Miley vs Commissioner of Taxation AAT [2016] 73

A popular aspect of the Australian taxation system is the ability of small business owners to substantially reduce capital gains tax (CGT) payable on the sale of their small business related assets. A key idea behind this tax concession is the view that long term small business owners typically invest all of their spare capital back into their business interests, leaving them with very little spare for retirement savings.  Division 152 of the ITAA 1997 is essentially a retirement payout for small business owners.

One condition of access to the CGT concessions is satisfying the '$6 million net assets test' - to stop citizens in possession of business assets worth $6m or more from accessing reduced capital gains.  The $6 million test was the sole subject of this case before the Administrative Appeals Tribunal (AAT).

Mr Miley sold his 1/3 share in a $17.7 million company for $5.9 million, being 1/3 of the $17.7 million sale price.  Unfortunately for him, a rental property (among other small assets) seems to have pushed Mr Miley over the $6 million threshold, hence the ATOs initial view was that he did not pass the test.

Section 152-15 titled "Maximum Net Asset Value Test" suggests that taxpayers pass the test if the market value of their assets immediately before the CGT event are worth $6 million or less.  The ATOs view is that the price paid for Miley's 1/3 share of this business being $5.9 million is the precise market value of those shares "immediately before the CGT event" (the CGT event being the sale of the shares in question...) - a reasonable proposition. 

Before proceeding, it is a good time to appreciate the intricacies of taxation law.

Mr Miley asked a valuation expert, Mr Halligan to value his 1/3 share in the business in question.  The valuation provided:

• "I adopt a discount for the relative lack of control of 16.7% for each company based on the following.
• All other things being equal, the average price per share of a controlling shareholding will be higher than the average price per share of a non-controlling shareholding because of the value of control.
• The value of control relates to the value in having the power to make decisions that affect the amount, timing, and risk of the cash flows from an investment in the equity of the company, whether listed or unlisted. Those decisions might, for example, affect the company’s strategic, operating, taxation, investment, and dividend payment policies." ¹

A16.7% discount reduces the market value of Mr Miley's sole 1/3 share, from $5.9 million to $4.9 million.  Allowing Mr Miley to easily pass the $6 million test.  So what did the tribunal member rule?

The Decision

"I think the correct enquiry is directed towards determining the market value of Mr Miley’s 100 shares alone – not as part of a package comprising the entire 300 shares in the Company.

I accept the opinion Mr Halligan expresses in [135] of his report: see [30] of these reasons. I find that the consideration that Mr Miley received for his shares, which formed part of the consideration paid by the Buyer for all the shares in the Company, is more than a hypothetical willing but not anxious purchaser would have paid if it had purchased Mr Miley’s shares alone – and that is the basis on which the market value of Mr Miley’s shares should be determined. Therefore, while the actual consideration received by Mr Miley should not be ignored as an indicator of the market value of his shares just before the time of the CGT event (Inez Investments: [26] of these reasons), it is not determinative of that market value.

The market value of Mr Miley’s shares, arrived at by reference to the correct enquiry, is $5,900,000 less 16.7% of that amount, for lack of control. That equates to $4,914,700."  ²

"The objection decisions are set aside. Instead Mr Miley’s objections are allowed in full."  ³

Notes

The case is here:  http://www.austlii.edu.au/au/cases/cth/AATA/2016/73.html#fn3

1.  (p30)

2.  (p34 - 36)

3.  (p39)