SHERLINC ENTERPRISES PTY LTD v FC of T

Members:
GA Barton M

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2004] AATA 113

Decision date: 4 February 2004

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Associate Professor GA Barton (Member)

On 20 December 2001 the Commissioner of Taxation (``the respondent'') issued an amended assessment to income tax for the year ended 30 June 1999 (``the amended assessment'') to Sherlinc Enterprises Pty Ltd, the applicant in these proceedings. The applicant objected to the amended assessment on 11 January 2002. The respondent disallowed the objection in a notice of decision of objection of 25 June 2002 (``the objection decision'') but remitted the additional tax for understatement of income to nil and part of the general interest charge. On 18 July 2002 the respondent issued a second amended assessment to give effect to the objection decision.

2. The applicant applied to the Administrative Appeals Tribunal (``the Tribunal'') for review of the respondent's decision disallowing the substantive objection. The respondent's decision is a reviewable objection decision that is an assessment for the purposes of s 14ZZK of the Taxation Administration Act 1953. The applicant is limited to the grounds stated in its objection and has the burden of proving on the balance of the probabilities that the amended assessment of 18 July 2002 is excessive.

3. The Tribunal had before it the ``T documents'' (documents T1-28) lodged by the respondent pursuant to s 37 of the Administrative Appeals Tribunal Act 1975. The applicant was represented by Mr Robert Forbes a principal of the accounting firm Forbes- Bradburn. Mr Craig David Sherlock, a director of the applicant, testified on behalf of the applicant. The applicant tendered Exhibit A1, a statement of evidence of Craig David Sherlock signed by Mr Sherlock on 7 July 2003. Ms Lorraine Price of counsel represented the respondent. The respondent tendered Exhibit R1, a document containing the results of a company search done by the respondent on the applicant. R1 consists of an extract prepared by the Australian Securities and Investment Commission from information obtained for the national database.

4. The Tribunal makes the following material findings of fact concerning the applicant and the transactions which gave rise to the amended assessment.

5. The applicant is a proprietary company that was registered in the State of Victoria in July 1994. It is the trustee and a beneficiary of the Sherlock Family Trust (``the trust''). The shareholders and directors of the applicant are Craig David Sherlock and his wife Natalie Suzan Sherlock. At all material times the applicant's registered office and principal place of business was in Western Australia.

6. In about October 1994 the applicant acquired ``Bakers Delight - Whitford City'' (``the business'') as trustee of the trust. The business address is Shop 113, Whitford City

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Shopping Centre, Whitfords Avenue, Hillarys, Western Australia (T23).

7. On 29 October 1998 the applicant sold the business and realised a capital gain on goodwill (``the capital gain'') for the purposes of Part 3-1 of the Income Tax Assessment Act 1997 (``the Act''). The amount of the capital gain was $165,605 (A1).

8. On 2 June 2000 the applicant lodged its income tax return for the year ended 30 June 1999 (``the return'') (T25). The return discloses taxable income in the amount of $34,340. The return does not include all or part of the capital gain (T4).

9. On 5 June 2000 the applicant lodged an income tax return for the trust for the year ended 30 June 1999 (``the trust return'') (T26). The trust return disclosed nil net capital gains and a capital gains tax small business net roll- over amount of $165,605 (T23). In the year ended 30 June 1999, Division 123 of the Act provided a small business roll-over that allowed a taxpayer to defer the making of a capital gain from a CGT event happening to a small business asset if the taxpayer acquired a replacement asset within 2 years.

10. On 13 June 2000 the respondent issued a notice of assessment to income tax to the applicant for the 1998/99 year based on taxable income of $34,340 as disclosed in the return (T28).

11. In a letter to the respondent dated 15 October 2001, the applicant requested an amended assessment for the 1998/99 year, because the trustee, having elected to apply the small business replacement asset roll-over to the capital gain and the 2 year time limit to acquire a replacement asset having expired, ``elects to distribute this capital gain to Sherlinc Enterprises Pty Ltd'' (T5). The letter is signed by Mr Kevin J Green of Paul M Taylor & Co Pty Ltd and Mr Craig Sherlock - Trustee. At the outset of the hearing the parties confined the issues by agreeing that this review be determined on the basis that, for income tax purposes, the capital gain was properly distributed and derived by the applicant as a beneficiary of the trust in the 1998/99 year.

12. As stated at the beginning of these reasons, on 20 December 2001 the respondent issued an amended assessment to the applicant for the year ended 30 June 1999 (T10). It is based on taxable income in the amount of $199,945 ie. the amount of $34,340 in the return lodged on 2 June 2000 plus the whole of the capital gain. The amended assessment also imposes additional tax penalties for understatement of income (in the amount of $2,980.89) and for interest (in the amount of $10,918.75).

13. In letters to the respondent dated 11 January 2002 and 1 March 2002, the applicant objected to the amended assessment on the ground that only 50% of the capital gain (ie. an amount of $82,802) should have been included in the applicant's taxable income for the purposes of the amended assessment because the trust is entitled to a 50% goodwill exemption pursuant to s 118-250 of the Act. In the 1998/99 year, s 118-250(1) in subdivision 118-C of the Act provided that in certain circumstances, if the ownership of the business of an entity changed, and the entity made a capital gain attributable to the goodwill of the business, half of the capital gain is disregarded. The applicant also requested that the respondent remit the additional tax penalties because the applicant as trustee was actively pursuing the acquisition of a replacement business but decided against any acquisition due to uncertain economic conditions (T11, T13).

14. In response to a request from the respondent the applicant provided information concerning its attempts, as trustee, to acquire a replacement business (T16, T17).

15. In the objection decision, the respondent remitted the additional tax penalty for understatement of income to nil. The tax penalty for interest for the period 29 October 1998 to 29 October 2000 (the period allowed the applicant by s 123-10(f) of the Act to acquire a replacement asset) was also remitted.

16. On 18 July 2002 the respondent issued a second amended assessment to give effect to the objection decision (T22).

17. The principal issue to be decided by the Tribunal is whether the applicant has proved that the second amended assessment is excessive because the effect of the Act in the 1998/99 year is that half the capital gain is disregarded in calculating the taxable income for the trust and, consequently, in calculating the taxable income of the applicant who derived the capital gain in that year as beneficiary.

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18. The Act bestowed the partial exemption of a capital gain attributable to goodwill in the following terms:

``118-250(1) If there is a change in the ownership of a business of an entity (except a partnership) (the primary business ) or its interest in it or that business or interest ends, and the entity makes a capital gain attributable to the goodwill of the primary business, half of the capital gain is disregarded.

118-250(2) However, that part of the capital gain is disregarded only if the sum of:

• (a) the net value of the primary business and the net values of businesses that are related businesses at the time the capital gain is made; or
• (b) the values of the entity's interests in the net value of the primary business and the net values of businesses that are related businesses at that time;

is less than the business exemption threshold for the income year in which the CGT event occurred.''

19. The circumstances in which businesses were related and the meaning of ``business exemption threshold'' were set out in s 118-250(3) and 118-260 respectively.

20. The following provision of the Act created an exception to the partial goodwill exemption:

``118-255 Section 118-250 does not apply, and is taken never to have applied, to the goodwill if the entity makes a choice for the goodwill under Division 123 (about roll- overs for the assets of small businesses).''

21. The parties did not dispute and the Tribunal finds that the net value of the business and any related businesses at the relevant time did not exceed the business exemption threshold referred to in s 118-250(2). So in order to prove that half the capital gain is disregarded the applicant must prove that it did not make a choice for the goodwill in the trust return.

22. The applicant contended that it was precluded from making a choice for the goodwill under Division 123 of the Act until it had chosen a replacement asset. It based this contention on the following provisions of s 123-10 of the Act:

``When you can obtain the roll-over

123-10 You can choose to obtain a roll-over if:

• (a) a CGT event (the trigger event ) happens in an income year (the roll-over year ) in relation to one or more CGT assets (the original asset ) that you own; and
• (b) the original asset satisfies the requirements set out in section 123-65; and
• (c) the trigger event would have resulted (apart from the roll-over) in you making a *capital gain (the notional capital gain ); and
• (d) you would have a *net capital gain for the roll-over year (apart from the roll- over); and
• (e) the maximum net asset value requirements set out in section 123-50 are satisfied; and
• (f) not later than 2 years after the last trigger event during the roll-over year for which you choose a small business roll- over, you choose one or more CGT assets as replacements (the replacement asset ), and
• (g) the replacement asset satisfies the requirements set out in section 123-75; and
• (h) you did not choose to disregard all or part of the capital gain from the trigger event under Subdivision 118-F.

Note 1: The full list of CGT events is in section 104-5.

Note 2: Paragraph (f) is an exception to the general rule about choices in section 103-25.''

23. Note 2 to s 123-10 refers to the general rule about choices in s 103-25 of the Act which, for the 1998/99 year, provided as follows:

``103-25 Choices

(1) A choice you can make under this Part or Part 3-3 must be made:

• (a) by the day you lodge your income tax return for the income year in which the relevant CGT event happened; or
• (b) within a further time allowed by the Commissioner.

(2) The way you (and any other entity making the choice) prepare your income tax

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returns is sufficient evidence of the making of the choice.

(3) However, there are some exceptions:

• (a) subsections 118-425(4) and (5) (relating to the small business retirement exemption) require a choice to be made in writing; and
• (b) paragraph 123-10(1)(f) (relating to the small business roll-over) requires a choice of replacement assets within the longer period specified in that paragraph; and
• (c) subsections 124-380(5) and 124-465(5) (relating to replacement asset roll-overs) require a company to make the choice at an earlier time specified in the subsections.''

Section 123-10 was in Part 3-3 of the Act. Section 103-25(1) refers to a choice that a taxpayer can make under Part 3-1 or Part 3-3. The word ``can'' has not been defined for the purposes of the Act. According to the second edition (2003) of the Oxford Dictionary of English the word ``can'' apart from expressions denoting capability or requesting or expressing permission, means ``be permitted to''. Clearly Parliament is prescribing by s 103-25(1) that taxpayers must make choices they are permitted to make under Part 3-1 or Part 3-3 by the day they lodge their income tax returns for the year in which the relevant CGT event happened or within a further time allowed by the Commissioner. Section 103-25(2) dispenses with any formal notification of the making of such a choice by providing that the way the taxpayer's income tax return is prepared is sufficient evidence of the making of the choice. Taxpayers who prepare their income tax returns on the basis of choices they are not permitted to make under Part 3-1 or Part 3-3 are doing no more than purporting to make the choices in question. Section 103-25 prescribes the time and method for making permitted choices and does not operate to validate a choice, such as that contained in s 123-10, in circumstances where the preconditions for making the choice have not been met. In order to determine, therefore, whether the applicant made a choice for the goodwill under Division 123 in the trust return for the purposes of ss 103-25 and 118-255 it must first be established whether the applicant was permitted to make the choice when the trust return was lodged on 5 June 2000. It was not in contention and the Tribunal finds that the respondent did not allow the applicant further time to choose as he was entitled to in terms of s 103-25(1)(b).

24. Section 123-10 of the Act permitted the applicant to choose the small business asset roll-over for the goodwill if the requirements of paragraphs 123-10(a)-(h) were met. It was common cause at the hearing that the applicant had at no stage satisfied the requirements in paragraphs (f) and (g) because it did not choose a relevant replacement asset for the goodwill within 2 years of the sale of the business.

25. Note 2 to s 123-10 (which forms part of the Act pursuant to s 950-100(1)) provides that paragraph (f) is an exception to the general rule about choices in s 103-25. Section 103-25(3), which lists the exceptions to the general rule about choices, provides in paragraph (b) that paragraph 123-10(1)(f) (sic) requires a choice of replacement assets within the longer period specified in that paragraph. The applicant contended that a taxpayer could only choose a small business asset roll-over once a replacement asset had been acquired, hence the exception to the general rule about choices to accommodate those instances where the replacement asset was acquired after the date for lodging the return for the income year in which the relevant CGT event happened. The respondent contested this interpretation of ss 123-10 and 103-25(3) of the Act.

26. The respondent submitted that the applicant could, and did, make a choice for the goodwill under Division 123 of the Act in the trust return because s 123-10(f) did not operate to preclude the applicant from choosing the roll-over before it had chosen a replacement asset. Paragraph (f), in the respondent's submission, enabled the applicant to choose a replacement asset over a 2 year period without losing the deferral concession of the chosen roll-over. It was agreed by counsel for the respondent that the practical effect of this interpretation of s 123-10 is that in the 1998/1999 year the applicant could either disregard half the capital gain pursuant to s 118-250 or choose the roll-over subject to the risk that none of the capital gain is disregarded in the event that no replacement asset is chosen in the 2 year period. Division 123 is a rewrite of Division 17A of the Income Tax Assessment Act 1936 (``the 1936 Act'') which had the effect that if a taxpayer did not nominate a

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replacement asset in respect of a net roll-over amount, a capital gain equal to that amount accrued to the taxpayer for the year of income in which the disposal occurred. The Division 17A roll-over only applied if the taxpayer made a written election to that effect on or before the date of lodgment of the taxpayer's return for the disposal year of income - see ss 160ZZPT(5) and 160ZZPQ(f) of the 1936 Act reproduced in paragraph 28 below. The respondent submitted that by force of s 1-3 of the Act, Division 123 is to be interpreted as having the same meaning as the old law in Division 17A of the 1936 Act.

27. Section 1-3 of the Act provides as follows:

``1-3 Difference in style not to affect meaning

(1) This Act contains provisions of the Income Tax Assessment Act 1936 in a rewritten form.

(2) If:

• (a) that Act expressed an idea in a particular form of words; and
• (b) this Act appears to have expressed the same idea in a different form of words in order to use a clearer or simpler style:

the ideas are not to be taken to be different just because different forms of words were used.

Note: A public or private ruling about a provision of the Income Tax Assessment Act 1936 is taken also to be a ruling about the corresponding provision of this Act, so far as the 2 provisions express the same ideas: see sections 14ZAAM and 14ZAXA of the Taxation Administration Act 1953.''

28. Division 17A of the 1936 Act was headed ``Roll-over relief for certain disposals of assets related to small business''. Subdivision B of Division 17A was headed ``How roll-over relief is available on the disposal of an asset'' and ss 160ZZPQ(1) and 160ZZPT(1) and (5) of that subdivision relevantly read as follows:

``160ZZPQ When roll-over relief is available

160ZZPQ(1) Assets in respect of which roll-over relief may apply. If:

• (a) there is a roll-over asset in respect of a taxpayer in respect of a year of income; and
• (b) apart from this Division, a capital gain (the notional capital gain ) would be taken to have accrued to the taxpayer as a result of the disposal of the roll-over asset; and
• (c) where the roll-over asset is neither a share in a company nor a unit in a unit trust;
  • (i) the roll-over asset was an active asset at the disposal test time or, if it was not an active asset at that time because the relevant business had ceased to be carried on, the cessation occurred not earlier than 12 months before that time; and
  • (ii) the roll-over asset was an active asset during more than one-half of the period in which it was owned by the taxpayer; and
• (d) (Omitted by 16 of 1998)
• (e) if the roll-over asset was nominated as a replacement asset under a previous application of this Division - the roll- over asset was acquired by the taxpayer more than 5 years before the disposal test time; and
• (f) the taxpayer elects in writing, on or before the date of lodgement of the taxpayer's return of income for the disposal year of income, that this Division is to apply to the taxpayer in respect of the disposal of the roll-over asset;

the following provisions of this section have effect.

...

160ZZPT Nomination of replacement assets

160ZZPT(1) Taxpayer may nominate replacement assets. Subject to subsections (2) and (3), if:

• (a) there is a roll-over asset or there are roll-over assets in respect of a taxpayer in respect of a year of income; and
• (b) there is a net roll-over amount that applies to the taxpayer in respect of the year of income;

the taxpayer may nominate, for the purposes of the application of this Division in respect of the net roll-over amount, one or more approved assets (a replacement asset or

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replacement assets ) that were acquired by the taxpayer within the period beginning one year before, and ending 2 years after, the last disposal by the taxpayer of any roll-over asset in that year of income.

...

160ZZPT(5) Capital gain to accrue if no nomination of replacement assets. If the taxpayer does not duly nominate a replacement asset or replacement assets for the purposes of the application of this Division in respect of a net roll-over amount, a capital gain equal to the net roll- over amount is taken to have accrued to the taxpayer in the disposal year of income.''

29. Section 160ZZPQ(1) of Division 17A of the 1936 Act contained a list of preconditions for roll-over relief including the requirement in s 160ZZPQ(1)(f) that the taxpayer elect in writing in the income return for the disposal year that Division 17A apply. Once the preconditions in s 160ZZPQ(1)(a)-(f) were satisfied a taxpayer had to nominate a replacement asset within the time specified in s 160ZZPT(1) failing which roll-over relief was expressly excluded by s 160ZZPT(5).

30. Section 123-10 of Division 123 of the Act contained a list of preconditions for choosing roll-over relief including the nomination of a replacement asset within the time specified in s 123-10(f). Unlike Division 17A of the 1936 Act the election or choice to obtain a roll-over was dependent on the nomination of replacement asset rendering it unnecessary to exclude roll-over relief should a taxpayer not nominate a replacement asset. This fundamental difference between Division 17A of the 1936 Act and Division 123 of the Act arises from the ordinary unambiguous meaning of the provisions referred to.

31. The issue to be determined by the Tribunal is whether s 1-3(2) of the Act requires it to look through the ordinary meaning of s 123-10 of the Act and give it an effect the same as that of the relevant provisions of Division 17A of the 1936 Act. The subsection operates in circumstances where the Act appears to have expressed an idea from the 1936 Act using different words to achieve a clearer and simpler style. Where there is a clear coincidence of ideas, the ideas are not to be taken to be different because the idea is expressed in the Act using different forms of the words in the 1936 Act. A rewritten provision should not be construed differently from the original on the basis of a mere difference in drafting style. ``Idea'' is not defined in the Act. Its ordinary dictionary meanings include ``the aim or purpose'', Oxford Dictionary of English, 2nd edition (2003). If one proceeds on the basis that this was the meaning intended by the legislature then, in the view of the Tribunal, the relevant idea expressed in the 1936 Act is materially different from that expressed in the Act in Division 123. The aim of Division 17A was to require taxpayers to elect small business asset roll-over relief in the disposal year of income regardless of whether they were in a position to nominate a replacement asset whereas Division 123 permitted a taxpayer to choose small business asset roll-over relief once certain pre- conditions were met including the requirement that the taxpayer nominate a replacement asset. The legislature has not used different words to achieve a clearer or simpler style of English in expressing the same idea but has expressed a different idea. In this instance the precondition for the operation of s 1-3(2) is absent. So the Tribunal finds that s 1-3(2) of the Act does not operate in this matter in the way contended for by the respondent.

32. In the course of her full and helpful submissions, Ms Price referred the Tribunal to the explanatory memoranda, records of parliamentary debates and other secondary materials relating to the legislation under consideration. They are silent on the change to the law introduced by s 123-10 of the Act. Although it may be inferred from this fact that no change to the law was intended it cannot displace the clear meaning of s 123-10 and reinstate the position that prevailed under Division 17A of the 1936 Act. The same may be said of the anomalous exception at s 103-25(3)(b) in the general provisions of s 103-25 of the Act dealing with choices.

33. The Tribunal finds that the second amended assessment of 18 July 2002 is excessive because the applicant could not, and so did not, make a choice in the trust return for the goodwill of the business under Division 123 for the purposes of s 118-255 of the Act. The applicant was required to include the capital gain in the trust return when it did not nominate a replacement asset on the last date for such nomination prescribed in s 123-10(f) of the Act. By s 118-250(1) of the Act half of the capital

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gain is disregarded because a choice for the goodwill was not made under Division 123.

34. The Tribunal sets aside the decision under review and remits the matter to the respondent for reconsideration in accordance with the following direction that a further amended assessment be issued on the basis:

• (a) that half the capital gain is disregarded in the trust return;
• (b) that the capital gain was derived by the applicant as a beneficiary of the trust in the 1998/199 year;
• (c) that the additional tax for understatement of income be remitted to nil; and
• (d) that the general interest charge for the period 29 October 1998 to 29 October 2000 be remitted.