Cannavo and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2009/5626 and 2010/2838)
Judgment date: 10 August 2010
Date published: 22 December 2011

Summary of decision:
This case concerned whether the applicant was entitled to small business concessions and the correct methodology of apportioning the incidental expense of vendor duty arising from the sale of property containing a pre-CGT portion.

Overview of facts:
1. The applicant was the owner of property at 672-676 Pacific Highway, Chatswood ("the property"), which had been acquired over a period of time in 1985 and 1986. | 2. On 11 July 2005, the property was sold for $9,900,000, and the applicant became liable to pay vendor duty under NSW legislation, and capital gains tax on the post-CGT portion of the property. | 3. The applicant declared a net capital gain of $1,179,357 for the 2006 income tax year, calculated on the basis of entitlement to the small business 50% reduction as the maximum net asset test and active asset tests in Division 152 of the Income Tax Assessment Act 1997 had been satisfied. | 4. The following factors were also relevant to the calculations: (a) an amount of $581,679 was included in the cost base of the property for the depreciated value of improvements; (b) a bill facility with the National Australia Bank which was used to fund the applicant's business, and which just prior to the sale of the property had been drawn upon in the amount of $4,813,667; (c) loans owing from related entities totaling $3,856,950 ("the debts"); (d) the applicant held an indirect interest in the Glowbuoy Unit Trust, which had a value of $94,129.32, and (e) member contributions made in the 2006 income year to the Joseph Cannavo Superannuation Fund of $1,014,116. | (a) an amount of $581,679 was included in the cost base of the property for the depreciated value of improvements; (b) a bill facility with the National Australia Bank which was used to fund the applicant's business, and which just prior to the sale of the property had been drawn upon in the amount of $4,813,667; (c) loans owing from related entities totaling $3,856,950 ("the debts"); (d) the applicant held an indirect interest in the Glowbuoy Unit Trust, which had a value of $94,129.32, and (e) member contributions made in the 2006 income year to the Joseph Cannavo Superannuation Fund of $1,014,116. | 5. Subsequent to an audit, the Commissioner determined the relevant tests had not been satisfied and issued an amended notice of assessment increasing the applicant's net capital gain to $1,745,639. An administrative penalty of 50% was imposed for recklessness. The applicant objected to the amended assessment and the penalty objection decision. | 6. At the hearing, the applicant contended that in calculating the liability for capital gains tax, it was not correct to deduct from the capital proceeds the relevant percentage (being the pre-CGT property percentage of 29.92%) of the value of the improvements or the relevant percentage of the vendor duty. It was also contended that the debts were not CGT assets and should not have been taken into account in calculating the small business concession threshold, or the debts were worth less than face value, or they were personal use assets and should be excluded. | 7. The Commissioner conceded at the hearing that the penalty should be reduced to 25% on the basis that the applicant's conduct should more appropriately be characterised as false and misleading. | Issues decided by the court | 1. The Tribunal found that the applicant's net CGT assets were far in excess of the threshold, thereby disentitling him to any small business concession in respect of his capital gains. The Commissioner's calculation of the capital gain, subject to the error in respect of the vendor duty, was correct and the objection decision must be affirmed. | 2. In respect of the vendor duty, which constituted an incidental expense forming part of the cost base of the property within section 110-35 of the Income Tax Assessment Act 1997 , it was not correct to apportion the relevant percentage of the vendor tax to the pre-CGT property. If the correct amount was written back in respect of the pre-CGT property the exempt gain would have been smaller while the taxable gain would have been greater. It followed that the amended assessment was not too high, but rather, too low. | 3. The Tribunal confirmed that debts are unquestionably CGT assets, and where a debt is not recovered in full the shortfall can be netted against capital gains, and where relevant carried forward. As there was no evidence to support the contentions of the taxpayer, and as the debts were linked to the bill facility, it was not reasonable to exclude the debts from the calculation of the threshold whilst nevertheless retaining the bill facility amount. | 4. No further reduction in the rate of penalty was warranted. Important aspects had been omitted from the applicant's tax return. Although the return was prepared by a tax agent, the actions of both are relevant, and a higher standard is expected from tax agents as they are presumed to be aware of the law.

Issues decided:
1. The Tribunal found that the applicant's net CGT assets were far in excess of the threshold, thereby disentitling him to any small business concession in respect of his capital gains. The Commissioner's calculation of the capital gain, subject to the error in respect of the vendor duty, was correct and the objection decision must be affirmed. 2. In respect of the vendor duty, which constituted an incidental expense forming part of the cost base of the property within section 110-35 of the Income Tax Assessment Act 1997 , it was not correct to apportion the relevant percentage of the vendor tax to the pre-CGT property. If the correct amount was written back in respect of the pre-CGT property the exempt gain would have been smaller while the taxable gain would have been greater. It followed that the amended assessment was not too high, but rather, too low. 3. The Tribunal confirmed that debts are unquestionably CGT assets, and where a debt is not recovered in full the shortfall can be netted against capital gains, and where relevant carried forward. As there was no evidence to support the contentions of the taxpayer, and as the debts were linked to the bill facility, it was not reasonable to exclude the debts from the calculation of the threshold whilst nevertheless retaining the bill facility amount. 4. No further reduction in the rate of penalty was warranted. Important aspects had been omitted from the applicant's tax return. Although the return was prepared by a tax agent, the actions of both are relevant, and a higher standard is expected from tax agents as they are presumed to be aware of the law.

ATO view of decision:
The decision clarifies the apportionment of vendor duty in respect of property with a pre-CGT portion for the purposes of calculating capital gains, and confirms the factors in determining the imposition of administrative penalties where a tax agent is involved.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | None | Implications for Law Administration Practice Statements | None

Legislative references: Income Tax Assessment Act 1997 108-5 108-70 110-35 152-15 152-105 152-205 152-300 Taxation Administration Act 1953 284-90
Case references: Hart v Federal Commissioner of Taxation (2002) 51 ATR 471 [2002] FCA 1559 2002 ATC 5193 The Taxpayer and Commissioner of Taxation [2010] AATA 455 2010 ATC 1-021 79 ATR 510
Subject references: Small business CGT concessions Administrative penalties