Taxpayer misses out on small business CGT concession

A taxpayer’s claim that a related trust was entitled to the small business 15-year exemption* was rejected because a loan from his trust had to be included in the net value of his CGT assets.

Note:- To be able to satisfy the “maximum net asset value test”, one of the requirements is that the net value of CGT assets of a taxpayer (and their connected entities and affiliates) must not exceed $6 million.

The Facts

On 26 July 2007, the East Terrace Unit Trust sold its finance broking business for $500,000, giving rise to capital gain in that amount.

The Allan Breakwell Family Trust was a beneficiary of East Terrace Unit Trust and therefore entitled to the $500k capital gain.

In its 2007/08 tax return, the East Terrace Unit Trust claimed the small business 15 year exemption in relation to the whole of the capital gain of $500,000.

A subsequent audit by the ATO amended the returns of Mr Breakwell and BIPL on the basis that the capital gain was taxable in their hands.

The issue at hand was essentially whether the $6 million MNAVT was satisfied. There was an agreement between the parties as to all but one of the asserts to be included in the MNAVT.

It was agreed that the net value of the agreed assets in 2008 was $5,960,913.

The parties disagreed, however, as to whether an amount of $1,144,934 shown in the ABFT 2008 balance sheet as “Loan- A Breakwell (pre-1998)” should be included as an asset.

If it was, then the total of the assets for the purposes of the MNAVT exceeded $6 million and the applicants were not entitled to CGT relief.

It was agreed between the ATO and the taxpayer that the total net value of town as a loan in the 2008 balance sheet of the taxpayer’s trust should be included as an asset – the taxpayer claimed that he was “statute-barred” from recovering the loan by the Limitation of Actions Act 1936 (SA).

Decision

The tax payers appealed the matter to the Administrative Appeals Tribunal on the basis that the loan from the trust was statue barred as, under the Limitations of Actions Act 1936 (the LAA), the six year limitation period had expired.

Their appeal was unsuccessful and they then appealed to the Federal Court.

The Federal Court held that any action by the trust against the taxpayer to recover the pre‑1998 loan would be an action to recover “trust property”, and the Limitation of Actions Act does not prescribe any limitation period in respect of claims of that kind. 

Therefore, “the contention that the pre‑1998 loan was statute‑barred and did not have to be brought into account in the calculation of the MNAVT must be rejected”.