Small business CGT concessions, as the term implies, apply to small businesses only. The old $5 million MNAVT has been replaced by the alternative of either: the $6 million MNAVT or the $2 million turnover test. This means that taxpayers with a relatively low turnover compared to the value of their CGT assets may access the concessions even if the $6 million threshold is exceeded, but as it is not always possible to satisfy the turnover test, the MNAVT and the $6 million threshold have to be met.
This MNAVT and the $6 million threshold are subject to close ATO scrutiny where taxpayers claim the small business CGT concessions, as recent cases have highlighted. One of the problem areas is the liabilities that may be included in the MNAVT. The ATO view (see TD 2007/14) is that contingent liabilities cannot be included in the MNAVT calculations and that the liabilities that are included must relate to CGT assets included in the calculation.
Contingent liabilities
With respect to contingent liabilities, the Full Federal Court in Commissioner of Taxation v Byrne Hotels QLD Pty Ltd [2011] FCAFC 127 held that real estate agent fees payable on the sale of a tavern were liabilities that could be taken into account for the purposes of the MNAVT. This was the case even though just before the sale of the tavern (the MNAVT is tested just before the relevant CGT event) the liability to pay the real estate agent fees was contingent on the signing of the sale contract and completion of the sale.
The Court did not restrict the meaning of the term ‘liabilities’ in a narrow way excluding all contingent liabilities. It now appears that contingent liabilities such as real estate agent fees, where a taxpayer bears the liability only subject to formalities or the occurrence of the CGT event, may be included in the MNAVT. Such liabilities should be distinguished from contingent liabilities for the payment of damages where there is much less certainty as to the liability to pay and the amount of the payment, these are more in the character of provisions or allowances for damages.
Liabilities must relate to CGT assets
Only liabilities related to CGT assets included in the MNAVT may be taken into account. In Bell v Commissioner of Taxation [2012] AATA 45 the Tribunal held that a liability arising from borrowing funds to discharge resolutions made by the trustee of a trust to distribute capital were not sufficiently related to the assets even though the taxpayer argued that the liability incurred preserved those assets by not using them to meet the capital distribution. It appears the correct approach is to look at a liability and determine how the funds have been used in order to work out the relationship to one or more assets. It is not enough to show that a liability is secured by a CGT asset where the funds have been used to acquire an asset not included in the MNAVT.
Resettlement of a trust
The resettlement saga continues. The ATO has released a decision impact statement (DIS) on the Full Federal Court decision in Clark’s case (see previous issues of the Report on the case).
The ATO accepts that the relevant issue or question is whether there is continuity in the trust estate when changes in or to the trust arise. The DIS acknowledges that in Clark’s case there were significant changes in the membership of the trust, its property and operations without the Court finding that there was a loss of continuity of the trust estate giving rise to what is commonly referred to as a resettlement. The ATO does not consider that Clark’s case decided the issue of whether or not an attempt by a trustee to waive its right of indemnity may be effective at law as this issue was not central to the dispute with the taxpayer.
Given that the decision in Clark’s case has broader application, the ATO will review its publication Creation of a new trust – Statement of Principles August 2001. In the past there has been a lot of uncertainty in the minds of many advisers about what constitutes a resettlement, and given that the revenue consequences of a resettlement can be enormous, there has been a marked reticence in making changes to trusts and trust deeds to deal with family and commercial matters because of the perceived tax risks. Hopefully the revised publication will provide advisers with clearer guidance so the decisions about amending trust deeds and other changes to a trust can be made with a much greater degree of certainty in future.
