The Federal Court of Australia denied the application of the CGT small business concessions on the basis that an unusual activity carried on by an associated entity of the taxpayer resulted in the aggregated annual turnover of that entity being more than $2,000,000.
In Doutch v Commissioner of Taxation, Mr Doutch sold mining tenements to Golden West Resources Pty Ltd (GWR) for the consideration of $5,000,000 cash and $5,000,000 ordinary shares in GWR. In the income year ended 30 June 2009, Mr Doutch declared the capital gain he made on the sale of the tenements and claimed 50% CGT discount under the provisions of the Income Tax Assessment Act 1997 (ITAA97). On 19 December 2013, Mr Doutch objected to the 2009 assessment on the basis that the small business concession outlined in Subdivision 152-C of the ITAA97 should also apply to the capital gain.
Under the small business entity test, a concession is available to a taxpayer that does not carry on a business but owns a CGT asset that is used in a business by an affiliate or connected entity to the taxpayer, as long as the aggregated turnover of the entity is less than $2,000,000. In his objection, Mr Doutch contended that the aggregated turnover of Denarda Holdings Pty Ltd (Denarda), which carried out exploration activities on the land, the subject of the tenements for the years prior to 2008 was less than $2,000,000 (an adjusted annual turnover of $1,977,723), therefore the CGT concession should apply.
The Commissioner disallowed the objection in full as he was not satisfied that Denarda was a small business entity within the meaning of section 328-111(1), as its annual turnover was more than $2,000,000. According to section 328-120(1), “an entity’s annual turnover or an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.”
Mr Doutch then appealed to the Administrative Appeals Tribunal (AAT) contending that receipts totalling $55,106 in respect of fuel disbursements provided to two customers did not form part of Denarda’s annual turnover. In summary, Mr Doutch argued that fuel charges were not derived in Denarda’s ordinary course of carrying on a business. The drilling operation contracts in place with clients state that fuel is needed for Denarda to carry out drilling services, and that it is the clients’ responsibility to provide it. Accordingly, fuel was provided ‘at cost’ by Denarda to those customers only because they did not provide it as first agreed.
The AAT dismissed the appeal and found that “although it may be accepted that Denarda’s customers usually purchased and provided fuel for Denarda’s drilling operations, the transaction in question, namely the provision of drilling services by Denarda to two customers, were part of the ordinary and common flow of transactions of Denarda’s business.”
In appeal to the Federal Court, it was found that Mr Doutch has not established any error of finding by the AAT because:
- the passage from Commissioner of Taxation v The Myer Emporium Limited (1987) 163 CLR 199, upon which Mr Doutch relied to construe the meaning of “in the ordinary course of carrying on a business” as excluding extraordinary transactions, is concerned with income according to ordinary concepts, and not what constitutes ordinary course of carrying on business;
- the AAT has correctly referred to the Explanatory Memorandum for the Tax Laws Amendments (Small Business) Bill 2007 (Cth) to confirm that the words “in the ordinary course of carrying on a business” in section 328-120(1) bear their ordinary meaning, and that while the words have been used in other provisions, they do not have a technical legal meaning;
- the meaning given to the expression “ordinary course of business” in the context of bankruptcy legislation is not wholly applicable in the context of section 328-120(1). The Court clarified that “in the context of s 328-120(1), it seems likely that it is the ordinary course of the particular business that is relevant. The provision is concerned with the “annual turnover” of a particular entity, and the reference to “business” is to the business of that entity”; and
- although Denarda’s customers usually purchase and provide fuel for Denarda’s drilling operations, those operations were part of the ordinary and common flow of transactions of Denarda’s business, and relevant fuel receipts were an incident of an ordinary part of the relevant entity’s business.
The decision illustrates the care that must be taken in determining what constitutes income derived in the ordinary course of carrying on a business for an entity in calculating its annual turnover.
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