The AAT has confirmed that Pt IVA applied to a scheme carried out by taxpayers in order to enable them to qualify for the CGT small business concessions via the maximum net asset value (MANV) test. Interestingly, the taxpayers argued before the AAT (contrary to their original position in their lodged tax returns) that various liabilities did not “relate to” any relevant CGT assets and that therefore the MNAV test had not been passed. The Commissioner contended that the liabilities arose as part of a scheme in order to satisfy the MNAV test threshold.
- The taxpayers were the trustee of a unit trust, which made the capital gain, its unitholders (viz: trustees of various family trusts) and certain “primary” individual beneficiaries of those family trusts.
- The liabilities in question were unpaid present entitlements of the family trusts totalling id=”mce_marker”.4m, a loan of $500,000 from “protection trusts” set up under the arrangement to fund relevant distributions, and various loans between related trusts.
In finding the taxpayers had not satisfied the onus of proving that the liabilities were not “related to” the CGT assets of the unit trust, the AAT dismissed the taxpayers’ accounting evidence and concluded that the unpaid present entitlements and the loans from the protection trusts were in fact and law “related to” the assets of the unit trust.
Moreover, the AAT distinguished the decision of the Full Federal Court in Bell v FCT [2013] FCAFC 32 (where it was held that loans taken out to fund distributions were not related to CGT assets of a trust) on the basis that in Bell’s case, “the cash that represented the borrowing had been disposed of [by way of distribution]”, whereas in this case, “the strategy seems to have been to avoid actually disposing of cash until after settlement of the sale in the following financial year”.
On the basis of finding that the MNAV test had in fact been passed, the AAT then addressed the issue of whether Pt IVA applied to cancel the “alleged” tax benefits obtained by the taxpayers as a result.
- After finding that a “scheme” clearly existed,
- the AAT then found that tax benefits had been received not by any of the family trust beneficiaries but by the primary beneficiaries of those [family] trusts on the basis that “it was reasonable to postulate that the distributions would have been made, in substance at least, on the basis of the resolutions that were seemingly prepared” in the relevant income year.
- It then found that the relevant “dominant purpose” existed.
Accordingly, the AAT affirmed the Commissioner’s objection decisions and affirmed 50% shortfall “scheme” penalties, noting also that there were no grounds to claim that a “reasonably arguable” position had been taken.
(Re Track and Ors and FCT [2015] AATA 45, AAT, File Nos 2013/0627 – 2013/0634, Hack DP, 29 January 2015.)
[LTN 20, 2/2/15]