Interim Decision Impact Statement

Commissioner of Taxation v Byrne Hotels Qld Pty Ltd

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Court Citation(s):
[2011] FCAFC 127
[2012] HCATrans 141
2011 ATC 20-286
83 ATR 261

Venue: Federal Court of Australia
Venue Reference No: QUD 280 of 2010
Judge Name: Dowsett, Bennett & Greenwood JJ
Judgment date: 11 October 2011
Appeals on foot: No - Application for special leave to the High Court refused on 8 June 2012
Decision Outcome:
Adverse

Impacted Advice

Relevant Rulings/Determinations:

• TD 2007/14

Subject References:
Capital gains tax
Small business concessions
Maximum net asset value test
Liabilities of the entity
CGT event

Précis

Outlines the ATO's response to this case which concerns whether a real estate agent commission and legal fees are liabilities 'just before' a capital gains tax (CGT) event for the taxpayer to obtain a small business relief concession.

Brief summary of facts

1. At some time between July 2003 and October 2003, the taxpayer retained a real estate agent and lawyers in relation to the proposed sale of its hotel business.

2. On 24 October 2003, the taxpayer contracted to sell its business. Settlement of the contract occurred on 19 January 2004.

3. By an invoice dated 28 October 2003, the lawyers issued the first of three accounts to the taxpayer.

4. By an invoice dated 28 November 2003, the lawyers issued the second of three accounts to the taxpayer.

5. By an invoice dated 17 December 2003, the lawyers issued the third of three accounts to the taxpayer.

6. On 15 January 2004, the real estate agent issued an invoice to the taxpayer. The commission payable to the real estate agent was payable under the real estate agent's contract upon completion of the contract of sale. Accordingly, the commission was paid by the taxpayer on 19 January 2004 on settlement of the contract.

7. When the taxpayer lodged its income tax return for the year ended 30 June 2004 it did not return the capital gain arising from the disposal of the business. The taxpayer considered that the maximum net asset value test ('MNAV') in the former section 152-15 of the Income Tax Assessment Act 1997 ('the Act') was satisfied because the net asset value of its CGT assets was reduced by the inclusion of the real estate agent commission and legal fees as "liabilities" under subsection 152-20(1) 'just before' the CGT event (24 October 2003).

8. Subsequently, the Commissioner concluded that the real estate agent commission and legal fees, as they were contingent liabilities just before the CGT event, were not to be included as "liabilities" and the taxpayer did not satisfy the MNAV.

ATO view of Decision

1. The Full Federal Court determined that in the context of Division 152, "liabilities" should be treated symmetrically with "assets". Section 108-5 of the ITAA 1997 defines CGT assets as "any kind of property" or "legal or equitable obligations that are not property", which the Court stated would include obligations existing at the relevant time under a contract which can be enforced by the other party or parties to a contract.

2. The Court found that as contingent assets can be included in the net CGT asset value calculation in subsection 152-20(1), on the basis of the definition of CGT assets in section 108-5, then liabilities should be matched to assets and contingent liabilities included as liabilities.

3. The Court emphasised that what is required under the MNAV test in section 152-15 is the calculation of liabilities (including contingent liabilities) 'just before' the CGT event.

4. Accordingly, the ATO view in TD 2007/14 that the term 'liabilities' in the context of subsection 152-20(1) extends to legally enforceable debts due for payment and to presently existing obligations to pay either a sum certain or ascertainable sums and does not extend to contingent liabilities, future obligations or expectancies, does not fully accord with the Court's judgment.

5. It is noted that subsection 152-20(1) was amended in 2007, but those amendments did not affect the meaning of the term 'liabilities' as discussed in TD 2007/14.

Administrative Treatment

Implications for ATO Precedential documents (Public Rulings & Determinations etc)

The Commissioner will review the TD 2007/14 in light of the Full Federal Court decision.

Implications for Law Administration Practice Statements

None.

Legislative References:
Income Tax Assessment Act 1997
104-10
108-5
152-1
152-10
152-15
152-20
152-20(1)
152-205
152-410

Case References:
Crimmins v Stevedoring Industry Finance Committee
[1999] HCA 59
(1999) 200 CLR 1

Walters v Babergh District Council
(1983) 82 LGR (Eng) 235

McDowell v Baker
[1979] HCA 44
(1979) 144 CLR 413

Legal Services Commissioner v Baker (No 2)
[2006] QCA 145
[2006] 2 Qd R 249

Keppel v Wheeler
[1927] 1 KB 577

Georgieff v Athans
(1981) 26 SASR 412

Havas v Cornish & Co Pty Ltd
[1985] 2 Qd R 353

Fitzgerald v Metcalfe
[1917] NZLR 486

Wardley Australia Ltd and Anor v State of Western Australia
[1992] HCA 55
(1992) 175 CLR 514