[vc_row][vc_column][vc_column_text]In a recent Federal Court case, FC of T v Miley, the Court has held that a taxpayer was not entitled to the small business CGT concessions on the sale of shares in a private company. It found that the net value of the taxpayer’s assets for the purposes of the maximum net asset value (MNAV) test in Div 152 of ITAA 1997 exceeded $6m.

The Court disagreed with the taxpayer’s position that in determining the market value of the shares sold, the value attributable to restrictive covenants under the sale contract should be excluded.

Facts

The taxpayer was one of three equal shareholders in AJM Environmental Services Pty Ltd (AJM). The shareholders entered a sale contract to sell their shares to an arm’s length purchaser for $17.7m, with each shareholder receiving $5.9m.

The taxpayer claimed he was entitled to the CGT concessions because he satisfied the MNAV test in s 152-15 of ITAA 1997 as the value of his assets did not exceed $6m at the valuation date i.e. just before the CGT event. The Commissioner disagreed, having calculated the value of the taxpayer’s assets as exceeding $6m.

The taxpayer’s argument in this instance was that the sales proceeds were received in respect of two CGT assets, the shares themselves and the non-competition rights negotiated in the sale contract, valued at $1.671m.

The taxpayer argued that these non-competition rights did not exist “just before the CGT event” when the valuation for the MNAV test was to occur. Therefore, the value attributable to the rights did not form part of his assets for the purpose of the MNAV test. As such, the correct approach was to deduct this value from the sales proceeds and divide the remaining figure by three.

The Commissioner submitted that these restrictive covenants themselves had an impact on the value of the shares where a willing but not anxious buyer of a business like that owned by AJM –– a business depending on the contribution of individuals associated with the business or which required protection from subsequent competition provided by those individuals –– would naturally press to include restrictive covenants in the contract for sale. The existence of the rights, therefore, justified paying a higher price for the shares.

Decision

The Court agreed with the Commissioner that the restrictive covenants under the sale contract were integral to the taxpayer maximising the value of his share sale. It noted that without the covenants, he would have sold the shares for less. But without the sale, the covenants probably had no value; they were only valuable to a buyer in connection with the sale because they protected and preserved the goodwill which was embedded in the price paid for the shares.

The AAT found that the taxpayer knew he could enhance the value of his shares by agreeing to the restrictive covenants. Therefore, the value of the shares just before the CGT event was impacted by the terms of the deal formally struck after it.[/vc_column_text][mk_blockquote font_family=”none”]Care should be taken when entering into any sales contracts to determine availability of CGT concessions.[/mk_blockquote][vc_column_text]Need help?

Are you considering a potential sale of shares/business assets? Contact us to discuss the potential CGT implications and any planning opportunities that may be available.[/vc_column_text][/vc_column][/vc_row]