Changes in the wind: increased tightening of taxpayers’ eligibility to CGT small business concessions

The application of the small business capital gains tax (CGT) concessions in Division 152 of the Income Tax Assessment Act 1997 (CGT Concessions) is an area of interest for the Australian Taxation Office (ATO).

This is not news as the ATO has had this focus for some time. However, recent cases highlight the ATO’s preparedness to litigate in this area and the difficulty taxpayers face in discharging the onus of proof. Coupled with this is the Bill currently before the Senate to further tighten eligibility to the CGT Concessions with retrospective effect.

Two recent Administrative Appeals Tribunal (AAT) decisions on the CGT Concessions illustrate these points. The taxpayers lost in both instances highlighting the risks that taxpayers face if they are unable to substantiate their positions taken on the CGT Concessions.

In the first decision, Rus v FCT [2018] AATA 1854, the AAT considered a taxpayer’s entitlement to the CGT Concessions on the capital gain from the sale of a 16-hectare property used for both business purposes and as a private residence.  

The property included two houses and a large shed. The taxpayer lived in one house and her adult children in the other. Within the taxpayer’s house, the taxpayer had a home office used for conducting her plastering business. The taxpayer used the shed for storing plant, equipment, and motor vehicles for that business. These fixtures occupied one hectare of the total area of the property, with the remaining 15 hectares being vacant land. At issue, was whether the property satisfied the ‘active asset’ test under the CGT Concessions.

The ‘active asset’ test requires the relevant assets to be ‘used or held ready for use’ in the course of carrying on a business. The AAT found that less than 10% of the property was used in connection with the taxpayer’s business.  The AAT found the property could not be an active asset where only a small fraction was used in carrying on the taxpayer’s business.  Accordingly, the AAT concluded the taxpayer was not eligible for the CGT Concessions.

In the second decision, Hookey v FCT [2018] AATA 1509, the AAT considered whether the taxpayer was able to satisfy the maximum net asset value (MNAV) test under the CGT Concessions on the  sale of five childcare centres during the 2008 income year.

To satisfy the MNAV, just before the relevant CGT event, the net value of the CGT assets of the taxpayer including, its connected entities, its affiliates and entities connected with those affiliates, cannot exceed $6 million.

The taxpayer led two arguments to claim the net value of his CGT assets were under $6 million:

  1. there were liabilities which would bring the net asset value below the threshold amount. The AAT accepted the existence of some but not all these liabilities; and
  2. valuations prepared after the sale showed that the purchaser paid more than $3 million more than the market value of the assets. However, the AAT found the taxpayer had not met the burden of proving the purchaser had overpaid and that the amount paid under the contract of sale was not the market value. For the taxpayer to be successful, he needed to give evidence that the price paid by the purchaser was wholly erroneous or affected by error, which the taxpayer had failed to do.

These cases demonstrate the evidentiary standard required to discharge the taxpayer’s onus of proof to prove eligibility for the CGT Concessions. When undertaking a transaction to which the CGT Concessions may apply, taxpayers should keep contemporaneous advice, valuations, and records.

These decisions occur at a time of uncertainty, with the Senate still to pass the Bill to tighten access to the CGT Concessions on the sale of shares or units. We have discussed the proposed changes and the delay in passage in our earlier article.

Cross-bench Senators Tim Storer and David Leyonhjelm proposed amendments to the Bill. Senator Leyonhjelm’s amendment would see the amendments applying from 8 February 2018 instead of 1 July 2017. Under the Bill, the relevant test requires the ‘object entity’ to be carrying on a business just prior to the CGT event and whether the object entity is either a small business entity for the relevant income year or satisfies the MNAV test. Senator Storer’s proposed amendment would remove this requirement.

Both the Bill and the proposed amendments are still before Parliament and it is uncertain whether the Bill (including the amendments) will become law.

This uncertainty, the ATO’s continued focus on the CGT Concessions, and the evidentiary requirements to discharge the onus of proof mean that taxpayers looking to apply the CGT Concessions should seek professional advice.

Sladen Legal’s tax team has expertise in all aspects of the CGT Concessions.

To discuss either this article or for more information please contact:

Sam Campbell
Associate | Business Law
Sladen Legal
M +61 423 515 454 | T +61 3 9611 0135
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia

Neil Brydges
Special Counsel | Accredited specialist in Tax Law
Sladen Legal
M +61 407 821 157 | T +61 3 9611 0176
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia  

Kristy Merganovski
Sladen Legal
+61 3 9611 0116
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia

Kelvin Yuen
Sladen Legal
T +61 3 9611 0177
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia