Commissioner of Taxation v Altnot Pty Ltd
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 280 of 2013)
Judgment date: 13 March 2014
Date published: 24 July 2014

Summary of decision:
Outlines the ATO's response to this case which concerned whether the AAT had erred in its construction of the former subsection 152-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

Overview of facts:
On 30 March 2007, the taxpayer entered into a contract to sell a 50% interest in a carwash business and made a capital gain of $1,029,449. There was a dispute about whether the small business concessions in Division 152 of the ITAA 1997 applied to that gain. The Commissioner considered that the taxpayer did not satisfy the maximum net asset value test in section 152-15 just before the sale. There was no dispute that, for the purposes of paragraph 152-15(b), the taxpayer's sole director, who owns 50% of the taxpayer's shares, was an entity connected with the taxpayer. The dispute was about whether the director's wife, who owns no shares in the taxpayer, was also an entity connected with the taxpayer. | The AAT [2013] AATA 140 found that, for the purposes of the former section 152-30, the director's wife was not an entity connected with the taxpayer because she did not control the taxpayer in the way described in the section, that is she did not own any shares in the taxpayer. The Commissioner appealed this aspect of the AAT decision to the Federal Court. | The AAT separately found that a property owned by the director and his wife that had previously been used by them as a holiday home and then a rental property, was not 'being used solely for the personal use and enjoyment' of the director and his wife just before the sale of the carwash business. Whilst at this time the property was no longer being rented, the director and his wife had not yet resumed using it as a holiday house, such that it was not actually 'being used' by them just before the sale. This aspect of the AAT decision was not appealed. | Issues Decided by the Court | The Court recognised that the AAT's construction of the former subsection 152-30(2) raised a question of law for the purposes of section 44 of the Administrative Appeals Tribunal Act 1975 . The Court also recognised that, when determining whether an entity controlled the taxpayer under the former subsection 152-30(2), the AAT was required to consider whether the entity, or its small business CGT affiliates, or the entity together with such affiliates, owned shares in the taxpayer carrying the right to exercise at least 40% of the voting power in the taxpayer. | The Court found that the AAT misapplied the covering words in subsection 152-30(2) by only considering whether the director's wife owned shares in the taxpayer, and failed to consider the other two bases on which the wife might control the taxpayer, i.e., whether the wife's small business CGT affiliates (the director), or the wife together with the director, owned the required percentage of shares. The director was his wife's small business CGT affiliate because he was her spouse under the former paragraph 152-25(1)(a).

Issues decided:
The Court recognised that the AAT's construction of the former subsection 152-30(2) raised a question of law for the purposes of section 44 of the Administrative Appeals Tribunal Act 1975 . The Court also recognised that, when determining whether an entity controlled the taxpayer under the former subsection 152-30(2), the AAT was required to consider whether the entity, or its small business CGT affiliates, or the entity together with such affiliates, owned shares in the taxpayer carrying the right to exercise at least 40% of the voting power in the taxpayer. The Court found that the AAT misapplied the covering words in subsection 152-30(2) by only considering whether the director's wife owned shares in the taxpayer, and failed to consider the other two bases on which the wife might control the taxpayer, i.e., whether the wife's small business CGT affiliates (the director), or the wife together with the director, owned the required percentage of shares. The director was his wife's small business CGT affiliate because he was her spouse under the former paragraph 152-25(1)(a).

ATO view of decision:
The ATO notes that the decision of the Court is consistent with the Commissioner's submissions to the Court. | The ATO also notes that, while section 152-30 was repealed in 2007, the test for determining whether an entity is connected with a taxpayer is now to be found in section 328-125, when read with section 152-78. The ATO considers that the Court's construction of the covering words in the former subsection 152-30(2) is equally applicable to the covering words of subsection 328-125(2).

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

Subject references: Capital gains Small business concessions Maximum net asset value test Connected with Being used solely for personal use and enjoyment