The impact of this case on ATO policy is discussed in Decision Impact Statement: Tingari Village North Pty Ltd v Commissioner of Taxation (2008/4646 & 2008/4647 ).
TINGARI VILLAGE NORTH PTY LTD v FC of TMembers:
PE Hack SC DP
BH McPherson CBE DP
Administrative Appeals Tribunal, Brisbane
MEDIA NEUTRAL CITATION:
 AATA 233
PE Hack SC, Dr BH McPherson CBE (Deputy Presidents)
1. Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) allows for concessional reductions in capital gains for small business provided certain conditions are satisfied. The present case involves the "50% reduction" concession dealt with in Subdivision 152-C of the ITAA 1997 and the "small business retirement exemption" in Subdivision 152-D of that Act.
2. The applicant Tingari Village North Pty Ltd (Tingari Village) is a company in which the shares are held by Mr Jeffrey Harris and Mrs Jenny Harris, who are also the directors. On 6 February 1996, Tingari Village purchased 1.883 ha of land and improvements at Duffys Road, Terrigal, New South Wales. The land was sold on 30 November 2005 at a capital profit of $2,141,292. The dispute before us raises the question whether Tingari Village is entitled to claim the benefit of the 50% reduction concession and the small business retirement exemption. The answer depends in the end on two issues - whether or not the amounts paid by residents of the park in return for the right to occupy residential sites are properly characterised as rent and whether the net value of assets owned by Tingari Village and its connected entitles just before the sale in November 2005 exceeded $5m.
3. Additionally there is an issue whether, as the Commissioner contends, Tingari Village is liable to pay shortfall penalty at the rate of 25%, that is, on the basis that it had a tax shortfall because it (or its agent) failed to take reasonable care.
4. We do not understand what follows to be in issue. Mr and Mrs Harris are husband and wife. At all times they have been the sole directors and members of Tingari Village and the other corporations that play a role in these proceedings. Those corporations are,
- (a) J H Property Investment Pty Ltd (J H Property) which is the trustee of the J & J Harris Unit Trust (the Unit Trust) and of the Jeff Harris Family Trust (the Family Trust);
- (b) Jeff Harris Aviation Pty Ltd (Aviation); and
- (c) Jeff Harris Developments Pty Ltd (Developments).
5. J H Property, as trustee of the Unit Trust, operated the Sanctuary Village Mobile Home Park at Lennox Head. The Unit Trust had 1,215,670 units, held equally by Mr and Mrs Harris.
6. Tingari Village was the owner and operator of the Tingari Village North Mobile Home Park (the Park) in Terrigal. It acquired the land and improvement constituting the Park in February 1996. At the time of acquisition there were 66 mobile home "sites" in the Park. Subsequently a further 11 sites were created by the demolition of the managers quarters and by better use of available areas. At the time of the sale of the Park in November 2005 there were 77 sites. All but one were occupied by mobile homes at the time of sale.
7. At the relevant time the business of conducting a residential park in New South Wales was governed by the Residential Parks Regulation 1999 made under the Residential Parks Act 1998 (NSW). The Act contains a
ATC 3348series of interrelated definitions. In substance, a "residential park" is a land on which the "park owner" conducts the business of accommodating "moveable homes", which are self-contained dwellings containing various rooms and facilities like those in other homes. The structures of the moveable homes are manufactured off the site before being transported and installed on steel bearers on a designated site in the Park. By s 85A of the Residential Parks Act a moveable dwelling on a residential site is not for any purpose to be regarded as a fixture, and the resident is entitled to sell it separately from the site (see s 80) which continues to belong to the park owner. The residential sites are located along sealed roads, which separate the dwelling individually from others in the park. The overall impression, according to Mr Harris, is like "suburbia".
8. In addition to the sites, the Park comprised a "Community Hall" with a kitchen, toilet, games room and library. Each mobile home was owned by the resident and was available to be sold as a chattel by the resident if required. The mobile homes were fully self-contained and were plumbed and had mains electricity connected.
9. In its income tax return for the year ended 30 June 2006 Tingari Village disclosed a net capital gain of $70,646 arising from the sale of the Park having claimed the small business retirement concession and the 50% reduction concession. Thereafter Tingari Village's advisors sent a series of calculations to the Commissioner that sought to demonstrate that the net value of assets owned by Tingari Village and its related entities did not exceed $5m.
10. The Commissioner was not persuaded that Tingari Village was entitled to small business CGT relief. On 18 February 2008 he made an amended assessment, evidenced by a notice of amended assessment bearing that date, by which Tingari Village's net capital gain was increased from $70,646 to $2,141,292. The taxable income was increased from a loss of $765 to $2,069,881. On 28 April 2008 the Commissioner made an assessment of Tingari Village's liability to pay shortfall penalty on the basis that the tax shortfall had resulted from recklessness i.e. a penalty of 50%.
11. Tingari Village objected to both of these assessments.
12. On 5 August 2008 the Commissioner disallowed the objection to the amended assessment. The objection to the assessment of shortfall penalty was disallowed on 28 August 2008. These proceedings were commenced on 3 October 2008. The subject matter of application 2008/4646 is the Commissioner's objection decision of 5 August 2008. The 28 August 2008 decision on shortfall penalty is the subject matter of application 2008/4647.
13. Division 152 of ITAA 1997 creates four mechanisms for the reduction of capital gains made by small businesses. The operation of Subdivision 152-A, which deals with the basic condition 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.
14. 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;
ATC 3349Note: 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."
There is no issue here that Tingari Village satisfies paragraphs (a) and (b) of the sub-section; the contest concerns satisfaction of the maximum net asset value test and active asset test.
15. Satisfaction of the maximum net assets value test is dealt with by 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) ..."
16. It is unnecessary for present purposes to consider the meaning given to the expression "entities connected with you". It is accepted that the entities that were connected with Tingari Village just before the CGT event, that is, the sale of the Park, were Mr Jeffrey Harris, Mrs Jennifer Harris, J H Property, as trustee of the Unit Trust, Aviation, Developments, and J H Property, as trustee of the Family Trust.
17. 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."
The question of liabilities "related to" assets is one of the areas of controversy here.
18. 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."
19. The CGT asset in this case is the Park. It satisfies the active asset test if it was an "active asset" just before the sale. And it is an active asset if, at the given time, it is owned, and used in the course of carrying on a business
- "(4) However, the following *CGT assets cannot be active assets :
- (a) ...
- (b) ...
- (c) ...
- (d) ...
- (e) an asset whose main use in the course of carrying on the *business mentioned in subsection (1) is to derive interest, an annuity, rent, royalties or foreign exchange gains unless:
- (i) the asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced; or
- (ii) its main use for deriving rent was only temporary.Example:
A company uses a house purely as an investment property and rents it out. The house is not an active asset because the company is not using the house in the course of carrying on a business. If, on the other hand, the company ran the house as a guest house the house would be an active asset because the company would be using it to carry on a business and not to derive rent."
There is no suggestion here that the exceptions in sub-paragraphs (i) and (ii) are relevant.
20. The Commissioner's contention is that the Park was an asset whose main use in carrying on Tingari Village's business was to derive rent. Tingari village contends that the Park is more in the nature of a business of offering accommodation and other services to those who resided in the Park.
21. The first issue may be simply stated. It is whether the Park is not capable of being an active asset because its main use was to derive rent.
22. The other issue concerns the net value of CGT assets of Tingari Village and its connected entities. Tingari Village contends that the net value of the CGT assets was $3,976,170. For the Commissioner it was said that the figure was $6,312,462. The areas of agreement and disagreement are best illustrated by reference to the following balance sheet which has been adapted from Exhibit 31B. The areas of disagreement have been highlighted by an *.
|JH Property Pty Ltd as trustee of the Unit Trust|
|Sanctuary Village, Lennox Heads||3,200,000||3,200,000|
|Loan - J & J Harris||(508,889)||(508,889)|
|Commercial bill- Sanctuary Village||(1,650,000)||*|
|Tingari Village North Pty Ltd|
|Loan to Aviation||347,630||510,000*|
|Loan from J & J Harris||(131,000)||(131,000)|
|Tax payable - 2005||(83,896)||*|
|Tax payable 1998-2004||(348,921)||(242,895)*|
|NAB bank bills||(697,000)||(697,000)|
|Loan - W Johnson||(225,000)||(225,000)|
|Jeff Harris Developments Pty Ltd|
|Plant & equipment||2,148||2,148|
|Loan from J & A Harris||(5,636)||(5,636)|
|Mr & Mrs Harris|
|Loan to Unit Trust||508,889*|
|Sanctuary Village debt||(508,889)*|
|Loan to Aviation||203,000*|
|Loan to Tingari Village||131,000*|
23. As appears from the balance sheet the considerable difference between the parties is explicable by reference to the following questions:
- (a) whether the face value of a commercial bill of $1.65m is to be brought to account as a liability of J H Property as trustee of the Unit Trust;
- (b) whether loans to Aviation by Tingari Village and by Mr and Mrs Harris ought be brought into account as assets at their face value (as the Commissioner contends) or at the lesser figure of their realisable value as calculated by Mr Mark Nicholson, the accountant for Tingari Village (and the other entities);
ATC 3352(c) the extent of Tingari Village's liability to pay tax at the relevant time and whether tax is to be regarded as a liability;
- (d) whether loans by Mr and Mrs Harris to other entities ought to be disregarded in determining the net value of their CGT assets because of s 152-20(4) of ITAA 1997?
24. Finally, there is an issue concerning the extent of shortfall penalty. The Commissioner's original stance of recklessness has softened. He now contends that the case is one of lack of reasonable care warranting the imposition of penalty at 25%, not the 50% rate imposed by the assessment. If we accept his concession Tingari Village is at least entitled to have the Commissioner's objection decision of 28 August 2008 varied to incorporate the concession.
Was the park used to derive rent?
25. As has been seen, s 152-40(4)(e) of the ITAA 1997 provides that an asset is not an active asset if its main use was to derive rent. The word "rent" is not defined in the Act, so it presumably bears its contemporary common law meaning. As to that, in
United Scientific Holdings Ltd v Burnley Borough Council 
"the medieval concept of rent as a service rendered by the tenant to the landlord has been displaced by the modern concept of a payment which a tenant is bound by his contract to pay to the landlord for the use of his land."
26. On occasions this may make it difficult to differentiate rent from a payment made for the use of land under a mere licence to occupy. It used to be said that the distinctive feature of rent is that it issues "out of the land"; but, although this was true at the dawn of our legal history
27. In the absence of other distinguishing features capable of identifying "rent", the submissions proceeded to focus on the interest conferred by the instrument providing for payment of rent. But saying that a lease, though not a licence, creates an interest in land is uninformative unless one knows in advance whether a lease and not just a licence has been created. After some years of uncertainty, the courts both in England and Australia confirmed that the test to be applied is whether or not "in substance and effect" exclusive possession is granted by the instrument in question. If it is, it is a lease; if not, it is a mere licence. In
Addiscombe Garden Estates Ltd v Crabbe 
Radaich v Smith 
Street v Mountford 
28. When one turns to the instrument or agreement relied on here, it is in the form prescribed in Schedule 1 to the Residential Parks Regulation. Section 8(1) of the Residential Parks Act confers power to prescribe standard forms of residential tenancy agreement, which by s 8(3) are taken to incorporate in the agreement all the terms contained in the Act. An agreement may include other additional terms but only if they are not inconsistent with the Act: see s 3(c) and s 10(1)(a); otherwise they are void to the extent of the inconsistency: s 11.
29. The agreement with which the Tribunal has been provided is simply an unexecuted copy of the form prescribed in Schedule 1. It does not contain particulars of the parties, of the site number, the date, or the duration of the agreement. The blank spaces for insertion of those details are not filled in. The form in Schedule 1 is intended to be used for a lease for a term of three years or less, while another form is prescribed in Schedule 2 for a term in excess of three years. That might appear not to matter much because cl 2 of the form in Schedule 2
ATC 3353incorporates into it clauses 2 to 33 of the form of agreement in Schedule 1. The difference between the two forms of agreement is nevertheless significant for other reasons.
30. There are various provisions in the Act that are expressed not to apply to agreements for a fixed term. Without having copies of the executed agreements themselves, it is not possible to say with any confidence which are, and which are not, fixed term agreements that exclude or qualify those statutory provisions. The most that can be said is that there is some evidence suggesting that many of the agreements in this residential park were for periods exceeding three years. Overall, the frequency of turnover in residents is said to have averaged out at about 10 years or more for each resident.
31. Section 14 of the Act contains provision that a residential tenancy agreement for a fixed term that continues after the end of that term is to continue on the same terms as before, on the basis that there is a holding over of a periodic tenancy. In this context it may be worth adding that at common law a periodic tenancy arising from express words is regarded as producing, not a series of separate new tenancies at the beginning of each recurring period, but a single letting for the entire duration that elapses. Such a tenancy is determinable by notice to quit
Gandy v Jubber 
32. Entry by tenant and possession. Under cl 2 of the prescribed agreement and s 3 of the Act the resident agrees to pay the rent on time, which is something that forms part of every well-drawn lease or tenancy agreement. What is more to the point for present purposes is cl 7, which significantly is headed POSSESSION OF THE RESIDENTIAL SITE. By cl 8.1 the park owner agrees to make sure that the residential site is vacant "so that the resident can move in on the agreed date". This strongly suggests that the resident is being given possession of the premises at and from the commencement of the agreement.
33. Right to enter and inspect. In
Addiscombe Garden Estates v Crabbe 
34. The first two of those provisions are found in cll 13 and 14 of the prescribed agreement. In Addiscombe
"intended as an exclusive right of occupation in that it was thought necessary to give a special and express power to the grantees to enter."
In other words, it was because the grantee had possession exclusive of the grantor that an express but limited right of entry was needed by the grantor. A restricted right of entry of that kind is not inconsistent with a grant of exclusive possession in favour of the tenant or occupier
ATC 3354not have exclusive possession. This represents a powerful reason for concluding that the agreement creates a lease rather than a mere licence.
35. Quiet enjoyment. Then there is the resident's express right in cl 9.1 to quiet enjoyment of the residential site "without interruption by the park owner", buttressed in cl 9.2 by a prohibition against the park owner from interfering with the reasonable peace, comfort or privacy of the resident in using the residential site. Such provisions are, of course, common in ordinary leases, where they receive a liberal interpretation in favour of the lessee
36. Termination of tenancy agreement. The third consideration mentioned by Parker LJ in Addiscombe is the grantor's power to enter and determine a lease for non-payment of rent. As we have seen, the prescribed agreement requires the resident to pay rent on time (cll 2 and 35). This calls for no particular comment except that, in establishing non-payment of rent as a ground for termination of a residential tenancy agreement under the Act and Regulations, s 99(3) of the Act requires the rent to have remained unpaid for at least 14 days, and also that notice of termination not take effect until 14 days after the notice has been served: s 99(2) of the Act. The statutory scheme is that there must be a notice of termination, which however does not by itself put an end to the agreement. For that to happen, the resident must in addition restore vacant possession of the premises to the park owner
37. No recovery of possession except by order. Perhaps the most far-reaching provision of the Act is s 122(1), which prohibits a person (including, of course, the park owner and the park owner's agent) from entering residential premises of which someone has possession under a residential tenancy agreement. If an owner does so "for the purpose of recovering possession of the premises ...", s 122(1) makes doing so an offence unless it is done under the authority of an order of a court or tribunal. The general scheme of the Act is to require a park owner wishing to recover possession of premises to serve notice of termination of the agreement and to apply for an order for possession of the premises: s 113(2) of the Act. The notice must be based on one or more of the grounds specified in s 98 (non-payment of rent); dilapidation (s 99); repairs and upgrading (s 101); change of use (s 102); frustration by destruction etc of the premises (s 104); and undue hardship suffered by the park owner (s 118). Without specifying any ground, a notice of termination may be given by either party provided the notice is not given during the currency of a fixed term of the agreement: s 109.
38. Relocation. Instead of issuing notice of termination of the agreement, the park owner may "require the resident to relocate to a different residential site" within the same park or another nearby park operated by the same owner: s 127(1) of the Act. A comparison of s 127(1) and cl 13(3) of the somewhat similarly worded provision in the Schedule 1 prescribed agreement shows that, whereas under s 127(1) the park owner may require a resident to relocate, under cl 13(3) he may only request him to do so. This emboldened Mr Marks, counsel for Tingari Village, to submit that, being inconsistent with s 127(1) of the Act, cl 13(3) of the Regulations was avoided by s 11 of the Act.
39. On examination, however, we do not consider there is an inconsistency between the two statutory provisions. Under s 127(1) an
ATC 3355element of compulsion is involved in requiring relocation. By contrast, under cl 13(3) there is none: a mere request to relocate may simply be declined. In any event, it is only where notice of termination is justified under one or more of the sections (ss 101, 102 104 or 118) specified in s 113(2) of the Act that jurisdiction arises under s 127(1) to order a resident to relocate under that provision.
40. Impact of s 127(1) on tenancy. The terms of s 127(1) nevertheless call for consideration of a further matter. Megarry & Wade, The Law of Real Property
Hamilton Enterprises Ltd v Croycom Pty Ltd
41. The same reasoning would invalidate the tenancy or lease predicated here if it were not for two considerations. The first is that the prescribed agreements under each of Schedule 1 and 2 take their force and effect from statutory enactment irrespective of what the common law says about them. The second consideration is that the park owner's right to require relocation under s 127 is dependent on the park owner having a right to terminate the agreement under ss 101, 102, 104 or 118 of the Act. In addition, during the currency of a fixed term, the statutory obligation to give notice of termination of the tenancy is displaced or qualified in the case of fixed term leases or tenancies by sections 101(2)(b), 102(2)(b), 102A(3), 103(3), 105(3), 107(3) and 109(1) of the Act. In these cases of fixed terms, the agreement of the parties is to prevail.
42. Other matters. Some other matters were put forward as showing that exclusive possession was absent in the case of a residential tenancy agreement like the one before us. The residential park contains various facilities for use by residents, notably a community hall, in which the park owner has sometimes arranged for food and drinks to be provided at his expense. Arrangements were also made to have the grass mown on access roads in the park, for gutters to be cleaned in buildings in common areas, and for rubbish to be collected from time to time. Mr Marks claimed this showed that under the agreements there was more to the park owner's functions than merely receiving regular payments from residents, and so showed that the owner was providing or promoting a community environment and lifestyle in the park.
43. None of these benefits are identified in the tenancy agreements or at all as legally enforceable incidents of the right to occupy a site
44. Conclusions. It is, of course, elementary that, as Windeyer J said in
Radaich v Smith 
45. Without resorting to features like the right to assign (s 41) or, subject to limits, to remove fixtures (s 26), which may suggest the existence of an interest in land, it is necessary only to refer to some of the earlier references to a resident's having, acquiring or ceasing to have vacant possession, or to repossession or receiving or recovering possession. See, for examples, ss 19, 101, 109(2), 113(1), 118(2)(a), 119(2), 122(1), 123(1) and 125(1). It is impossible to accept that the expressions used, many of which are part of the traditional stock of centuries of litigation over leases and tenancies, were adopted in the Act without an
ATC 3356awareness of their long-standing meanings or significance in this field. To take one illustration among the many already referred to, it is necessary to mention only the prohibition in s 122(1) against entering residential premises of which another has possession if the entry is "for the purpose of recovering possession of the premises". This prohibition necessarily extends to premises in the possession of a resident who, as against the park owner, has been granted the right to occupy the site in question. No clearer example of exclusive possession can be conceived.
46. Speaking of a lease or tenancy in
Bruton v London & Quadrant Housing Trust 
"a contractually binding agreement, not referable to any other relationship between the parties, by which one person gives another, the right to exclusive occupation of land for a fixed or renewable period or periods of time, usually in return for a periodic payment in money."
This definition exactly describes the substance and effect of the residential tenancy agreements entered into in the present case. Because of the presence of s 152-40(e) of the ITAA 1997 of the exception in respect of "rent" Tingari Village was not entitled to the concessions conferred in Division 152 of the ITAA 1997.
47. Finally we note that Mr Marks also relied upon a private ruling (No 55228) earlier issued by the Commissioner which concluded that a mobile home park was an active asset. Such a ruling, being at best an expression of policy on the part of the Commissioner, does not bind us but, as Ms Brennan, counsel for the Commissioner pointed out, the ruling was made on the basis of the factual conclusion that the residents did not have a right to exclusive possession but enjoyed only a right to occupy a site.
What was the net value of GST assets?
48. Our conclusion that the Park did not satisfy the description of an active asset is sufficient to dispose of the matter and make it unnecessary to consider the interesting questions that arise in determining the net value of the GST assets. However against the possibility that that conclusion might be regarded as being erroneous we will deal, albeit somewhat briefly, with one aspect of the "net value" issues relating to the treatment of the commercial bill of $1.65m. It is sufficient to confine our consideration to that issue because, on the view we take of the matter, the Commissioner was correct not to regard that amount as a liability of JH Property as trustee of the Unit Trust. That being so, Tingari Village cannot satisfy the $5m threshold, regardless of the view taken of the other matters of controversy.
49. Some further background, again uncontroversial, is necessary. In May 1998 Mr and Mrs Harris obtained approval from the National Australia Bank to borrow $1.5m to assist with the purchase of the Sanctuary Village Mobile Home Park at Lennox Head. Of that sum $1.2 m (or thereabouts) was used by them to acquire units in the Unit Trust. JH Property, in its capacity as trustee of the Unit Trust, used those, and other, funds to acquire the land and improvements comprising the Sanctuary Village Mobile Home Park. The balance of the loan, together with further sums drawn down in 1999, was on-lent by Mr and Mrs Harris to JH Property as trustee of the Unit Trust. It is accepted by the Commissioner that just before the sale of the Park the loan balance of Mr and Mrs Harris to JH Property as trustee of the Unit Trust stood at $508,889.
50. These dealings are reflected in various ways in the balance sheet. First, the value of Sanctuary Village Mobile Home Park is brought in as an asset of JH Property as trustee of the Unit Trust and valued at $3.2 m. Neither that treatment nor the value is in issue. Next, an amount of $508,889 is brought to account as a liability of JH Property as trustee of the Unit Trust. That is the amount which it is agreed remains owed to Mr and Mrs Harris from the borrowing in May 1998. Again, no issue arises about this entry.
51. The controversy arises from the inclusion of a liability of $1.65m, said to be a liability of JH Property as trustee of the Unit Trust to the National Australia Bank in relation to the commercial bill facility. The amount is agreed but the Commissioner contends that the liability ought not to be brought to account.
52. The argument for Tingari Village is that whilst Mr and Mrs Harris may have been the
ATC 3357primary borrowers JH Property, as trustee of the Unit trust, was jointly and severally liable to repay that loan, the liability being secured by a guarantee and indemnity and a real property mortgage over the land and improvements constituting the Sanctuary Village Mobile Home Park.
53. It may be accepted that, in a very broad sense, the liability to the National Australia Bank is a liability of JH Property, in its capacity as trustee. That is so because the bank has the capacity to look to JH Property, and to its real property, to satisfy the obligations of Mr and Mrs Harris were they to default on the loan. But there are at least two reasons why it cannot be regarded as a liability in the sense that the term is used in s 152-20 of ITAA 1997.
54. First, the section requires, in effect, a balance sheet view of the net asset position just before the CGT event. At that time, no demand had been made by the National Australia Bank on JH Property (or, indeed, on Mr and Mrs Harris), and there is no reason to think that Mr and Mrs Harris would have been unable to satisfy any demand for payment had it been made. The absurdity of the position contended for by Tingari Village is highlighted by the inclusion of a total liability in excess of $2.1 m when the face value of the commercial bill was $1.65m. A very clear form of words would be required to read "liability" in this way.
55. Moreover we do not regard any liability of JH Property to be "related to" the asset comprising the Sanctuary Villager Mobile Home Park. The requirement of "related to" implies the existence of a relationship between the asset and the liability however it cannot be read as encompassing every conceivable relationship no matter how remote or tenuous. The relationship here is no more than that Mr and Mrs Harris borrowed $1.65m to acquire units in the Unit trust and to lend to JH Property. So much of that borrowing as was on-lent to JH Property as trustee has been brought to account as a liability by the Commissioner. But even assuming that the contingent liability of JH Property to the National Australia Bank was a liability for the purposes of s 152-20 of ITAA 1997, it is not a liability that is related to any asset of JH Property. As we read the section it requires that the relationship exist between the liabilities and assets of the entity in issue, not any assets held by other connected entities.
56. It follows that we consider that the net value of the CGT assets of Tingari Village and its connected entities must be, at least, $1.65m in excess of the figure that it concedes. Given that that results in a net assets figure in excess of $5.6m, Tingari Village is unable to satisfy the test in s 152-15 of ITAA 1997. For that additional reason Tingari Village was not entitled to the concessions conferred in Division 152 of the ITAA 1997.
57. It follows that we would affirm the Commissioner's objection decision of 5 August 2008.
58. For completeness we note that, had we been called upon to consider whether Tingari Village ought to have leave to amend its Statement of Facts, Issues and Contentions to incorporate the argument that Mr and Mrs Harris were "small business CGT affiliates" of Tingari Village, we would not have been disposed to grant leave to do so. Because the matter was raised very late the matters of fact that underpin the submission were not adequately canvassed during the course of the hearing.
59. Division 284 of the Taxation Administration Act 1953(Cth) (the Administration Act) deals with the imposition of administrative penalties. By virtue of s 284-75 of the Administration Act, a liability to pay an administrative penalty arises where a taxpayer (or agent) makes a statement to the Commission that is false or misleading in a material particular and that results in a shortfall i.e. a tax liability that is less than it would have been but for the false or misleading statement. The Act imposes a "base penalty amount", determined by reference to the character of the act or omission that led to the shortfall amount. That amount can be increased by aggravating conduct or reduced for mitigating conduct. There is no dispute here that the preliminary conditions for the imposition of an administrative penalty are satisfied. What is in issue is whether the shortfall resulted from a failure on the part of Tingari Village or its agent to take reasonable care to comply with a taxation law
ATC 3358Administration Act imposes a base penalty amount of 25% of the shortfall amount.
60. As we have noted, the Commissioner originally took the view that Tingari Village's shortfall had resulted from recklessness warranting a penalty of 50% 
61. We are satisfied that the shortfall resulted from Tingari Village, by its agent, failing to take reasonable care in determining the extent of net CGT assets. We acknowledge that Mr Nicholson was hamstrung by the work (or, perhaps more accurately, the absence of work) of his predecessor and that vast amounts of work had to be undertaken to obtain an accurate picture of the financial affairs of Tingari Village and its connected entities. But the question is whether he took reasonable care when lodging a return in August 2007 that claimed, implicitly, that Tingari Village and its connected entities had net CGT assets of $5m or less.
62. The first written justification of the claim was made in September 2007 when a list of assets and liabilities was produced. It showed total assets in excess of $6.8m but "business assets" i.e. excluding the value of Mr and Mrs Harris' assets and liabilities, of $606,416. That figure, which did not remain static, is to be compared with the figure of $3.9m put forward by Tingari Village at the hearing. That balance sheet contained the following note,
"The above are indicative estimates only and require detailed examination."
For our part we would have thought that the "detailed examination" ought to have been undertaken prior to the lodgement of the return, all the more so when the claim in issue involved statutory income in excess of $2m.
63. But the evidence of Mr Nicholson seemed to us, with respect, to demonstrate that he had simply failed to give adequate attention to the terms of the legislation and to the factual matters that the statute made relevant. By way of one simple example, he gave no consideration to which entities were connected with Tingari Village. We accept, as Mr Marks submitted, that the legislation is complex but if it was beyond Mr Nicholson's capabilities he ought to have sought assistance in its operation from someone better qualified to do so. Our conclusion is not affected by the fact that we have found it unnecessary to consider the totality of matters where Tingari Village and the Commissioner have differing views given that we are required to focus on whether the shortfall resulted from a failure to take reasonable care at the time of lodgement, not whether respectable arguments might be thought of after the event.
64. We would then vary the objection decision of 28 August 2008 to incorporate the Commissioner's concession.