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FC of T v ALTNOT PTY LTD

Members:
Pagone J

Tribunal:
Federal Court of Australia, Melbourne

MEDIA NEUTRAL CITATION: [2014] FCA 362

Decision date: 13 March 2014

Pagone J

1. This case concerns the proper construction of s 152-30 of the Income Tax Assessment Act 1997 (Cth) ('the 1997 Act'). The Commissioner appeals from a decision of the Administrative Appeals Tribunal under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth). An appeal to this court under that provision may only be brought on a question of law, and the question of law is both the qualifying condition for an appeal and the subject matter of the appeal itself:
TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 82 ALR 175, 178.

2. The Commissioner identified three questions of law in this proceeding: however, the first two depend upon the same question of construction of s 152-30 and the third, as formulated, is not a question of law and, in any event, is both conceded by the respondent and has no impact on the outcome of the proceeding.

3. The one issue in the proceeding raising a question of law, therefore, concerns the construction of s 152-30(2)(b) of the 1997 Act. The issue arose in the context of the assessment of the respondent, Altnot Pty Ltd, to a capital gain of $1,029,449 made on 30 March 2007 from the sale of a CGT asset, namely its fifty per cent interest in a business known as the Clearwater Carwash which had operated in South Yarra. Altnot claims that in calculating its taxable amount it was entitled to rely upon a statutory concession in s 152-10(1)(c) of the 1997 Act on the basis that the value of its CGT assets did not exceed $5 million. Section 152-10(1)(c) provides that a capital gain may be reduced or disregarded where, relevantly, the taxpayer satisfies the maximum net asset value test in s 152-15. The Commissioner contends that the calculation of the amount of Altnot's CGT assets includes those of Mrs Roberts, the wife of the sole director of Altnot, by reason of the operation of s 152-30(2)(b). The question of law raised by the Commissioner in this proceeding is, therefore, whether the proper construction of s 152-30(2)(b) required the Tribunal to take into account Mrs Roberts' assets when calculating Altnot's CGT assets under s 152-15 for the purpose of the concession in s 152-10.

4. The liability of Altnot depends upon whether it satisfied the maximum net asset value test in s 152-15 of the 1997 Act before the CGT event which occurred upon the sale of its interest in the car wash. Section 152-10(1) provides that a capital gain may be reduced or disregarded if the assessable taxpayer (identified in the section as "you") satisfies specified basic conditions including that in s 152-10(1)(c), namely, that the assessable taxpayer (again identified as "you") satisfied the maximum net value test found in s 152-15. That section provides:

You satisfy the maximum net value asset 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 small business CGT affiliates of yours or entities connected with your small business CGT affiliates (not counting any assets already counted under paragraph (b)).

The Commissioner contends that in applying this provision the Tribunal ought to have included, but did not include, the value of the assets of Mrs Roberts in the calculation of the value of Altnot's assets before the CGT event. The Commissioner contends that to be required by operation of s 152-30(2)(b) which defines when an entity is "connected with" another

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entity for the purposes of s 152-15(b). The Tribunal concluded that Mrs Roberts was not "connected with" Altnot within the meaning of s 152-30 because: (a) she did not have any interest in Altnot that carried with it the right to receive at least forty per cent of any distribution of income or capital; (b) she did not own any shares in Altnot; and (c) Altnot is not a discretionary trust. The Commissioner contends, however, that the Tribunal erroneously limited its enquiry into whether Mrs Roberts herself beneficially owned shares in Altnot that carried the right to control the exercise of at least forty per cent of the voting power, whereas the Tribunal ought to have considered whether Mrs Roberts' small business CGT affiliate (namely her spouse Mr Roberts) owned shares in the company that carried between them the right to control the exercise of at least forty per cent of the voting power.

5. Section 152-30 is concerned with the meaning of an entity being "connected with" another entity. Subsection 152-30(1)(a) provides that an entity is connected with another entity if either entity controls the other entity in the way described by the section. The covering words in s 152-30(2) identify the reference point of the inquiry as follows:

An entity (the first entity) controls another entity if the first entity, its small business CGT affiliate or the first entity together with its small business CGT affiliates…

The issue in this case is whether the Tribunal misapplied those words. Section 152-30(2)(b) contemplates that an entity (the first entity) controls another entity (being a company) if (a) the first entity, or (b) its small business CGT affiliates, or (c) the first entity together with its small business CGT affiliates:

  • (b) […] beneficially own, or have the right to acquire beneficial ownership of, shares in the company that carry between them the right to exercise, or control the exercise of, at least 40% (the control percentage) of the voting power in the company.

In other words, the covering words in s 152-30(2) contemplate three bases upon which to determine the relevant connection between a company (in this case Altnot) and another entity (in this case Mrs Roberts). The Tribunal considered whether Mrs Roberts was connected with Altnot on the first basis stated in the covering words in the section, but did not consider the application of the section to Altnot by reference to whether Mrs Roberts' small business CGT affiliates (namely, her husband) or Mrs Roberts "together with" her small business CGT affiliates (namely, together with her husband), beneficially owned shares in Altnot carrying the right to control the exercise of at least forty per cent of the voting power in the company.

6. The Tribunal concluded that s 152-30(2)(b) did not apply because Mrs Roberts was not connected with Altnot although Mr Roberts was. The Tribunal did not, however, consider whether Mrs Roberts was deemed to be connected with Altnot by virtue of s 152-30(2)(b) which required that her connection be determined also by reference to her small business CGT affiliate (in this case, relevantly, her husband) or together with her small business CGT affiliate (in this case, relevantly, together with her husband). The enquiry called for by the section was into whether Mrs Roberts (relevantly, "the first entity") was connected with the other entity (relevantly, Altnot). That enquiry required a determination of whether Mrs Roberts or her small business CGT affiliates or she and her small business CGT affiliates had the relevant control percentage in Altnot.

7. The reason for the Tribunal not having considered the application of s 152-30(2)(b) through Mrs Roberts (as the relevant "first entity") by reference to the position of Mrs Roberts' small business CGT affiliates and to her position together with her small business CGT affiliates was not explained by the parties, but it was contended on behalf of Altnot that the Tribunal must be taken to have correctly construed the provisions as not applying. To that end it was submitted that the legislation carefully uses the words "you" and "yours" to require a focus of attention upon the taxpayer (in this case Altnot) rather than Mrs Roberts as the reference point for Altnot's liability. Reference was made to
Registrar of Titles v Franzon (1975) 132 CLR 611 and
Eureka v Freehills Services(2008) VSCA 156 for the principle of statutory interpretation that a person drafting legislation is to be understood

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to be using words consistently when using the same words, and, of course, to be intending different meanings when using different words. It was submitted, therefore, that the Tribunal was to be understood as having focused upon the use of the word "you" in Division 152 to refer to Altnot rather than to Mrs Roberts. However, the submission confronts obstacles which cannot be overcome. The first is that in construing s 152-30(2) one is faced not with the word "you" or its cognate word "your", or any other variation thereof, but, rather, with the word "its", in a provision where it is clear that in the application of s 152-30(2) the legislature contemplated a focus not upon the relevant taxpayer (who may otherwise be referred to as "you") but upon the first entity to be looked at for the purposes of the application of the section (which is expressly contemplated not to be the taxpayer).

8. The second obstacle in the submissions about "you" and "yours" was in its reliance upon the use of the word "yours" in s 152-25 as a basis for its incorporation into the operation of s 152-30(2) for the purposes of applying s 152-15(b). In applying s 152-15(b) (as was the case here), it is necessary to consider not s 152-25, but s 152-30(2), where the question about who is intended to be referred to by use of the word "you" does not arise. Section 152-25 is concerned with the meaning of "small business CGT affiliate" and identifies the reference point for affiliation by use of the word "yours". It may, for present purposes, be assumed (without expressing a concluded view about the question) that the word "yours" in that section would require reference to Altnot rather than to Mrs Roberts. But the use of the word "yours" in s 152-25 can only be engaged in this case to the extent that the phrase "small business CGT affiliates" is used in s 152-30(2). In that section the phrase "small business CGT affiliates" is preceded by the word "its" in the task of determining a connection between entities not by reference to the taxpayer but by reference to "the first entity" (in this case Mrs Roberts). Thirdly, although Altnot's submissions sought to defend the Tribunal's decision by reference to a construction of s 152-30(2)(b), there is, in fairness to the Tribunal, nothing in an otherwise methodical and carefully reasoned decision to indicate that the construction contended for by Altnot was a construction which had been submitted to, or adopted by, the Tribunal (even if the submission had been sufficient to uphold the Tribunal's decision).

9. Accordingly, I will make orders setting aside the decision of the Tribunal and remitting it back to the Tribunal for reconsideration in accordance with these reasons.


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