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In Miley v FC of T, the AAT held that a taxpayer was not entitled to the small business CGT concessions on the sale of shares in a private company as the net value of the taxpayer’s assets for the purposes of the maximum net asset value (MNAV) test exceeded $6m.
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 just before the CGT event.
The Commissioner disagreed, having calculated the value of the taxpayer’s assets exceeded $6m. The dispute was about the appropriate valuation of the taxpayer’s shares in AJM.
At ﬁrst instance, the AAT decided in favour of the taxpayer, accepting that the value of the shares was the sale price less a discount. It agreed that an additional amount was paid by the arm’s length purchaser to secure control even though none of the shareholders could deliver control on their own prior to the contractual agreement.
On appeal, the Federal Court held that the AAT erred in considering that the market value of the taxpayer’s shares was not the sales proceeds received for them ($5.9 million), but the consideration received discounted for “lack of control” that a purchaser of the taxpayer’s shares in isolation would get. The Federal Court remitted the matter to be heard by a differently constituted AAT.
Back at the AAT, the taxpayer’s new argument was that the sales proceeds were received in respect of two different CGT assets, the shares themselves and the non-competition rights negotiated in the sale contract, valued at $1.671m. The taxpayer argued that as the non-competition rights were created by the sale contract, they could not logically exist “just before the CGT event” being the date or time the last party signed it.
As the purchase price of $5.9 million was paid for both the shares and the non-competition rights, the taxpayer argued the value of those rights should be deducted from the total value of $5.9 million and hence the taxpayer’s net CGT assets.
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.
The AAT held that the correct approach was to take the total purchase price and divide it by three, meaning the shares were valued at $5.9m. Accordingly, the net value of the taxpayer’s assets for the purposes of the MNAV test exceeded $6m and he was not entitled to the CGT concessions.
The AAT took the view that the pre contract value of the shares (as required by s 152-15) was imbued with the value of the non-competition rights immediately to be provided by the applicant on the forthcoming signing of the sale contract.
The AAT 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 in any event; 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. That commercial reality was explicitly acknowledged in the terms of the sale contract.
The AAT stated that “it follows the value of the shares just before their sale – the relevant point for assessing their value for the purposes of the asset test in Div 152 – was impacted by the terms of the deal that was formally struck immediately thereafter.”
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