Decision impact statement

Bell v Deputy Commissioner of Taxation

Court Citation(s):
High Court
[2013] HCA Trans 179
Full Federal Court
[2013] FCAFC 32
2013 ATC 20-380
Federal Court
[2012] FCA 1042
2012 ATC 20-350
Administrative Appeals Tribunal
[2012] AATA 45
2012 ATC 10-230

Venue: Federal Court of Australia
Venue Reference No: M40 of 2013 (High Court)
VID 792/2012 (Full Federal Court)
VID 151/2012 (Federal Court)
2010/3362 (Administrative Appeals Tribunal)
Judge Name: Robertson J
Judgment date: 16 August 2013
Full Federal Court - 22 March 2013
Federal Court - 19 September 2012
Administrative Appeals Tribunal - 30 January 2012
Appeals on foot: No
Decision Outcome: Favourable

Impacted Advice

Relevant Rulings/Determinations:

• N/A

Subject References:
Small business CGT concessions
Maximum net asset value test
Calculation of the net value of CGT assets
Penalty
Failure to exercise reasonable care

Précis

Outlines the ATO's response to this case concerning whether an entitity satisfied the maximum net asset value test prescribed by section 152-15 of the Income Tax Assessment Act 1997.

Brief summary of facts

The trustee of the Bell Family Trust, entered into a contract to sell units it held in the Barry Plant Holding Unit Trust (BPHT) and the Plant Bell Unit Trust (PBUT).

In its return for the 2007 year, the Bell Family Trust ("the Trust") claimed, inter alia, the small business CGT concession under Division 152 of the Income Tax Assessment Act 1997 ("ITAA 1997"). The taxpayer, Christopher Bell, was presently entitled to 100% of the Trust's income. The assessable income of the taxpayer therefore included the net income of the Trust for that year pursuant to section 97 of the Income Tax Assessment Act 1936 ("ITAA 1936") and section 6-10 of the ITAA 1997.

The Commissioner concluded at audit that the CGT assets of the Trust just before the CGT event, 14 March 2007, exceeded $5,000,000. As such, the Trust did not satisfy the section 152-15 ITAA 1997 maximum net asset value (MNAV) test and was not entitled to apply the small business concessions to discount the relevant capital gains.

The Bank Accounts

The AAT found that the Trust's Adelaide Bank facility comprised two accounts; a loan account and a linked offset account. The two accounts were not one CGT asset with a single value as contended by the taxpayer, but rather were two independent CGT assets, each having an independent value. Accordingly, whether each account was related to the assets included in the calculation of the "net value of the CGT assets" under section 152-20 of the ITAA 1997 is an enquiry that is made by treating each account as a separate CGT asset.

The AAT found that the loan account was a liability that had its origins in moneys borrowed to purchase a dwelling of the individual. That type of asset is excluded from the calculation of the net value of the CGT assets by subparagraph 152-20(b)(ii) of the ITAA 1997 and accordingly the loan account liability is excluded from the calculation [33-34].

On appeal to the Federal Court, Justice Gordon refused to disturb the findings of the AAT in relation to the Bank accounts and refused to admit further evidence tendered by the taxpayer after the conclusion of the hearing. The Full Court found that her Honour did not err in law by adopting that approach.

The $2,018,000 liability

The AAT found that in October 2006 the Trust resolved to distribute $2,018,000 from the capital of the Trust to the taxpayer. The Trust did not have sufficient cash reserves to pay the distribution to the taxpayer [9]. BPHT made available to the Trust a Macquarie Bank loan facility to the extent of $2,018,000 with repayment of that amount to be made by the Trust to BPHT.

The AAT found that the debt of $2,018,000 owed by the Trust related to the discharge of an obligation to distribute capital and therefore was not related to the assets relevant to the calculation required by section 152-20 of the ITAA 1997.

On appeal to the Federal Court, Justice Gordon held that the AAT had erred in concluding that the $2,018,000 liability was not related to the CGT assets of the Trust for the purpose of section 152-20 of the ITAA 1997.

The Full Court disagreed with her Honour's conclusion that there was a real and substantial connection between the relevant assets of the Trust and the debt.

The Full Court held that "as part of the one series of transactions on a single day, the [$2,018,000 of] borrowed funds were applied directly by Macquarie Bank to the appellant's own end purposes. Although, as a matter of accounting, the records of the Trust ultimately (although not, it seems, originally - as the result of a mistake) showed that the sum of $2,018,000 had been disbursed to the appellant pursuant to the distribution resolution of October 2006, in fact no money ever passed through the Trust. It may be correct to conclude that the Trust never had an asset to which the debt to the BPHT related. It is, however, sufficient to note that any such asset had been disposed of (to the appellant) on 13 March 2007, and that, "just before the CGT event" there was no asset to which the liability to the BPHT related" [40].

Penalty

The taxpayer was liable under section 284-75 of Schedule 1 to the Taxation Administration Act 1953 ("TAA") to an administrative penalty because the taxpayer, or his agent, made a false or misleading statement resulting in a shortfall amount.

The AAT found that the shortfall amount arose because the taxpayer, or his agent, failed to take reasonable care. The Commissioner had assessed the taxpayer to administrative penalty on the basis that the behaviour constituted recklessness. The Commissioner did not seek to disturb the AAT's finding on appeal.

Appeals

The taxpayer appealed each decision. The Full Court dismissed each of the taxpayer's grounds of appeal and upheld the Commissioner's notice of contention concerning the primary judge's finding in relation to the $2,018,000 liability.

The High Court found that the conclusions reached by the Full Court of the Federal Court were not attended by sufficient doubt to warrant the grant of special leave, nor were there raised questions of principle that would warrant the grant of special leave.

Issues Decided by the Court

1.1 Is the Adelaide Bank facility, being the loan account and the linked offset account, two CGT assets?

1.2 Is each account related to the assets of the Trust for the purpose of the calculation in section 152-20 of the ITAA 1997?

The AAT found that the Adelaide Bank facility consisted of two CGT assets, the loan account and the linked offset account. The loan account was a liability relating to an asset excluded from the section 152-20 of the ITAA 1997 calculation of the net value of the CGT assets and accordingly is not included in that calculation.

On appeal, each Court refused to disturb the AAT's findings in relation to the Adelaide Bank accounts.

The Full Court held that the AAT's conclusion that the Adelaide Bank facility consisted of two accounts was reasonably open on the material before it and the question of characterisation is one of fact for the AAT.

2. Did the $2,018,000 liability relate to the assets of the trust just before the CGT event?

The Full Court agreed with the Commissioner's contention that the Trust's debt to the BPHT did not relate to the CGT assets of the Trust within the meaning of section 152-20 of the ITAA 1997 because there was not a relevant ongoing relation between the liability and the generality of the assets of the Trust [41].

The Full Court held that the AAT did not err in law in finding as it did and explained that "[t]he error into which the primary judge fell, in our respectful view, was to regard the Trust's purpose - that of preserving its existing assets - as dispositive of the question arising under s 152-20" [41].

3. Did either the Full Court or the primary judge err in law by refusing to disturb the AAT's finding that the taxpayer, or his agent, failed to take reasonable care?

The Full Court noted that its role was limited to questions of law and that it saw no error in the conclusions of the primary judge on the issue of penalty.

ATO view of decision

The decision of the Full Court of the Federal Court of Australia, which the High Court determined was not attended with sufficient doubt to warrant the granting of special leave to appeal, is consistent with the Commissioner's view and current practices.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

N/A

Implications on Law Administration Practice Statements

N/A

Legislative References:
Administrative Appeals Tribunal Act 1975
44

Income Tax Assessment Act 1997
152-10
152-15
152-20

Taxation Administration Act 1953
Sch 1 284-75
Sch 1 284-90
Sch 1 284-215

Case References:
Collector of Customs v Agfa-Gevaert Limited
[1996] HCA 36
(1995) 186 CLR 389
35 ATR 249
96 ATC 5240

Commissioner of Taxation v Traviati
[2012] FCA 546
(2012) 205 FCR 136
2012 ATC 20-321

Coulton v Holcombe
[1986] HCA 33
(1986) 162 CLR 1

CPT Custodian Pty Ltd v Commissioner of State Revenue
[2005] HCA 53
(2005) 224 CLR 98
2005 ATC 4925
60 ATR 371

Hope v Bathurst City Council
[1980] HCA 16
(1980) 144 CLR 1

House v The King
[1936] HCA 40
(1936) 55 CLR 499
12 ATR 231
80 ATC 4386

NSW Associated Blue-Metal Quarries Ltd v Federal Commissioner of Taxation
(1956) 94 CLR 309
[1956] HCA 80

TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation
[1988] FCA 119
(1988) 82 ALR 175
19 ATR 1067
88 ATC 4279

Saunders v Vautier
[1841] EngR 629
49 ER 49
[1841] 4 Beav 115