“Holiday home” included in tax concession test

The Administrative Appeals Tribunal (AAT) has confirmed that a corporate taxpayer did not satisfy the maximum net asset value test for the purpose of qualifying for the capital gains tax (CGT) small business concessions. This was essentially on the basis that the individual controlling the company could not exclude from the test his interest in a Queensland property, which he claimed was for “personal use and enjoyment”.

Background

The taxpayer was a company that made a capital gain of over $1 million in selling its interest in a car wash business in the 2007–2008 income year. It did not return the gain as assessable income but instead claimed that it was entitled to apply the CGT small business concessions (namely, the 50% active asset reduction and the retirement concession). However, the Commissioner issued an amended assessment to include the gain on the basis that the taxpayer failed the (then) $5 million maximum net asset value (MNAV) test.

At issue before the AAT was whether the sole director and controller of the taxpayer company (in terms of his 50% shareholding) could exclude from the MNAV his interested in a Queensland property, which had been rented for much of the previous seven years but which, at the time of the CGT event, had been taken off the rental market with the intention to once again use it as his and his wife’s holiday home.

Also at issue was whether the wife’s CGT assets, including her interest in the Queensland property, were to be taken into account on the basis of her being either a connected entity and/or a “CGT small business affiliate” of the taxpayer company (as that concept applied in those income years).

Decision

The AAT first found that the wife’s CGT assets, including her 50% interest in the holiday home, were not to be counted in applying the MNAV test. This was because she was not connected with the taxpayer company as she did not own any shares in it. It then found that, although she was a “CGT small business affiliate” of the controller of the taxpayer company by virtue of being his wife, she was not a CGT small business affiliate of the taxpayer company as was required by s 152-15(a)(iii) of the Income Tax Assessment Act 1997 in order for her CGT assets to be included.

In arriving at this conclusion, the AAT emphasised that s 152-15(a)(iii) does not take into account the net value of the CGT assets of an entity that is a small business affiliate of one of the taxpayer company’s small business affiliates (of which there were none in this situation), but only takes into account the net value of the CGT assets of an entity “connected with” one of the taxpayer’s small business affiliates. In this case, the wife was not “connected with” the husband for the purposes of the MNAV test and, therefore, the net value of her assets was not to be taken into account under s 152-15(a)(iii).

However, the AAT dismissed the argument that the husband’s 50% interest in the Queensland property should be disregarded under the exclusion in s 152-20(b)(i) for CGT assets “being used for the personal use and enjoyment” of the taxpayer. In particular, the AAT found that although the property was “ready” for such personal use and enjoyment just before the relevant CGT event and for several months beforehand, it was nevertheless not actually being used in that way at that point in time. Rather, the AAT found that, in effect, its continual use as a rental property over the previous seven years meant that, until it was once again used as a holiday home, it could not be regarded as “being used” for the husband’s personal use and enjoyment.

In arriving at this conclusion, the AAT interpreted the exclusion in s 152-20(b)(i) for assets “being used for the personal use and enjoyment” of the taxpayer as requiring a sense of continuity of use (as inherent in the phrase “being used”) and found that this requirement could not be met until the property was in fact again used in this manner. The AAT also emphasised the requirement for the asset to be used “solely” for personal use and enjoyment. It concluded that all that could be said was that the property was ready and available for use and had been used as such in the past, but was not being so used in a continuous manner as required.

Re Altnot Pty Ltd and FCT [2013] AATA 140, www.austlii.edu.au/au/cases/cth/AATA/2013/140.html.

Appeal update

The Commissioner has lodged a notice of appeal to the Federal Court against the decision, presumably in relation to the AAT’s findings in relation to s 152-15(a)(iii), ie that the wife was not “connected with” the husband for the purposes of the MNAV test and that, therefore, the net value of her assets was not to be taken into account under s 152-15(a)(iii).