New ATO draft ruling on company tax residence – TR 2017/D2

The following article originally appeared on the A&A/FTI Tax website:


On 15 March 2017, the Commissioner of Taxation released Draft Taxation Ruling TR 2017/D2 and withdrew Taxation Ruling 2004/15. These moves came in response to the High Court’s 2016 decision in Bywater Investments.[1] This decision, and the tax rulings, concerned the residence of companies not incorporated in Australia.

Under s 6(1) ITAA 1936 a company, not incorporated in Australia, is resident if it carries on business in Australia and has either its central management and control in Australia or its voting power controlled by Australian resident shareholders.

Bywater Investments

Bywater concerned a foreign-incorporated company that held meetings of its Board of Directors outside of Australia. The taxpayer argued that the court was bound to find that central management and control (CM&C) was exercised abroad. The High Court rejected this approach and held that the location of CM&C of a company was not to be determined by its formal structure, but was rather a question of fact.

The Court found that, as a matter of fact, the real business of the appellant was conducted by an individual from Sydney (Mr Vander Gould), without the involvement of the foreign directors. The directors had abrogated their decision making in favour of Mr Gould and only met to rubber-stamp decisions made by him in Australia.

The situation in Bywater was contrasted with that in Esquire Nominees[2]. In Esquire, a firm of Australian accountants exerted significant influence over the directors. Nevertheless, it was found that CM&C was exercised by the directors, as they would not have acted on the accountants’ instructions had these instructions been improper or inadvisable.

TR 2017/D12 – Income Tax: Foreign Incorporated Companies: Central Management and Control test of residency

This ruling sets out the Commissioner’s preliminary but considered view on how to apply the CM&C test of company residency, following the Bywater decision.

The ruling states that;

“If a company has its central management and control in Australia, and it carries on business, it will carry on business in Australia within the meaning of the central management and control test of residency. It is not necessary for any part of the actual trading or investment operations from which its profits are made to take place in Australia.”

Authority for this proposition can be found in Malayan Shipping.[3]

This position represents a significant change from the view expressed in TR 2004/15 which was that other acts of carrying on a business generally need to exist before the CM&C test is satisfied. TR 2004/15 had argued that only where a company’s business is management of its investment assets and where it undertakes only minor operational activities, will both tests (carrying on a business and CM&C) be satisfied by the same set of facts.

Like TR 2004/15, the draft ruling states that CM&C involves the making of high-level decisions that set the company’s general policies, and determine the direction of its operations and the type of transactions it will enter. This is to be contrasted with day-to-day conduct and management of operational activities. The new ruling adds, in a reference to Bywater, that decision making involves active consideration and does not include the mere implementation of, or rubberstamping of decisions made by others.

Previously, the Commissioner’s view was that CM&C is usually exercised by the company’s board and therefore the place where the board meets is highly relevant in determining where CM&C is located. The new ruling however downgrades the actions of directors to a “useful starting point” and states that “there is no presumption that the directors exercise central management and control unless proved otherwise”. All relevant facts must be considered.

It follows that mere legal power or authority to manage a company is not sufficient to establish exercise of CM&C, particularly where this authority is not used. Furthermore, legal authority is not necessary for a person to exercise CM&C – if an outsider dictates or controls the decisions made by the directors, the outsider will exercise CM&C of the company. The key questions are whether the people with formal decision-making authority actively consider whether to do what they are told or advised to do and make a decision in the best interests of the company and whether they would refuse to follow advice or directions that are improper or inadvisable.

Practical considerations

A common issue is how much influence/control an Australian parent can have over an overseas subsidiary before that subsidiary becomes a resident. To demonstrate that the parent is merely influential and does not itself exercise CM&C, it may be advisable that;

  • The directors of the company have the required skills, experience and qualifications to perform their duties and sufficient knowledge of the business to make informed decisions;
  • The directors actively consider all information and advice before making decisions in the best interests of the company;
  • The directors meet frequently enough to actually exercise CM&C. Ideally these meetings would take place outside of Australia; and
  • Board minutes record, not only what decisions were made, but why the directors made them to evidence that decisions were actually made at the meetings.

The ruling, when finalised, is proposed to apply from 15 March 2017.

[1] Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589

[2] Esquire Nominees Ltd v. FCT [1973] 129 CLR 177

[3] Malayan Shipping Co Ltd v Federal Commissioner of Taxation [1946] 71 CLR 156


2017-18 Federal Budget – Tax Measures Affecting Property


Treasurer Scott Morrison handed down the 2017-18 Federal Budget on 9 May 2017. Many of the announced measures impact investment in Australia’s property market. These measures are broad-ranging and may apply to both residents and non-residents, younger- and older-Australians alike.


Foreign resident capital gains withholding regime


Date of application: 1 July 2017


The foreign resident capital gains withholding regime is to be extended;

  • Currently, the regime applies to Australian real property and related interests valued at $2m or more. This threshold will be reduced to $750,000
  • Currently, the standard withholding rate is 10%. This will be increased to 12.5%


First home buyers accessing their super


Date of application: 1 July 2017


Individuals will be able to make voluntary contributions into superannuation of up to $15,000 per year and $30,000 in total. These contributions are to be used for a first home deposit.


These contributions must be made within an individual’s existing contributions caps. The total concessional contributions that an individual may make in 2017-18 is $25,000.


Concessional contributions will be taxed at 15%, along with associated deemed earnings. Upon withdrawal, concessional contributions will be taxable at the member’s marginal tax rate, less a 30% tax offset.


The ATO will be responsible for ensuring that people purchase their first home after they withdraw from superannuation.


Over 65s may contribute proceeds from downsizing into super


Date of application: 1 July 2018


A person aged 65 or older will be able to make a non-concessional contribution of up to $300,000 from the proceeds of selling their principal residence. The residence must have been owned by the individual as their main residence for 10 years or more.


This contribution;

  • Is excluded from the $1.6m balance test for making non-concessional contributions
  • Is exempt from the age and work tests


These contributions are available to both members of a couple for the same home.



Depreciation – rental properties


Date of application: 1 July 2017, though existing investments will be grandfathered


Under the current law, a purchaser of a residential property is able to allocate a portion of the purchase price to plant and equipment (broadly items that can be easily removed from a property, such as dishwashers and ceiling fans). The purchaser can then claim depreciation on the cost allocated to the plant and equipment.


From 1 July 2017, depreciation deductions on plant and equipment for owners of residential real estate will only be available to the party who incurred the cost, not to subsequent purchasers. The cost to subsequent purchasers will be reflected in the cost base of the property and therefore taken into taken into account for CGT purposes when the property is sold.


Where plant and equipment forms part of a residential property on 9 May 2017, the existing deduction rules will continue until the asset is sold or written off.


Rental property inspection expenses


Date of application: 1 July 2017


Travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed from 1 July 2017. However, taxpayers may continue to claim deductions for amounts paid to real estate agents or property managers to provide these services.


CGT main residence exemption


Date of application: 9 May 2017, but grandfathering provisions apply until 30 June 2019


Currently, foreign and temporary resident individuals are able to claim the main residence exemption from CGT. From 9 May 2017, they will no longer be able to access this exemption. However, properties already held by this date will be able claim the exemption until 30 June 2019


Vacant housing charge


Date of application: 9 May 2017


An annual charge will be imposed on foreign owners of residential property which is neither occupied nor generally available for rent for at least 6 months of the year.


The annual levy will be equivalent to the relevant foreign investment application fee imposed on the property when it was acquired by the foreign investor and will therefore be at least $5,000. A property costing between $1m and $2m will incur a charge of $10,000, while a property costing between $2m and $3m will incur a charge of $20,000.


The measure will apply to persons who make a foreign investment application for residential property from 9 May 2017.



CGT discount increased for affordable housing


Date of application 1 January 2018


A 60% (rather than 50%) CGT discount will apply for Australian resident individuals to gains on disposals of qualifying affordable housing.


To access the 60% discount;

  • The housing must be provided to low to moderate income tenants
  • The rent charged must be at a discount to the apparent market rate
  • The property must be held for a minimum of three years
  • The property must be managed by a registered community housing provider


The higher discount will be pro-rated for periods where the property is not used for affordable housing purposes.


Managed Investment Trusts – affordable housing


Date of application: 1 July 2017


Under current law, investments in residential property are not eligible for the Managed Investment Trust (MIT) tax concessions. However, from 1 July 2017, MITs will be able to acquire, construct or redevelop affordable housing.


To qualify for concessional tax treatment, the affordable housing must;

  • Be available for rent for at least 10 years
  • Be provided to low to moderate income tenants
  • Be rented at a discounted rate
  • Represent 80% or more of the MIT’s assessable income. The remaining funds must be derived from other eligible investment activities permitted under existing MIT rules.


Purchasers of new residential properties to remit GST


Date of application: 1 July 2018


Purchasers of newly constructed residential properties or new subdivisions will be required to remit the GST directly to the ATO as part of settlement of the property from 1 July 2018. Under current law, GST is included in the purchase price and the developer remits the GST to the ATO.


Purchasers who use conveyancing services should experience minimal impact from these changes.


Capping foreign ownership in new housing developments


Date of application: 9 May 2017


A new condition will be applied to New Dwelling Exemption Certificates where the application is made after 9 May 2017 – foreign ownership in the new housing development must not exceed 50%. These certificates allow the sale of new dwellings in a specified development to foreign residents without each foreign purchaser seeking their own foreign investment approval.

2017 FBT update

The following update originally appeared on the A&A/FTI tax website. It can be viewed


Fringe Benefits Tax Update

In Brief


>>                    Many FBT rates remain the same, while others rates and thresholds have changed, effective 1 April 2016. The FBT rate and gross-up rates will revert to their previous rates from 1 April 2017.


>>                           Since 1 April 2016, it has been easier for employers to provide work-related portable electronic devices to their employees without incurring an FBT liability. Employers are no longer required to consider the functions of these devices.


>>                           Important changes to salary packaged entertainment benefits apply from 1 April 2016. These changes affect how these benefits are valued and reported for payment summary purposes. A new cap has also been introduced for concessionally-taxed employers.


>>                           Effective from 1 April 2016, the government has restricted the methods available to value car expense payment fringe benefits. The one-third method will no longer be accepted.


>>                           The ATO has released guidance, clarifying the FBT treatment of various matters. These include customer loyalty programs, Uber travel and overpaid salary.




Key takeaway – Providing non-salary benefits to employees can be tax effective way of rewarding and retaining employees. However, the FBT rules are often highly complex. A&A Tax Legal Consulting can help you to comply with the laws and reduce your liability as much as possible.


With the end of the 2017 FBT year approaching and FBT returns due for lodgement on 25 June (and payment on 28 May) it is time to review some of the most significant areas of FBT change over the past year or so.

Key FBT rates and thresholds

The following rates and thresholds apply for the FBT year 1 April 2016 to 31 March 2017 (2017 FBT year):

FBT rate 49% (no change)
Type 1 gross-up rate 2.1463 (no change)
Type 2 gross-up rate 1.9608 (no change)
Gross up rate for payment summary purposes 1.9608 (no change)
Car parking threshold $8.48 (up from $8.37)
Motor vehicle (other than cars) cents per kilometre rates 0-2,500cc – 52c (up from 51c)

Over 2,500cc – 63c (up from 61c)

Motorcycles – 16c (up from 15c)

Statutory benchmark interest rate 5.65% (no change)
Capping of concessional FBT treatment for certain employers Public benevolent institutions and health promotion charities – FBT exemption capped at $31,177 (no change)

Public hospitals, non-profit hospitals and public ambulance services – FBT exemption capped at $17,667 (no change)

Rebatable employers (certain registered charities, non-government and non-profit organisations) – FBT rebate capped at $31,177 (no change)

Note: While the above caps have not changed, a separate $5,000 cap for salary packaged meal entertainment and entertainment facility leasing expenses has ben introduced, effective from 1 April 2016.

Reasonable food and drink amounts for employees living away from home in Australia One adult – $242 per week (up from $241)

Two adults – $363 per week (up from $362)


Changes that came in to effect on 1 April 2016 (i.e. the 2017 FBT year)

FBT exemption for work-related electronic devices

Since 1 April 2016 (i.e. the 2017 FBT year) small businesses (i.e. those with an aggregated turnover of less than $2m) have been able to more easily provide their employees with multiple portable electronic devices (for example a laptop, tablet or mobile phone) without incurring an FBT liability.

Before this change, an exemption was generally only available for the first of multiple portable electronic devices where they performed substantially identical functions. This restriction has been removed so small business employers no longer need to determine whether, for example, a tablet and laptop have sufficiently different functions for the exemption to apply.

Note that the requirement that these items be primarily for work-related purposes remains in place.

Salary packaged entertainment

Valuing Salary Packaged Entertainment

From 1 April 2016, all employers must value salary packaged meal entertainment and entertainment facility leasing expenses (entertainment benefits) under the actual method. It will no longer be permitted to use the 50-50 split or 12-week register methods. This change means that salary-packaged meal entertainment will generally be unable to access the minor benefits or business premises exemptions.

This changes does not apply to the valuation of non-salary packaged entertainment benefits.


Reportable Fringe Benefits

From 1 April 2016, all salary packaged entertainment benefits are reportable on an employee’s payment summary, if that employee’s reporting threshold is exceeded. This change does not apply to non-salary packaged entertainment benefits, which continue to be non-reportable.

$5,000 Entertainment Cap

By way of background, public benevolent institutions, health promotion charities and public and not-for-profit hospitals can provide their employees with benefits (up to a cap) without triggering any FBT liability. Furthermore, rebatable not-for-profit organisations (such as sporting clubs and trade unions) can provide their employees with benefits and (up to a cap) and receive a rebate that almost halves the FBT payable.

Prior to 1 April 2016, salary sacrificed entertainment benefits were excluded from the relevant cap. From 1 April 2016, however, entertainment benefits will be counted when calculating whether an employee exceeds their exemption or rebate cap. Where the relevant cap has been exceeded, the excess amount is reduced by the lesser of $5,000 and the grossed-up amount of salary packaged entertainment benefits.

This change does not apply to non-salary packaged entertainment benefits, which continue to be excluded from the caps.

Reimbursing car expenses

Where an employer pays or reimburses car expenses in respect of a car that the employee owns or leases a car expense payment benefit arises. The value of this benefit may be reduced to the extent that the employee could have obtained a ‘once-only’ tax deduction had they incurred the costs themselves. This is known as the ‘otherwise deductible’ amount.

From 1 April 2016, the one-third method for calculating the otherwise deductible amount has been removed. Employers must either apply the logbook method or the declaration method. This change follows changes to rules regarding claiming car expenses for individual taxpayers.

Large Car Fleets

From 1 April 2016, a concession was made available to certain employers who maintain a fleet of 20 or more cars. Such employers often find it difficult to obtain valid logbook data from all drivers. Where the employer has a valid logbook for at least 75% of the fleet, they are now permitted to calculate the average business use percentage of those logbooks and apply that percentage to the entire fleet. Previously employers would be required to apply the Statutory Formula Method to those cars without a valid logbook.

There are a number of conditions (in addition to the size of the fleet and the 75% requirement) that must be met before the concession is available. For example, the cars must have a value less than the luxury car threshold at the time of acquisition, the make and model must be chosen by the employer and the vehicles must be ‘tools of trade’. This last condition precludes cars provided under a salary sacrifice arrangement from accessing the concession.


Other Important Matters

Customer Loyalty Programs

The ATO has clarified the circumstances where an employee receiving benefits under a customer loyalty program (e.g. Frequent Flyer) is more likely to result in an FBT exposure for the employer. They have also indicated that this will be an area of increasing focus in coming years.

Broadly, a fringe benefit may arise where an employee accrues points in relation to business expenditure and later redeems these points for a flight or gift that is applied for personal use. The ATO has stated that the risk of FBT exposure is greater where the points accrued are in excess of 250,000 per annum, the employer participated in or facilitated the arrangement and/or there is no commercial purpose to the arrangement.

Workplace Travel Using Uber

An FBT exemption applies to taxi travel that begins or ends at the employee’s place of work. For the purposes of this exemption, taxi travel is defined as travel “in a motor vehicle that is licensed to operate as a taxi”.

The ATO has confirmed that travel that begins or ends at an employee’s place of work in an Uber will not qualify for the exemption since, at present, no state or territory has licensed Uber to operate as a taxi.

FBT Treatment of Overpaid Salary

The ATO has clarified when the payment of additional salary (for example due to an administrative error) may give rise to a fringe benefit. A loan fringe benefit would arise if the employee is given additional time to repay the excess salary. If this obligation is later waived, a debt waiver benefit may arise. A number of exemptions are potentially available, including where the taxable value of the benefit is less than $300.

ATO 2017 Audit Focus

The ATO have indicated that they will be focused on identifying taxpayers who have an obligation to lodge an FBT return but fail to do so. To that end they will be reviewing income tax returns for disclosures (e.g. motor vehicle expenses, contractor expenses, employee contributions and superannuation) that suggest a potential FBT exposure. The ATO may contact the taxpayer or their agents for further information.

The ATO will also be directing audit resources towards Living Away From Home Allowance benefits, as there is concern that some employers are not correctly implementing the changes that were introduced from 1 October 2012.

Changes to Key FBT Rates from 1 April 2017 (i.e. the 2018 FBT year)

FBT rate 47% (down from 49%)
Type 1 gross-up rate 2.0802 (down from 2.1463)
Type 2 gross-up rate 1.8868 (up from 1.9608)
Gross up rate for payment summary purposes 1.8868 (up from 1.9608)

These changes reflect the removal of the 2% Temporary Budget Repair Levy from 1 July 2017.

11 tips and traps for navigating the small business CGT concessions

The following article originally appeared in the June 2017 edition of The Taxpayer journal published by Taxpayers Australia (formerly Tax & Super Australia).



The small business CGT concessions are amongst Tax & Super Australia’s most popular helpline topics. Guest writer Simon Dorevitch from A&A Tax Legal Consulting gives some practitioner advice on getting it right and getting the most for your clients.

The small business reliefs in Division 152 of the ITAA97 are some of the most generous concessions contained in the tax acts. However, they can also be complex and confusing. This article provides practical advice on how to help your client satisfy the maximum net asset value, small business entity and active asset tests.

  1. It is never too early to formulate an escape plan

When setting up a structure for a new client, advisors should consider the effect of the proposed structure on potential exit strategies. The small business CGT concessions are one of the best exit strategies that exist and therefore, advisors should consider how their advice may impact their client’s ability to access and maximise the concessions in the future.

While all structures (companies, trusts, partnerships and sole traders) can access the small business CGT concessions, there are situations where a discretionary trust may receive greater advantages. For example, a company may find that it can reduce a capital gain via the small business 50% reduction, but not have sufficient franking credits to pass on this benefit to shareholders in a tax-effective manner. Similarly, a unit trust may access the concessions but find that some of the benefit is undone via the application of CGT event E4 (unit trust makes a non-assessable payment).

Naturally the small business CGT concessions are only one factor that should be considered. A client that intends to conduct research and development activities may not appreciate an advisor who guides them towards a trust, only to find that the R&D tax incentive is only available to companies.

  1. Don’t just ‘set and forget’

It is important to continually monitor developments in the law as well as decisions of the courts and AAT and guidance issued by the Commissioner for any changes which may affect your client. This is especially true of the small business CGT concessions, which are the subject of frequent changes in law and interpretation.

Thought should also be given to triggering a CGT event (for example via a sale to an associate) when a client is on the verge of no longer satisfying the $6m maximum net asset value test. While this plan may incur costs (such as stamp duty) and may require making a payment into superannuation, it would provide an uplift in the cost base of the relevant assets – thereby creating a tax saving on the ultimate sale to a third party. It is necessary to monitor the client in order to identify the most appropriate time to take this action.

  1. Ask and you shall receive

There are numerous situations where, in order to correctly apply the small business CGT concessions, an advisor needs to gather historical information on a client. For example, satisfying the active asset test depends on the use of an asset over time, not only in the year of the CGT event. Additionally, a client’s ability to apply the small business retirement exemption will depend on whether it has been accessed before (and if so how much of the $500,000 lifetime limit remains).

An advisor may be approached by an existing business to act as their new accountants. As the new advisor, it would be wise to ask for more of the previous accountants than the prior year tax return and financial reports. It may be that these documents alone will not provide all the information needed to assess the new client’s eligibility for the small business CGT concessions when the time comes.


  1. Know what to count…

Satisfying the maximum net asset value test requires that the total of the net value of the taxpayer’s CGT assets, and the net value of the CGT assets of connected entities and affiliates (associated entities), does not exceed $6m. Net assets refers to the value of the assets after subtracting liabilities that are related to those assets and certain provisions.

A CGT asset is defined as any kind of property or a legal or equitable right that is not property. Depreciating assets and trading stock are both CGT assets. Do not exclude these assets merely because the profit on their disposal is taxed under a different regime. Similarly, while CGT assets acquired before 20 September 1985 may not attract CGT on disposal, they are still taken into account for the purpose of this test. The same is true of non-taxable Australian property held by non-resident taxpayers.

The provisions that may be deducted are exhaustively listed as provisions for annual leave, long service leave, unearned income and tax liabilities. Be careful not to overlook these provisions if they are not disclosed in the financial statements.

  1. …and know that what doesn’t count can matter a great deal

When applying the maximum net asset value test, certain assets may be disregarded. By maximising these exclusions, it may be possible to bring the aggregated net assets of a taxpayer and associated entities below $6m. This may be done, for example, by:purchasing or improving an excluded asset

maximising superannuation contributions, or

making a bona fide gift to a recipient who is not connected to the taxpayer.

An asset that is owned by an individual and is being used solely for the personal use and enjoyment of that individual or their affiliate is an excluded asset. A holiday home may be an example of such an asset, but vacant land on which an individual intends to construct a holiday home will not qualify.

The ATO’s view, as expressed in ATO ID 2011/37, is that the use of an asset over its entire ownership period should be considered – not only how the assets was being used at the time of the CGT event. The Commissioner believes that any non-personal use of an asset at any stage of its ownership period can render the asset ineligible to be disregarded. In its Altnot decision1, the AAT found instead that one must look to what was happening in ‘the time surrounding’ the CGT event. The taxpayer argued that the director’s interest in a family holiday home was an excluded asset since, just before the relevant CGT event, it was being used for his personal use and enjoyment. The AAT ruled that, due to the home’s use as a rental property over the prior seven years, it was not being used solely for his personal use and enjoyment.

The ATO did take a more concessional approach in ATO ID 2011/40, where it determined that the personal use of an individual’s holiday house where rent was not paid, did not mean that the property was not an asset being used solely for the personal use and enjoyment of the individual or their affiliate.

An individual’s main residence is another example of an excluded asset, though it would not be fully excluded if the individual used it for income producing purposes, such that they could claim a deduction for interest during part of the part of the ownership period. A deduction for interest (if any were incurred) would be available if a part of the home were set aside exclusively as a place of business, was clearly identifiable as such and was not readily adaptable for private use. A doctor’s surgery located within a home is an example. Income producing use by an individual other than the owner would not prevent the dwelling to be excluded. Therefore, a doctor working from home may be well advised to ensure that their spouse owns the house outright.

  1. Raise those liabilities

As mentioned above, the net value of the CGT assets is determined in part by identifying the liabilities of the entity that are related to included CGT assets. Therefore, by maximising these liabilities, a taxpayer increases the likelihood of satisfying the maximum net asset value test. The courts have looked at this aspect of the test on multiple occasions.

In Byrne Hotels2, the court allowed the taxpayer to include some contingent liabilities. It ruled that the real estate agent commission incurred on a sale was an included liability just before the CGT event, even though the taxpayer was invoiced after the sale, and that it was contingent on the sale being completed. Similarly, legal fees issued after the sale could be taken into account, to the extent that they related to work done before the CGT event.

In Scanlon3, it was determined that the passing of a resolution by the Board of Directors cannot, by itself, create a legal or equitable liability. Unless there is an enforceable agreement binding the company, no liability arises. In this case, the directors passed a resolution that the company would pay an ETP to them in consequence of the termination of their employment (upon sale of shares in the company).

  1. Timing is everything

When it comes to the small business CGT concessions, it is important to get the timing right. This is particularly true is the context of the maximum net asset value test, which must be satisfied ‘just before the CGT event’. Great care, therefore, should be taken when entering into a Heads of Agreement or similar arrangement prior to the conclusion of the contract. In Confidential4, the AAT decided that CGT event A1 happened when a Heads of Agreement was executed, and not when the formal Contract of Sale was signed. This was despite the fact that it was common practice in the industry that a party who had signed a Heads of Agreement could back out at any time if dissatisfied with the results of their due diligence enquiry. The AAT said that “if the terms of the document indicate that the parties intended to be bound immediately, effect must be given to that intention”. It ruled that the parties had agreed to the sale in question and the essentials of this agreement were set out in the Heads of Agreement document. Accordingly, CGT event A1 occurred when the Heads of Agreement was signed and the maximum net asset value test was applied at this date.

In Scanlon5, shareholders signed a letter indicating their agreement to sell their shares. The letter stipulated a requirement of exclusive dealing between the parties and made reference to certain conditions precedent (including that the purchaser would undertake due diligence). The AAT found that CGT event A1 happened when the letter was signed, not when the ultimate contract was executed. The Tribunal emphasised that the issue depends on the intention of the parties as objectively ascertained from the relevant documents and that the existence of a condition precedent (such as a due diligence enquiry) will usually only be a condition precedent to the performance of the contract and not its making.

Getting the timing right will sometimes depend on correctly identifying the correct CGT event. The law says that, if more than one CGT applies to a transaction, taxpayers must apply the ‘most specific’ CGT event. In Healy6 the taxpayer argued that CGT event A1 applied. The Federal Court, however, ruled that event E2 (transfer of an asset to a trust) applied instead. This meant that the relevant CGT event occurred at an earlier time and the 50% CGT discount was not available.

  1. Do not assume that the sale price is the market value

The maximum net asset value test asks taxpayers to obtain a market value of relevant CGT assets. Market value is to be determined in accordance common law principals, chiefly the principals set out in Spencer v Commonwealth7.

In most cases, the market value of an asset will be the price agreed to by parties dealing at arm’s length. However, there are cases where the courts have found that market value and sale price have diverged. This may occur where a buyer is willing to pay more than an asset’s intrinsic value because it has a particular adaptability or usefulness to them (eg a parcel of land that a neighbour wanted to acquire).

Market value and sales price may also diverge in cases of aggregated disposals. In Miley8, the taxpayer was one of three equal shareholders who sold their shares to a single purchaser. The AAT agreed with Mr Miley’s argument that the amount he received included a premium for control of the company and found that the correct enquiry was directed towards determining the market value of Mr Miley’s shares alone.

Syttadel Holdings9 is another case that demonstrates that market value is not always equal to sales price – even where the parties deal at arm’s length. Though the taxpayer and ATO disagreed over the market value of a marina, both parties agreed that it was substantially less than the sale price.

Taxpayers who wish to argue that the proceeds from the sale of an asset are greater than its market value (for example to reduce the value of assets under the maximum net asset value test) should remember that they bear the onus of proof. It is not enough to merely find flaws in the ATO’s valuation. It would be wise to obtain the services of an independent professional valuer – preferably one with relevant experience in the asset being valued. Tax law is rife with examples of the courts failing to accept a valuation because the methodology was flawed10 so the valuer should clearly document the process they undertook and be prepared to justify it in a dispute.


  1. Consider taking some time off

If the maximum net asset value test cannot be satisfied, the small business entity test must be. In the context of the small business CGT concessions, this requires that the entity carry on a business and have an aggregated turnover (ie. including associated entities) that does not exceed $2m.

There is not a much that a business owner can practically do in order to satisfy the small business entity test. When selling a business, owners typically seek to maximise the sale price and therefore purposefully running down a business (e.g. by operating it part time) in order to cause turnover to drop below $2m is not usually an attractive option.

However, in limited circumstances, this course of action may produce the most optimal result. For example, where a business owns a parcel of land that has appreciated in value considerably – especially if it has owned it for 15 years or more.


  1. Don’t look back in anger

But do look back at an asset’s use over its relevant ownership period to determine whether it satisfies the active asset test. Unfortunately, some practitioners incorrectly assume that an asset that is currently active has always been so.

If the asset has been owned for less than 15 years, it must have been an active asset for at least half of the ownership period.

Once an asset has been active for 7.5 years, it will always satisfy the active asset test no matter how long the asset has been owned. From that point, if it ceases to be active for any reason, this will not prevent it from satisfying the active asset test.

Whether a share or unit is an active asset depends on the underlying assets. Broadly, they will be active if 80% or more of the market value of all assets of the company or trust are active or otherwise included. A share (rather than asset) sale is often preferable to the vendor, so disposing of any non-active assets (especially pre-CGT assets if possible) to enable the shares or units to get above this 80% threshold may be advisable.

  1. Sometimes being in business isn’t enough

Certain assets are specifically excluded from being an active asset. One such exclusion applies to assets whose main use by the taxpayer is to derive rent, unless the main use for deriving rent was only temporary.

There is a misconception among some advisers that this exception does not apply where the taxpayer carries on a business of leasing properties. The AAT has rejected this argument, stating clearly that it does not matter if the taxpayer is in the business of leasing properties or not.11

That is not to say that all income derived from allowing third parties to use property is considered ‘rent’ for the purposes of the exclusion. The AAT and the ATO have at various times previously ruled that income derived from a commercial storage facility, boarding house, holiday apartments12 and caravan park13 were not rent. However, it was found that payments for short stays in a holiday unit were rent.14 The key factor to consider is whether the occupier has a right to exclusive possession of the property.


1: Altnot v FCT [2013] AATA 140. Note that Altnot was appealed to the Federal Court but this aspect of the decision was not disputed.

2: Byrne Hotels Queensland [2011] FCAFC 127

3: Scanlon and FCT [2014] AATA 725

4: Confidential and FCT [2010] AATA 756

5:  Scanlon and FCT [2014] AATA 725

6: Healy v FCT [2012] FCA 269

7: Spencer v Commonwealth [1907] 5 CLR 418

8: Re Miley and FCT [2016] AATA 73. It is understood that this case will be appealed in the Federal Court.

9: Syttadel Holdings Pty Ltd and FCT [2011] AATA 589

10:       See, for example, Venturi v FCT [2011] AATA 588

11: Jakjoy Pty Ltd v FCT [2013] AATA 526

12: Tax Determination TD 2006/78

13: Tingari Village North Pty Ltd and Commissioner of Taxation [2010] AATA 233

14: Carson and Commissioner of Taxation [2008] AATA 156