The Administrative Appeals Tribunal (AAT) has recently held that tax losses were not available to a partner in a property development partnership.
In RGGW and Commissioner of Taxation  AATA 238, the taxpayer was a 50% partner in a partnership established to develop a shopping centre in suburban Sydney. As a result of poor performance, the partnership was placed in administration and the taxpayer claimed that his share of tax losses incurred by the partnership during the years 1990 to 1995 was in excess of $25 million. As a consequence, during the years 1996 to 2003, the taxpayer lodged tax returns applying the partnership’s tax losses so the tax liability that would otherwise have arisen to the taxpayer in each of those years was extinguished.
The issues considered by the AAT were whether the taxpayer could access the tax losses through satisfaction of the continuity ownership test (COT), or alternatively, the same business test (SBT). When considering the changes to the COT and SBT over the relevant period, and the complex family corporate structure which the taxpayer was involved in, the AAT found that neither tests could be satisfied. In summary, the AAT found that:
- for the income years 1996 and 1997, the COT test is found is section 80A of the ITAA36 . The requirement for each of those income years is that the same people have the requisite level of beneficial ownership throughout the income year as throughout the loss years. Evidence, which included a share sale agreement dated December 1994, indicated that the position immediately before, and immediately after, the share sale agreement was substantially differently to the position five and a half years earlier, when the 1990 financial years commenced.
- for the income years 1998 and 1999, the COT test is found is section 165-12 of the ITAA97, which requires that the continuity ownership must be established not only for the loss year and the income year but in all the intervening years as well. The AAT found that supporting documentation to substantiate the taxpayer’s allegation was “strikingly absent” and that a case put forward in support of such substantial tax losses “should be supported by more than assertions and broad-brush submissions”.
- for the income years 2000 to 2003, the COT test is also found in section 165-12 of the ITAA97, but subject to a requirement in section 165-165, which states that when tracing ownership from the loss year to the income year, interests cannot be taken into account unless they are ‘exactly the same interests and beneficially owned by the same persons’. For this group of income years, availability of the COT was promptly dismissed by the AAT, as interests held during the loss years were fundamentally different from interests held in any of the 2000 to 2003 income years.
- the taxpayer also failed to satisfy the SBT stated in section 165-13 of the ITAA. Under this provision, a taxpayer satisfies the SBT if, throughout the SBT period (the income year in which the tax loss is to be claimed), the taxpayer carried on the same business as it carried in immediately before the SBT period. The AAT did not accept the taxpayer’s allegations that its pre-1996 business was a business of ‘investment’. The AAT understood that a more accurate characterisation of its pre-1996 business is a ‘business of property development’, whereas the post-1995 business is accurately described as ‘investing in units in a trust’.
When considering the different penalty regimes covering the relevant years, the AAT held that the correct method of calculating the penalty was that the 80% reduction in relation to the taxpayer’s voluntary disclosure should be applied to the tax shortfall amount that included the 20% uplift. The 20% uplift was applied by the Commissioner for each of the 1997 to 2003 years as a result of the taxpayer’s recklessness as to the operation of taxation law.
The decision is an important reminder to taxpayers to ensure that relevant supporting documentation is in place when accessing tax losses.
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