Robert Richards on CGT relief; when taxpayers want to object; and saying goodbye to a past tax editor.
Is your holiday unit active?
The small business capital gains tax relief provisions (Division 152 of the Income Tax Assessment Act 1997) are perhaps the most generous part of all the tax law. The combination of the 15-year exemption, a 50 per cent additional general discount, a retirement concession, and a rollover, means the capital gains made on sale of a small business (or of shares in a company carrying on a small business) might be totally exempt from the capital gains tax.
However, these concessions are not allowed unless some basis conditions are satisfied. Firstly, from 1 July 2007 the taxpayer must satisfy either the '$6m net asset test' or 'the $2 million turnover test'. The '$6m net asset test' requires that the total net value of assets owned by the taxpayer and associated entities must not exceed $6m (excluding personal assets such as the family home, life insurance and superannuation).
Alternatively, the '$2 million turnover test' will be met where the aggregated turnover of the taxpayer and associates does not exceed $2 million. Also, the asset being sold must be an active asset, which broadly excludes assets that are not used in carrying on a business. There are additional tests where the asset sold is a share or an interest in a trust.
While it is possible to plan to ensure that a taxpayer's business assets are within the $6m net value limit, it is a question of fact whether an asset is an active asset or not.
The general rule is that an asset is an active asset if it is used in a business. If the asset is an intangible asset (such as goodwill) it has to be inherently connected with a business carried on by the taxpayer or an associate of the taxpayer. Passively held shares and real estate will not normally be active assets.
The decision in Carson and Anor v FC of T (Administrative Appeals Tribunal, 26 February 2008) is an example of this (This decision should also be seen as being relevant to the business real property provisions of the Superannuation Industry (Supervision) Act 1997.)
There the taxpayers owned a holiday home unit that was let on short-term leases (occasionally it was also used by them). The tribunal said that the taxpayers in leasing the unit were not carrying on a business.
It said: 'Whether a business is being carried on is a question of fact and objective consideration of the extent of the applicants' activities relating to the property. Here, they invested approximately $500,000 in one property, appointed a real estate agent to arrange rentals and minor repairs, spent one week every six months servicing the property and provided brochures relating to the property as required.
'These activities have all the hallmarks of maintaining and deriving income from an investment rather than the carrying on of a business. The activities such as financing the property, dealing with the rating authorities and body corporate are no more than any investor in real estate would do. Equally, the maintenance of accounting and tax records are relevant to any income-producing investment.'
Accordingly the tribunal concluded: 'The consequence of the foregoing is that the objection decision under review should be affirmed on the basis that the holiday unit was not an active asset as it was not used or held ready for use in the course of carrying on a business.'
Remember the Hickman principle
If taxpayers wish to challenge an ATO assessment, they would normally object against it, and if that objection was disallowed, they would then appeal that disallowance to either the Administrative Appeals Tribunal or the Federal Court.
But sometimes it would be better were there an alternative remedy. Appeals against assessments can be expensive and time consuming. Given the burden of proof imposed upon a taxpayer, sometimes there is just no practical sense in objecting to an assessment.
Normally, however, the taxpayer is restrained by the so called 'Hickman principle' from simply making an appli-cation (normally pursuant to the Judiciary Act 1903) seeking to have the assessment declared invalid.
The 'Hickman principle' is named after the decision of the High Court in R v Hickman; Ex parte Fox and Clinton (High Court, 5 September 1945).
This was not a tax case but a was a labour relations case involving the meaning of the phrase 'coal mining industry'. It involved a challenge to a decision of a local reference board. The applicants there said the decision made by the local reference board was invalid. The High Court said that the validity of the decision of an authority such as the Board (and the ATO is also such an authority) was valid unless the decision made by the authority was not bona fide, or did not relate to the subject matter of the legislation being challenged, or if the decision was not reasonably capable of reference to the power given to the body being challenged.
Taxpayers sometimes want to say: 'This assessment is stupid, I don't want to go to all the trouble of showing why it is wrong. Why can't I simply say that it is invalid?'
The answer to that sort of remark is that a taxpayer is stuck with the ordinary objection procedures unless it can show the ATO was, for example, not acting bona fide in the making of the assessment.
But sometimes a taxpayer will not be successful in arguing that an assessment is invalid.
I looked at one such instance last year (see INTHEBLACK, August 2007, p.61). I looked at the decision of the Full Federal Court in Futurius Corporation Ltd v FC of T (Full Federal Court, 22 June 2007).
There the ATO effectively issued two inconsistent assessments. In issuing the second of those assessments the ATO deliberately double counted a capital gain.
This did not worry the ATO because it felt that if necessary it would subsequently reverse that double counting.
However, it did concern the Full Federal Court. It believed that the second assessment was not a bona fide assessment. It said that this was because the ATO knew that the second assessment was for a greater amount than it should have been.
The ATO hates people saying that its assessments are invalid. It adopts a formalised approach to those who make applications to a court seeking to have an assessment declared invalid. It writes to the taxpayer threatening to seek orders that the application be struck out. It thinks that to achieve this all that it needs do is produce to the court a certified copy of the assessment, which it states is conclusive evidence of the due making of the assessment, and that the amount and all the particulars of the assessment are correct. However, it is not that simple.
Given the ATO's attitude to such claims it is not surprising that it sought special leave from the High Court to appeal the Futurius decision to the High Court.
A matter cannot be appealed to the High Court unless the High Court first hears an application for leave to appeal to it. If it does not grant that leave a decision of the Full Federal Court will, as is normally the case in tax matters, be final.
Here, however, the High Court granted leave (16 November 2007) to the ATO to appeal to it against the decision of the Full Federal Court, somewhat of a rarity in tax matters.
It would appear from observations made by the ATO's counsel, that when applying for leave, the ATO will argue that before it can be established there is a lack of bona fides, subjective evidence of bad faith rather than objective evidence is required. The ATO is also concerned as to the likely ramification of the Futurius decision. Its counsel said, 'In the area of collateral attack on assessments there is a large incentive to exploit every departure from principle.'
Perhaps as an example of what concerned the ATO was the subsequent decision of the Federal Court in Bonnell v DC of T (Federal Court, 8 February 2008).
Some 300 of Bonnell's clients had entered into non-complying superannuation fund tax minimisation schemes. Bonnell had also entered into such a scheme. These schemes proved to be unsuccessful. The ATO, however, remitted all penalties that had been automatically imposed on Bonnell's clients as a consequence of their unsuccessful participation in such schemes. However, the ATO did not remit penalties imposed on Bonnell (for the year ended 30 June 1999 he claimed a $5m deduction for an amount paid by him to a non-complying superannuation fund, on disallowance of that claimed deduction he was assessed to additional penalty tax of just over $600,000).
Bonnell is going to argue that the ATO's assessment of the penalty (which was by way of amended assessment) was invalid. The gravamen (grievance) of Bonnell's complaint is that 'in levying penalties under the amended assessment the [ATO] knowingly sought to punish me as a promoter. That act was in bad faith and the bad faith vitiates the amended assessment".
The ATO did not want its amended assessment to be so reviewed. However, the Federal Court held that the ATO's amended assessment could be reviewed 'if one or other of the Hickman provisos was satisfied'. It was not satisfied that Bonnell had no reasonable prospect of successfully prosecuting the proceeding insofar as a claim for relief could be sought under the Judiciary Act, if reliance was placed on one or other of the Hickman provisos.
But the court was not required to consider that. All that Bonnell currently sought was an order, which was given, that the ATO provide him with discovery of documents relating to the exercise or possible exercise of the ATO's decision not to remit that additional tax.
In due course, unless the matter is settled, one can expect that the Federal Court will consider the substance of Bonnell's complaint.
In the meantime taxpayers who believe that the ATO has acted improperly in issuing an assessment might apply to the Federal Court, arguing that the assessment is invalid. As evidenced by the Futurius decision, at least some members of the Federal Court might be receptive to such an argument.
As an example, I am seeking to have an assessment declared invalid where the ATO has assessed on a gross rather than net basis.
I will argue that the assessment is invalid, in that the ATO should have considered whether the taxpayer was entitled to any offsetting deductions (and the decision in Martin v FC of T, Federal Court, 16 December 1993, supports that contention). I will argue that the ATO's own statistics, benchmarks, or tables of gross income to expense ratios, show that.
Vale Don Wilkins
Don Wilkins, who was the tax editor of the Australian Accountant (as INTHEBLACK was then known) from August 1957 to December 1983, died on 9 February 2008 aged 88. I succeeded him as taxation editor in 1983. Because the style of the journal changed from being an almost purely technical journal to being largely a news magazine, the role of taxation editor became that of tax contributor.
Don was a partner of Peat Marwick Mitchell & Co (now KPMG), and before joining the profession had been with the ATO.
Don himself succeeded Richard O'Neill (tax editor 1955-1957) on O'Neill becoming a member of the then Sydney Board of Review. O'Neill succeeded the legendary John Gunn (tax editor 1936-1955), who apart from being one of the first tax practitioners in Australia, wrote the predecessor to the current CCH Taxation Service.
Robert Richards CPA is a solicitor specialising in tax matters.
