Tax Update

DEDUCTIBILITY OF INTEREST ON LOANS: ATO DECISION IMPACT STATEMENT

The ATO has released a Decision Impact Statement on the AAT's decision in AAT Case [2010] AATA 549, Re Tanti and FCT. In that case the Taxpayer borrowed a total of $250,000 from his mother at varying interest rates. The Taxpayer used the $250,000 to:

(a) on lent part of the funds to his company (where       he was the sole director and shareholder)       interest free so that his company could pay off       part of an existing loan to the CBA; and
(b) part of fund were used to purchase shares in his       own name in an unrelated company.

The question in this case was whether the interest paid to the Taxpayer’s mother was deductible in the Taxpayer’s hands under Section 8-1.

In relation to the first issue in paragraph (a) above, the tribunal found that the Taxpayer did not ever receive any income from his company either by way of salary as an employee, interest or dividends.

Accordingly, the interest was found not to be deductible under Section 8-1 as it were not incurred in gaining or producing assessable income or not necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

The Tribunal considered there was no connection between the interest and the taxpayer's activities as an employee of his company, nor any connection between the interest and any director's fees, dividends or interest he might have received from the company.

In relation to the second issue in paragraph (b) above, after receiving further information from the Taxpayer at the hearing, the ATO conceded that the interest of $3,610 on the funds used to purchase shares in an unrelated company was deductible under Section 8-1.
In the ATO’s Decision Impact Statement, the ATO said that the above concession was granted as the Taxpayer provided further information and that this decision was decided on its on facts.

CGT SMALL BUSINESS NET ASSET VALUE
TEST - TINGARI CASE: ATO DECISION
IMPACT STATEMENT

The ATO has released a decision impact statement on the AAT's decision in AAT Case [2010] AATA 233, Re Tingari Village North Pty Ltd and FCT.

In that case, the AAT upheld the Commissioner's decision that a taxpayer was not entitled to certain CGT small business concessions as the asset in
question (a mobile home park) was not an "active asset" and the taxpayer also failed the net asset value test.

The taxpayer, a company, sold a mobile home park at a capital profit of $2.1m. In its tax return for the year ended 30 June 2006, the company disclosed
a net capital gain of $70,646 arising from the sale of the park, after having claimed the CGT small business retirement concession and the 50% reduction concession

The Commissioner did not consider the company was entitled to the CGT relief and issued an amended assessment increasing the company's net capital gain from $70,646 to $2,141,292. He also argued that the taxpayer failed the (then) $5m maximum net asset value test as various assets and liabilities of connected entities were not properly taken into account.

The Tribunal said the site agreement entered into between the taxpayer and each resident of the Park conferred on the resident a right to exclusive possession of the site and thus amounted to a lease. Accordingly, the main use of the Park was to "derive rent" (per para 152-40(4)(e) of the 1997 Act). The Tribunal concluded that the Park was therefore not an "active asset" under Section 152-40 of the 1997 Act.

The Tribunal also concluded that the net value of the CGT assets of the taxpayer and its connected entities was more than $5.6m. Therefore, the taxpayer was unable to satisfy the test in Section 152-15 of the 1997 Act. Before the Tribunal, the Commissioner contended that the taxpayer failed to take reasonable care only with respect to the net assets test (and not with respect to the active assets test), and the Tribunal decided a penalty of
25% was warranted for failing to take "reasonable care" in respect of the maximum net asset value test. The Tribunal did so on the basis that there was a failure to give adequate attention to the terms of the legislation and relevant factual matters in submitting returns on the basis that the maximum net asset value test had been satisfied