White v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 936 of 2011 and VID 937 of 2011)
Judgment date: 20 February 2012
Date published: 18 April 2012

Summary of decision:
Outlines the ATO's response to this case, which concerned whether the taxpayers satisfied the maximum net asset value (MNAV) test in section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997) (as it applied for the 2007 income year).

Overview of facts:
The applicants are husband and wife. Each was a small business CGT affiliate of the other under the former section 152-25 of the ITAA 1997. | Before 12 December 2006, the husband owned 30%, and the wife 28.2%, of the issued capital in Sixteenth Autex Pty Ltd (the Company). As, together, the applicants owned 58.2% of the Company, it was an entity connected with each applicant under the former section 152-30 of the ITAA 1997. | On 12 December 2006, the applicants sold their shares in the Company and each made a capital gain of nearly $1.9 million. If the applicants satisfied the MNAV test under section 152-15 of the ITAA 1997, they were otherwise entitled to disregard the gains under the 15-year retirement exemption in Subdivision 152-B. | It was common ground: that the applicants satisfied the MNAV test if the net value of the Company's assets was not included in their MNAV calculations; and that the literal operation of paragraph 152-15(b) (which would have otherwise included the net value of the Company's assets in each MNAV calculation) was subject to the operation of paragraph 152-15(c) and the then forms of subsections 152-20(3) and 152-20(4) of the ITAA 1997. | Issues decided by the court | The Court (Gordon J) found that the then form of subsection 152-20(3) operated to include the net value of the Company's assets in the calculation of each applicant's MNAV test. Her Honour accepted that 'another entity connected with' a taxpayer at the end of subsection 152-20(3) could be 'an entity that is connected with (a taxpayer's) small business CGT affiliate' in paragraph (b) of the subsection. In this case, the assets of the Company were used in the carrying on of a business by an entity, the Company, connected with each applicant (paragraph 41). | However, her Honour found that the then form of subsection 152-20(4) operated to exclude the net value of the Company's assets from the calculation of each applicant's MNAV test. Her Honour agreed with the applicants that the Company was connected with each applicant 'only because' of the other applicant. The phrase, 'only because', imports a 'but for' test, such that, but for the circumstance that each applicant was connected with the Company only because both applicants, together, owned more than 40% of it, each applicant would not have been otherwise connected with the Company (paragraph 46). | Given that subsection 152-20(4) operated to exclude the net value of the Company's assets from the calculation of each applicant's MNAV test, they both satisfied the test. Accordingly, they were entitled to apply the 15 year retirement exemption in Subdivision 152-B to the capital gains made on the sale of the shares in the Company.

Issues decided:
The Court (Gordon J) found that the then form of subsection 152-20(3) operated to include the net value of the Company's assets in the calculation of each applicant's MNAV test. Her Honour accepted that 'another entity connected with' a taxpayer at the end of subsection 152-20(3) could be 'an entity that is connected with (a taxpayer's) small business CGT affiliate' in paragraph (b) of the subsection. In this case, the assets of the Company were used in the carrying on of a business by an entity, the Company, connected with each applicant (paragraph 41). However, her Honour found that the then form of subsection 152-20(4) operated to exclude the net value of the Company's assets from the calculation of each applicant's MNAV test. Her Honour agreed with the applicants that the Company was connected with each applicant 'only because' of the other applicant. The phrase, 'only because', imports a 'but for' test, such that, but for the circumstance that each applicant was connected with the Company only because both applicants, together, owned more than 40% of it, each applicant would not have been otherwise connected with the Company (paragraph 46). Given that subsection 152-20(4) operated to exclude the net value of the Company's assets from the calculation of each applicant's MNAV test, they both satisfied the test. Accordingly, they were entitled to apply the 15 year retirement exemption in Subdivision 152-B to the capital gains made on the sale of the shares in the Company.

ATO view of decision:
The ATO notes that the Court's findings on subsection 152-20(3) of the ITAA 1997 are consistent with the Commissioner's view of the operation of the subsection. | The Court considered the operation of subsection 152-20(4) because it excludes from subsection 152-20(3) the business assets of an entity that is 'connected with you only because of your affiliate'. The ATO accepts the Court's view that the words 'only because' in subsection 152-20(4) import a 'but for' test, such that the issue is whether, but for the circumstance that an entity is connected with 'you' only because of your affiliate, the entity would not have been connected with 'you'. | The ATO notes that the reference to 'small business CGT affiliate' in subsections 152-20(3) and (4) has been replaced with a reference to 'affiliate'. The definition of 'affiliate' in section 328-130 of the ITAA 1997, and the limited extended definition in section 152-47, is different to the definition of 'small business CGT affiliate' in the former section 152-25. As a result of these amendments, subsections 152-20(3) and (4) may operate in more limited circumstances for the 2008 and later income years.

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

Legislative references: Income Tax Assessment Act 1997 152-10 152-15 152-20(3) 152-20(4) 152-25 152-30 Subdivision 152-B Tax Laws Amendment (2006 Measures No 7) Act 2007 68
Case references: Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 [1998] HCA 28
Subject references: Small business CGT concessions Maximum net asset value test Entity connected with the taxpayer Small business CGT affiliate