The Federal Court has remitted a CGT matter back to the AAT for rehearing and determination in accordance with its reasons. The case concerned the maximum net asset value test (MNAV) and the CGT small business concessions.
- The taxpayer was a company that made a capital gain of over id=”mce_marker”m in selling its interest in a car wash business in the 2007-08 income year.
- It did not return the gain as assessable income but instead claimed that it was entitled to apply the CGT small business concessions.
- However, the Commissioner issued an amended assessment to include the gain on the basis that the taxpayer failed the (then) $5m MNAV test.
The AAT had to decide whether sole director and controller of the taxpayer company (the husband), could exclude from the MNAV his interested in a Queensland property which had been rented for much of the previous 7 years but which at the time of the CGT event had been taken off the rental market and had intended to be once again used as his and his wife’s holiday home.
Also at issue was whether the wife’s CGT assets, including her interest in the Queensland property, were to be taken into account on the basis of her being either a connected entity and/or a “CGT small business affiliate” of the taxpayer company.
The AAT dismissed the argument that the 50% interest of the husband in the Queensland property should be disregarded. However, it held that the wife’s CGT assets, including her 50% interest in the holiday home, were not to be counted in applying the MNAV test, because she was not connected with the taxpayer company, as she did not own any shares in it. The Commissioner appealed.
The Federal Court said the Tribunal did not consider whether the wife was deemed to be connected with the taxpayer company 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 Court set aside the AAT’s decision and remitted the matter to the Tribunal for rehearing and determination in accordance with its reasons.
(FCT v Altnot Pty Ltd  FCA 362, Federal Court, Pagone J, 13 March 2014 (but only released by the Court on 16 April 2014))
[LTN 75, 22/4/14]
Catchwords from  FCA 362
TAXATION – capital gains tax – whether taxpayer entitled to small business capital gains tax concession under s 152-10 of the Income Tax Assessment Act 1997 (Cth) – whether taxpayer met maximum net asset value test – net value of CGT assets of entities “connected with” taxpayer required to be taken into account for purposes of maximum net asset value test – meaning of “connected with” – construction of s 152-30(2)(b) of the Income Tax Assessment Act 1997 (Cth) – connection for purposes of s 152-30 to be determined by reference to first entity and “its small business CGT affiliates”.
Extract from  FCA 362
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’ [as a] small business CGT affiliate (namely, [of] 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.
[FJM Note: s152-30 has been replaced and no longer exists.]