The Federal Court has dismissed a taxpayer’s appeal from the decision in AAT Case [2012] AATA 45, Re Bell and FCT in which the AAT found that the taxpayer failed to qualify for the CGT small business concessions in relation to a capital gain of $6m made by a family trust to which the taxpayer beneficiary was presently entitled. The AAT arrived at its decision on the basis that the family trust was the relevant entity to which the (then) $5m maximum net asset value (MNAV) test was to be applied, and that it failed this test and that in fact the relevant MNAV was some $8m.
Crucial to the AAT’s decision was the finding that a loan of over $2m made to the family trust by a related unit trust to give effect to a trust resolution to distribute capital to the taxpayer beneficiary was not a liability to be taken into account under the MNAV test. However, on appeal, the Federal Court found it was a liability that “related” to the assets of the family trust. It did so essentially on the basis that in the absence of the $2m loan, the trust resolution to distribute capital to the taxpayer would have to be to be met by sale or direct delivery up of the assets of the family trust and that, in these circumstances, there was a direct relationship between the assets of the family trust which was “real and substantial”, and not “remote”.
Nevertheless, the Court confirmed that the taxpayer still failed to satisfy the MNAV in view of the fact that a liability of some $1m in a separate bank account held by the taxpayer’s wife that was connected to an offset account she also held (which contained $1.2m in credit) could not be taken into account. This was because the Court found that liability did not “relate” to the offset account, but rather to an asset excluded from the MNAV calculation – namely, a home purchased in the wife’s name. The Court also questioned whether the wife was in fact a “connected entity” or (as then applied) “a CGT small business affiliate of the family trust.
(Bell v FCT [2012] FCA 1042, Federal Court, Gordon J, 19 September 2012.)
[LTN 189, 28/9]