The Full Court of the Federal Court has dismissed the taxpayer’s appeal in Breakwell v Commissioner of Taxation  FCA 1471 and confirmed the earlier Administrative Appeals Tribunal decision to include an allegedly statute-barred loan of $1.1m in the calculation of the taxpayer’s net assets for the maximum net asset value (MNAV) test when determining the taxpayer’s eligibility for small business CGT concessions.
The taxpayer was the beneficiary and trustee of a family trust (ABFT), which was in turn the beneficiary of a unit trust (ETUT). In July 2007 the ETUT sold its finance broking business for $500,000. In its 2008 income tax return, the ETUT excluded the capital gain from the sale of the business by applying the small business CGT concessions.
However, the Commissioner sought to include loans of $2.3 million from the ABFT to the taxpayer. Inclusion of these loans would have meant that the taxpayer did not qualify for the concessions on the basis that the MNAV test was not satisfied. The taxpayer contended that a loan of $1.14 million was statured-barred from recovery at the time of the CGT event and should therefore have been regarded as having nil value for the purposes of the MNAV calculation.
The AAT held that the signing by the taxpayer of the balance sheets of the ABFT in the 2003 to 2008 income years was sufficient acknowledgment in writing signed by him, as trustee of the ABFT, that the loan was an asset of the ABFT. As such, it was not statute-barred under s 35(a) of the Limitation of Actions Act 1936 (SA) (LAA). Therefore, the loan was properly included as an asset of the ABFT in the financial accounts of that Trust in the 2008 income year and was a debt of the ABFT that was required to be properly included in its net assets for the purposes of the MNAV test calculation;
The Full Court confirmed the AAT decision, noting that:
- any action by the ABFT against the taxpayer to recover the loan would be an action to recover trust property, for which the LAA did not prescribe a limitation period;
- the 6 year limitation period in s 35(a) did not have the effect of extinguishing a claim for repayment of a debt - s 35(a) barred the remedy, not the cause of action; and
- s 48 of the LLA empowered the courts to extend certain limitation periods, including that fixed in s 35(a).
Consequently, taxpayers and their advisers should consider the nature of, and ability to recover, debts owing to them by related entities when these debts are disclosed in financial statements. They should also consider the potential application of the commercial debt forgiveness rules and / or Div 7A to their circumstances when making any decisions as to whether to exclude these debts from disclosure.
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