In RGGW and Commissioner of Taxation  AATA 238, the Administrative Appeals Tribunal (AAT) held that tax losses were not available to a corporate partner in a property development partnership due to poor evidence to support its claim for losses.
The taxpayer was a 50% partner in a partnership established to develop a shopping centre in suburban Sydney. As a result of poor economic performance, a receiver and manager was appointed to the partnership and the taxpayer was placed in administration. The taxpayer claimed that its share of tax losses incurred by the partnership during the years 1990 to 1995 was in excess of $25 million. As a consequence, during the years 1996 to 2003, the taxpayer lodged tax returns applying the partnership’s tax losses so the tax liability that would otherwise have arisen to the taxpayer in each of those years was extinguished.
The issues considered by the AAT were whether the taxpayer could access the tax losses through satisfaction of the continuity ownership test (COT), or alternatively, the same business test (SBT). When considering the changes to the COT and SBT over the relevant period, and the complex family group structure which the taxpayer was part of, the AAT found that neither tests could be satisfied. In summary, the AAT found that:
- for the income years 1996 and 1997, the requirement to satisfy the COT test was was for the same people to have the requisite level of beneficial ownership throughout the relevant income year as throughout the loss years (refer to former section 80A of the Income Tax Assessment Act 1936). Evidence, which included a share sale agreement dated December 1994, indicated that the position immediately before, and immediately after, the share sale agreement was substantially different to the position five and a half years earlier, when the 1990 financial years commenced.
- for the income years 1998 and 1999, the COT test required that the continuity ownership must be established not only for the loss year and the relevant income year but in all the intervening years as well (section 165-12 of the Income Tax Assessment Acr 1997 (ITAA97)). The AAT found that supporting documentation to substantiate the taxpayer’s contentions was “strikingly absent” and that a case put forward in support of such substantial tax losses “should be supported by more than assertions and broad-brush submissions”.
- for the income years 2000 to 2003, the COT test is also found in section 165-12 of the ITAA97, but subject to a requirement in section 165-165, which states that when tracing ownership from the loss year to the income year, interests cannot be taken into account unless they are ‘exactly the same interests and beneficially owned by the same persons’. For this period , satisfaction of the COT was promptly dismissed by the AAT, as interests held during the loss years were fundamentally different from interests held in any of the 2000 to 2003 income years.
- the taxpayer also failed to satisfy the SBT stated in section 165-13 of the ITAA 1997. Under this provision, a taxpayer satisfies the SBT if, throughout the SBT period (the income year in which the tax loss is to be claimed), the taxpayer carried on the same business as it carried in immediately before the SBT period. The AAT did not accept the taxpayer’s allegations that its pre-1996 business was a business of ‘investment’. The AAT understood that a more accurate characterisation of its pre-1996 business was a ‘business of property development’, whereas the post-1995 business was accurately described as ‘investing in units in a trust’.
When considering the different penalty regimes applying to the relevant years, the AAT held that the correct method of calculating the penalty was that the 80% reduction in relation to the taxpayer’s voluntary disclosure should be applied to the tax shortfall amount that included a 20% uplift. The 20% uplift was applied by the Commissioner for each of the 1997 to 2003 years because of the taxpayer’s recklessness as to the operation of taxation law.
The decision is an important reminder to taxpayers to ensure that relevant supporting documentation is in place when accessing tax losses.
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