Part IVA and the Small Business CGT Concessions

I have been fearing this day for some time. A day when the Commissioner applies the general anti avoidance provision in Part IVA to a taxpayer who arranges a sale of a business to make the most of the Small Business CGT Concessions.

We all know how this is done. “Just before” the sale we make distributions to the owners that they put into super ($540k non concessional), or they renovate their house, or buy a ferrari – all assets excluded from the $6 million maximum net asset test. We also remember that we have not included liabilities for long service leave, or for the legal advice on the sale or the real estate agents commission for property sold with the business and we add these in… And hopefully we find we have maximum net assets of under $6million.

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In the AAT decision of Track and Ors and Commissioner of Taxation ([2015] AATA 45) the taxpayer took these ideas one step further. They created a series of liabilities by declaring capital distributions. As the funds to pay these distributions were not available in the business (most of the value was in the goodwill) the business had to borrow money to pay these distributions – thereby adding liabilities and reducing the maximum net assets below the threshold.

But the question with any liability that we want to take into account in assessing the maximum net assets is does it relate to the assets of the business. If these liabilities relate to the assets in the business the taxpayer can use the small business CGT concessions. if not, they can’t use the concessions.

And this is where it all gets weird…

“The Track Bros 1 Trust lodged its 2006 income tax return on the footing that it satisfied the maximum net asset value test, thus enabling it to take the benefit of the concessions. It now contends to the contrary. It says that … the Trust’s liabilities … were not “related to” assets … . If these liabilities are excluded the net value of the CGT assets .., so it contends, is [greater than the maximum net asset threshold]. The Commissioner contends that each of those liabilities is related to assets … and that the net value of CGT assets was [less than the maximum net asset threshold]”

The taxpayer says they failed the Maximum Net Asset test and cannot claim the small business CGT concessions. The Commissioner says they pass the Maximum Net Asset test and can claim the small business CGT concessions. I have never seen it argued this way! Isn’t this the wrong way around? This is just weird.

Until you realise that the reason the taxpayer was trying to argue that the small business CGT concessions don’t apply was that the Commissioner was trying to apply Part IVA – the general anti avoidance provision. The Commissioner argued that the creation of the liabilities just before the CGT event of selling the business was a scheme undertaken for the dominant purpose of gaining a tax benefit. The taxpayer tried to argue there was no tax benefit as they had actually failed in structuring themselves to get into the small business CGT concessions – and they failed

Picture 1

The AAT found that the general anti avoidance provisions did apply as the taxpayer had been successful is structuring themselves just before the sale of the business to take advantage of the small business CGT concessions. And how many times have we done this?

It should be noted that the actions of the taxpayer to make sure they could claim the small business CGT concession were done very close to the sale time so it might be OK to set these things up well before a sale is contemplated – but if you do things just before the CGT event, the Commissioner might consider applying Part IVA… Ouch.

100% sure we will see this decision appealed. At least I hope we do.

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
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