurred. It was a deeming provision, deeming the gain to have been made at a time which might differ from the time of the actual event. Thus, it was submitted, the liability to pay commission (and presumably the other liabilities connected with the sale) was to be determined "as at the instant before the handing over of the transfer in return for the cheque for the balance purchase price".

23. The submission is ingenious but it raises considerable difficulties given that the evidence addresses the value of assets and liabilities as at 24 October 2003, not as at 19 January 2004. Whilst it may be accepted that the nature of the applicant's obligations for commission on the sale and for legal and accounting costs altered between the date of sale and the date of completion nothing is known of the liabilities and assets of the applicant and entities connected with it at the latter date. I am not prepared to rely on a "presumption of continuity" to infer that the overall financial position would have remained the same in the period of three months between contract and completion.

24. But in any event, I am unable to accept the submission because it is contrary to what seem to me to be the plain words of the statute. Section 152-15 requires a calculation of the net value of CGT assets, that is, the market value of those assets less the amounts of liabilities related to those assets, "just before the CGT event". The time of that event, in present circumstances, is when the contract for the disposal is entered into. I accept that, in reality, there is no CGT event unless there is a disposal and that there is, in law, no disposal without the change of ownership that occurs on completion of the sale of real property. But in my view the language of the statute falsifies that reasoning and has the effect that the entry into a contract is taken to be the disposal where an executory contract is ultimately completed.

25. I turn then to consider the width of the expression "liabilities" in its present context. The content of the word has been the subject of much judicial consideration. The decision in Winter v Inland Revenue Commissioners^[7] [1963] AC 235 at 249. to which the Commissioner's submissions drew attention, concerned s 50 of the Finance Act 1940 (U.K.). The Commissioners were required to determine the value of shares held by the deceased in a company. They were required by s 50, when determining the net value of the company's assets for estate duty purposes, to,

"make an allowance from the principal value of those assets for all liabilities of the company (computed, as regards liabilities which have not matured at the date of the death, by reference to the value thereof at that date, and, as regards contingent liabilities, by reference to such estimation as appears to the Commissioners to be reasonable …"

The company might be liable to pay tax if two contingencies were fulfilled. The particular issue was whether, in these circumstances, there was a contingent liability of the company. Thus, the case is not of any great assistance here given that narrow focus of the reasoning of the House. But Lord Reid did describe his understanding of a contingent liability in these terms:

"I would, therefore, find it impossible to hold that in Scots law a contingent liability is merely a species of existing liability. It is a liability which, by reason of something done by the person bound, will necessarily arise or come into being if one or more of certain events occur or do not occur. If English law is different - as to which I express no opinion - the difference is probably more in terminology than in substance."

26. That definition commended itself to Spender & Ryan JJ. in Tierney v Automotive, Food, Metal, Engineering, Printing and Kindred Industries Union of Australia^[8] (1996) 137 ALR 312. , a case concerning a wide statutory definition of "liability".

27. The applicant referred me to three cases, each involving the transfer of assets and liabilities between entities. The first was the decision of Woolf J in Walters v Babergh District Council^[9] (1983) 82 LGR (Eng) 235. where the Court was concerned with the expression, "transfer of rights and liabilities" in s 254(2)(a) of the Local Government Act 1972 (U.K.). Woolf J held that "liabilities" in that context included potential and accruing liabilities as well as those enforceable at the date of transfer of assets and liabilities. His Lordship observed^[10] Ibid at 243. :

"I regard the word 'liabilities' as capable of having amplitude of meaning. In the context of this case I consider that it is wide enough to apply to contingent or potential liabilities. It appears to me that I have a fair choice …Having that choice I have no hesitation in choosing an interpretation which makes, in my view, sense of this part of the order …"

28. Those remarks were referred to with evident approval by Gleeson CJ in Crimmins v Stevedoring Industry Finance Committee^[11] [1999] HCA 59; (1999) 200 CLR 1 at [8]. See also at [144]–[146] (per McHugh J), [190] (per Kirby J) and [367–369] (per Hayne J). . The case concerned the entitlement of an injured employee to recover damages from the Committee, the statutory successor of an earlier Authority. By virtue of the statute, on the expiration of a transitional period, the Committee was liable to perform all the duties and to discharge all the liabilities and obligations of the Authority that existed immediately before the expiration of that period. Gleeson CJ said, by reference to Walters v Babergh District Council:

"Depending upon the context, the meaning of 'liability' can include a contingent or potential liability … When the legislature, in providing for replacement of the Authority by the respondent, stipulated that the respondent was to perform all the duties, and discharge all the liabilities, of the Authority, which was abolished and which had no further capacity itself to meet any claims upon it, there was no good reason to distinguish between complete and inchoate causes of action in cases where the Authority had committed a breach of a legal duty. Such a distinction is not required by the use of the word 'liability', and to give it a narrow construction would defeat the evident purpose of the legislation, which was to preserve the just entitlements of those who had dealings with the Authority before its abolition."

Gaudron J said, to similar effect^[12] At [15]. :

"There is no difficulty in speaking of the existence of a liability or obligation that is not presently enforceable: equally, there is no difficulty in speaking of a liability or obligation that existed in the past but was not then enforceable. At least that is so if there is or was some foundation for the liability or obligation in question."

29. The next case to which reference may usefully be made is the decision of Lindgren J in Stork ICM Australia Pty Ltd v Stork Food Systems Australasia Pty Ltd^[13] [2006] FCA 1849; (2006) 25 ACLC 208. where his Honour was concerned with s 413(2) of the Corporations Act 2001 (Cth). The Act allowed for approval to be given to schemes of arrangement where the whole or part of the undertaking or property of one company might be transferred to another company. Subsection 413(2) provided:

• "(2) Where an order made under this section provides for the transfer of property or liabilities, then, by virtue of the order, that property is transferred to and vests in, and those liabilities are transferred to and become the liabilities of, the transferee company, free, in the case of any particular property if the order so directs, from any charge that is, by virtue of the compromise or arrangement, to cease to have effect."

The term "liabilities" was defined as including,

"duties of any description, including duties that are of a personal character or are incapable under the general law of being assigned or performed vicariously."

30. His Honour said this:

• "[89] In Crimmins v Stevedoring Industry Finance Committee (1999) 200 CLR 1, the High Court held unanimously that the word 'liabilities' in s 14 of the Stevedoring Industry Acts (Termination) Act 1977 (Cth), which provided for a vesting in the Stevedoring Industry Finance Committee of liabilities of the Australian Stevedoring Industry Authority, operated to vest in the Committee the liability of the Authority in respect of a breach of its duty of care to safeguard wharf labourers against exposure to asbestos fibres, even though the injury was suffered after the vesting under s 14 took place. Gleeson CJ observed that depending on the context, 'liability' can include contingent or potential liability (his Honour cited Walters v Babergh District Council (1983) 82 LGR (Eng) 235 (QBD)). The Chief Justice noted (at 14) that the legislation abolished the Authority which no longer had the capacity to meet any claims upon it, and said that there was no good reason to distinguish between complete and inchoate causes of action, where the Authority had committed a breach of a legal duty.
• [90] The other members of the Court also read the word 'liabilities' in s 14 expansively, rather than narrowly.
• [91] That the word 'liabilities' in s 413 should also receive an expansive interpretation is indicated by the purpose of the section of facilitating the transfer of undertakings.
• [92] In my opinion the inchoate, potential or contingent liabilities of Stork ICM to the potential claimants, are capable of being made the subject of an order under s 413(1), and therefore of becoming inchoate, potential or contingent liabilities of Stork FSA instead."

31. It is also of some interest to note the remarks of McPherson JA in R v Dunwoody^[14] (2004) 149 A Crim R 259 at 290; see also Trustees of Property of Cummins v Cummins [2006] HCA 6 ; (2006) 227 CLR 278 at [31] . where, in the context of statutes dealing with the defrauding or deceiving of "creditors", his Honour said:

"It is true that statutory enactments of this kind consistently refer to defrauding or deceiving 'creditors'; but the course of judicial decision over the centuries shows that this expression is not to be confined to its limited and technical sense of a person to whom a debt is presently due and owing."

32. What I draw from these authorities is that, in the absence of words of limitation or expansion, the width of the expression "liabilities" is determined, at least in part, by reference to the evident purpose of the provision to be construed and that, without more, it can be given a wide scope if the purpose of the provision requires that. The present is such a case. It would make no sense to exclude liabilities that are inextricably connected to the sale where it is the disposal of the asset that creates the CGT event and determines the market value of the asset which in turn allows the extent of the capital gain to be ascertained. That connection provides "the foundation for the liability or obligation" spoken of by Gaudron J in Crimmins.

33. In considering the width of the expression, it is to be remembered that the CGT event is the disposal of the asset and there is a disposal of a CGT asset if a change of ownership occurs. Without a change of ownership CGT event A1 cannot occur. Section 104-10(3) does not alter that basic principle nor does it have the effect of creating CGT event A1 on the execution of the contract for sale. Rather, in my view, where CGT event A1 occurs by virtue of the disposal constituted by the change of ownership of the asset, s 104-10(3) operates to identify the time of the event^[15] Cf. s 100-20(2), ITAA 1997. . That view is reinforced by the words of s 104-1 which describes the purpose of Division 104 as being to tell "you how to work out if you have made a gain or loss from each [CGT] event and the time of each event."

34. It is not necessary for present purposes to undertake any detailed analysis of the rights and obligations of the vendor and the purchaser upon entry into an executory contract. It may be accepted, as the High Court concluded in KLDE Pty Ltd v Commissioner of Stamp Duties (Q)^[16] (1984) 155 CLR 288, 297. , that:

"a purchaser under a contract for the sale of land which is specifically enforceable has a beneficial interest in the land, albeit one conditional on, amongst other things, payment of the price."

But the vendor retains the legal interest in the subject matter of the contract until that legal interest is disposed of on completion of the contract. Thus, there was not a disposal by the applicant (or by Relatedco 1) of the legal interest until completion of the contract on 19 January 2004. Section 104-10(3) does not alter the reality of the fact that the disposal occurs on completion and that the execution of the contract does not amount to a disposal.

35. Given that, prior to completion, there cannot be a CGT event in fact and that the CGT event occurs by virtue of completion of the contract it seems entirely artificial to regard s 104-10(3) as requiring only liabilities actually incurred at the time of the contract to be regarded for the purposes of determining net CGT assets. Whatever the width of the expression may be it must surely extend to a contingent liability where the contingency is the happening of the event that produces the capital gain. In the language of Woolf J, it appears to me that I have a fair choice. Having that choice, I have no hesitation in choosing an interpretation which makes, in my view, sense of this part of Division 152. The interpretation that I prefer is one that includes within the scope of liabilities those that are an integral part of the sale, that is, liabilities incurred, or to be incurred, in the completion of the contract.

36. What then needs to be considered is the precise nature of each of the debts in issue in this case.

37. The accountancy fees of $23,450 were the subject of an invoice dated 31 October 2003 which was expressed on its face to be payable within 14 days from the date of receipt. The work performed was described by the applicant's accountant, as being "related to due diligence carried out before the contract for the sale of the … Tavern business was entered into on 24 October 2003."

38. I have difficulty in seeing how it could possibly be said that the amount of $23,450 was not a liability of the applicant "just before" the execution of the contracts of sale. All of the accountants' work had been performed; all that remained to be done was for an invoice to be prepared and sent for the fees payable. The obligation to pay had been incurred prior to 24 October 2003 even if the date for payment had not yet arrived. A balance sheet of the applicant prepared as at 23 October 2003 would not be a true and fair financial statement^[17] See s 286(1), Corporations Act (Cth). if it did not show the accountants' fees as a liability that had been accrued by the applicant.

39. The position is slightly different in the case of the legal costs. The total of $15,606.88 is represented by three invoices: # 418262 dated 28 October 2003 for $4,108.48, # 429108 dated 28 November 2003 for $8,049.53 and # 432959 dated 17 December 2003 for $3,448.87. The time sheets that are in evidence show that all of the work represented by the 28 October 2003 invoice was undertaken prior to 24 October 2003, that part of the work represented by the 28 November 2003 invoice was done prior to 24 October 2003 and part on or after that date, and that all of the work represented by the 17 December 2003 invoice was undertaken on or after 24 October 2003.

40. The Commissioner's first argument is that, in the absence of a written legal services agreement, it ought be concluded that the retainer of the solicitors was indivisible and that,

"(i)n the absence of any evidence to the contrary, the fees under the retainer were due and payable on completion of the tasks for which the retainer was made."^[18] Commissioner’s submissions, para 21.

The task was identified as one of bringing the contracts of sale to completion by mid-January 2004.

41. The submission is devoid of merit. First, I observe that neither the issue nor the Commissioner's present contention was raised in the Statement of Facts, Issues and Contentions lodged by the Commissioner on 16 April 2010. Parties, especially government parties, ought not raise contentions of this nature for the first time at the hearing where they might otherwise have been the subject of evidence.

42. But beyond that, there is no substance to the point. The cases cited by the Commissioner - Legal Services Commissioner v Baker (No 2)^[19] [2006] QCA 145; [2006] 2 QdR 249. and Stark v Dennett^[20] [2008] QCA 50; [2008] 2 QdR 72. - do not, in my view, stand for the broad proposition relied on by the Commissioner. They stand for the narrow proposition expressed in Baker by McPherson JA in these terms,

• "[3] In the case at least of a retainer in respect of relatively uncomplicated litigation, such a contract is entire; that is to say, the solicitor is, apart from any agreement to the contrary, bound to do what is necessary to institute (or defend) the action and bring it to a conclusion before becoming entitled to payment of any of his professional fees …"^[21] See Baker at [5]; see also Stark v Dennett (supra) at [45].

But stating the rule in that way says nothing about the liability of the client to pay where, for example, the client breached or repudiated the retainer. In such circumstances, as McPherson JA pointed out,

"… the right of the solicitor, like anyone else, to recover his professional costs or fees for work done before termination of the retainer or contract rests on quantum meruit, or, as it would now be described, in restitution …"^[22] See Baker at [5].

43. There is a further reason to reject the point. The invoices were issued on a periodic basis with an endorsement that the amount of the invoice was payable within seven days of the date of the account. I would infer from that that the retainer was not an entire contract but one under which the solicitors were entitled to charge, and recover, on the basis of work done. That inference may be more readily drawn where the Commissioner's argument was raised without any prior notice.

44. The result is that the solicitors' costs fall to be considered without regard to any notion of an entire agreement. So far as concerns work done up to the date of the contract I am satisfied, for the reasons given in relation to the accountants' fees, that the costs incurred to that date are liabilities that existed just before the CGT event. The issue as to the balance, that is, fees for work done in connection with the conveyances after the making of the contract, is more complex.

45. There can be no doubt that those fees were closely connected to the sales. It was necessary for the applicant to incur the fees in order to complete the contracts. Had they not done so the contracts would not have been completed and the capital gain would not have arisen. It makes no sense of Division 152 to interpret "liabilities" in a manner that would exclude an outgoing, even one after the CGT event, that would not have been incurred but for the event that brings about the capital gain.

46. The amount of commission payable by the applicant was $190,625 however I do not regard the position of Relatedco 1, which was liable to pay the balance of $162,500, as being different. The entitlement of the agent to commission, and thus the liability of the principal to pay the commission is determined, in the first instance, by reference to the question, "what, on the proper construction of the contract, is the event upon the happening of which the agent acquires the right to commission"^[23] See LJ Hooker Ltd v WJ Adams Estates Pty Ltd (1977) 138 CLR 52 , 66 . . Here, the appointment of the agent executed by the applicant on 14 July 2003 gave the agent an "exclusive agency" during the period in which the contracts were executed. The entitlement to commission was dealt with in this way:

• "2.1 The Client agrees to pay the Agent commission as specified in the Appointment if a Contract of Sale of the Property is entered into with a buyer, whether within the Term or after the Term, where the [agent] is the effective cause of the sale within the Term, provided that:
  • (1) the Contract of Sale of the Property is completed; or
  • (2) the Client defaults under the Contract of Sale and that Contract is terminated by reason of or following that default; or
  • (3) the Contract of Sale is not completed and the whole or part of the deposit paid is liable to be forfeited; or
  • (4) the Contract of Sale is terminated by mutual agreement of the Client and the buyer."

47. Thus, the liability of the principal is truly a contingent liability, that is to say, the applicant was liable to pay commission upon the entry of an agreement for sale but that liability was contingent upon fulfilment of one of the four listed contingencies. Importantly, for present purposes, the liability arises from the same event that constitutes the CGT event and the contingency was fulfilled by the event. But, in one critical sense, it is distinguishable from a contingent liability. That is so because, if the contingency is not fulfilled, there is no need to consider the issue of the liability. That is, it is only where the sale is completed that it becomes necessary to consider the nature of the liability. The same is true of the other costs of sale, accountancy fees and legal costs, which were incurred after the entry into the contract of sale but before its completion.

48. As it seems to me, on the proper construction of the expression, "liabilities" in s 152-20 of the ITAA 1997 extend to liabilities that may not have crystallised "just before" the CGT event but which crystallise as part of completion of the sale. Put slightly different, whilst the "just before" element defines the time of the test it is proper and necessary to have regard to subsequent events to ascertain the liabilities that were an integral and necessary part of the CGT event.

49. Thus, in my view, each of the outgoings in issue here is to be regarded as a liability of the applicant or an entity (Relatedco 1) connected with it. The Commissioner does not dispute that the liabilities were "related to" CGT assets of the applicant or Relatedco 1.

The position of the son director

50. The son director was one of two directors of the applicant and, through his company Relatedco 2, a 15% shareholder in the applicant. The Commissioner says that the son director was a "small business affiliate" of the applicant whose net CGT assets were required by s 152-15 of the ITAA 1997 to be brought into account in determining whether the applicant satisfied the maximum net asset value test. He would answer that description if he acted, or could reasonably be expected to act, in accordance with the wishes or directions of the applicant, or in concert with it.

51. In my view the evidence falls well short of permitting that finding to be made.

52. In addition to his capacity as a director of the applicant, the son director was also the duty manager who had primary responsibility for the day to day management of the hotel side of the business while his parents concentrated their endeavours on the motel side. The Commissioner accepts that holding the office of director is not sufficient to give rise to the inference that the director acts at the direction of the company or in concert with it. The concession is hardly novel; the reality is that the company acts at the direction of its directors. The Commissioner indentifies four matters of fact said to warrant the inference that the son director satisfied the test.

53. The Commissioner's submissions highlighted

• • the son director's close involvement in the day to day operations of the hotel as its duty manager;
• • the fact that he is the company's nominee for the purpose of liquor licensing laws;
• • the fact that he is the guarantor of the company's liabilities under the Gaming Machine Act 1991 (Qld); and
• • the evidence of the male director that the son director generally acted in accordance with the male director's directions, made on behalf of the company, in the carrying on of the business of the applicant.

These matters, it was said, give rise to the inference,

"that [the son director] could reasonably be expected to act and acted in pursuance of a common objective with that of the applicant, namely in the interests of the company in the proper and lawful pursuit of the Hotel business."

54. I do not regard the submission as sound. The acts of the son director, that is the first three matters, are explicable on the basis of the son director's position as a director or as an employee (or both) of the applicant. That is to say, it was his conduct qua director of the applicant, not conduct of his in his own right or in his capacity as director of other entities. Moreover, there is no objective or purpose common to both, the object or purpose that underlies the conduct is that of the applicant. The son director's conduct is directed to that objective or purpose but it is not his objective or purpose. Were the matter to be tested in the way that the Commissioner suggests, every employee would be regarded as a small business CGT affiliate of the employer. What is required to satisfy the test of affiliate, and what is absent from the Commissioner's formulation, is demonstrated by the test of "in concert with" described by Finkelstein J in Papua New Guinea Dockyard Ltd v Adams^[24] [2005] FCA 413; (2005) 215 ALR 742 at [13]. in this way:

"Many of the important cases that discuss the meaning of 'acting in concert' are helpfully collected by Barrett J in Bateman v Newhaven Park Stud Ltd (2004) 49 ACSR 597. These cases show that a person, A, will be acting in concert with another person, B, if A engages in conduct (act or omission) in consequence of an agreement or understanding between A and B and the conduct is in pursuance of an objective or purpose which is common to both. It is not as is sometimes suggested necessary to show that the common objective or purpose "has some pejorative element [such as] to circumvent the letter, or perhaps even the spirit, of some other statutory obligation or requirement"

55. It follows that I do not regard the son director as a small business CGT affiliate of the applicant.

Disregarded assets

56. Section 152-15 of the ITAA 1997 requires consideration of the net value of the CGT assets of the applicant, the net value of CGT assets of entities connected with the applicant and the net value of the CGT assets of any small business CGT affiliate of the applicant. It is common ground that the male director and the female director are each entities^[25] The definition of entity in s 960-100 of the ITAA 1997 includes an individual. connected with the applicant. It is also common ground that their assets are $483,221 in the case of the male director and $263,787 in the case of the female director. What is in issue is whether they are CGT assets.

57. The assets of the male director comprise amounts shown as liabilities in the accounts of related entities as follows:

• the applicant	$37,698
• Relatedco 4	$44,380
• Family Trust	$401,143
	$483,221

Female director's assets comprise debts owed by Relatedco 4 ($44,380) and the Family Trust ($219,408).

58. The male director and the female director are small business CGT affiliates of the applicant. Thus, s 152-20(4) of the ITAA 1997 applies in working out the net value of their CGT assets. That subsection requires that assets of theirs that are not used, or held ready for use, in the carrying on of a business by the applicant or an entity connected with the applicant be disregarded.

59. The Commissioner says that the assets, comprising the amounts shown in the accounts of the applicant, Relatedco 4 and Relatedco 1 to the credit of the male director and the female director, are assets used in the carrying on of the businesses of those entities. Those funds, he contends, have been lent back to the entities and form part of the funds available for use.

60. The applicant contends to the contrary. It says that an amount shown in books of account cannot be regarded as an asset of the creditor capable of being used in the carrying on of a business. The asset is not the money that has been lent and which now constitutes the debt; it is the chose in action that the debt represents. A chose in action, it is said, is not capable of being used in the carrying on of a business.

61. I do not propose to determine the issue as it is unnecessary for me to do so. The conclusions reached by me to this point are sufficient to satisfy me that the net value of the CGT assets of the relevant entities did not exceed $5m just before the CGT event even were the assets of the male director and the female director required to be brought into account. Moreover, the issue was not fully explored in oral submissions and is the subject of supplementary submissions from the parties. It is, I think, preferable, having regard to the Tribunal's statutory objectives that I not delay publication of the decision and the reasons for it to consider an issue that is entirely academic so far as the outcome is concerned.

62. Similarly, the issue of the value to be attributed to the inter-entity loans does not strictly arise given the conclusions I have reached however it may be readily disposed of in any event. I do not doubt that in an appropriate case the market value of a book debt may be an amount less than its face value; it might even have no market value. But where, as is the case here, there are inter-entity loans, it is too simplistic to reach a conclusion of the market value merely by reference to one entity. Regard would need to be had to the position of all of the entities. If value is to be determined by the notional winding up method it is unrealistic not to do so by reference to all related entities. Thus, had I reached the conclusion that the loans owed to the male director and the female director were net CGT assets of theirs, I would have brought them into account at their face value.

63. The result is that I am satisfied that the sum of net CGT assets of the applicant and the entities connected with it just before the CGT event did not exceed $5m. The Commissioner's objection decision should be set aside and the matter remitted to the Commissioner with directions to allow the objection in full.

Penalties

64. Given my earlier conclusion, the question of the imposition of an administrative penalty does not arise.