May 2009

Tax update - land tax exemptions, capital gains concessions & deductible rent

In this bulletin we bring you a round up of recent taxation cases, news and developments.

NSW Land Tax – Primary Production Exemption Allowed
Reysson Pty Ltd v Chief Commissioner of State Rev.

The Appeal Panel of the NSW ADT has determined that the exemption from land tax in section 10(1)(p) of the Land Tax Management Act 1956 (NSW)) should apply to land used for the keeping of bees to produce honey for sale.

A beekeeper kept bees on the land producing approximately 35,000kgs of honey per year which resulted in income of approximately $80,000 per year.  The actual area of land on which the bees were kept was less that 0.4% of the total size of the land.

The Appeal Panel of the NSW ADT determined that, despite the small actual area of land on which the bees were kept, the whole of the land was used for the bee keeping activity. The Panel also noted that there was no statutory requirement that both, the bees be kept on the land and that the honey be produced on the land in order for the primary production exemption to apply.

This case demonstrates that the relevance of tax concessions and exemptions to client’s circumstances may not always be so obvious. In this case, what appeared to be the use of less than 1% of a parcel of land, entitled the owner to a complete exemption from land tax.

Small Business CGT Concessions – increased access
Tax Laws Amendment (2009 Measures No 2) Bill 2009

This Bill deals with a number of issues affecting the application of the small business CGT concessions. Key changes include providing access to the CGT concessions via the $2m turnover test for taxpayers:

  • who own CGT assets used in a business by the taxpayer's affiliate, or an entity connected with the taxpayer (subject to certain conditions); and
  • who are a partner (or partners) owning a CGT asset that is not an interest in an asset of the partnership provided the asset is made available for use in the partnership

There are of course certain conditions that must be met. Other key changes include:

  • treating CGT assets owned by a taxpayer as active assets where the taxpayer's spouse owns an entity that uses the CGT asset in its business; and
  • allowing an entity that operates a business and owns a CGT asset used in the business of another entity to access the small business concessions via the $2m turnover test.

These amendments will apply to the 2007-08 and later income years.

These amendments, when passed will provide greater scope for planning when considering ownership of business assets used in a small business.

Prepaid Rent not deductible
FCT v Star City Pty Limited

The full Federal Court has unanimously held that the taxpayer was not entitled to a deduction for the prepayment of rent of $120m to cover a 12 year period.

The taxpayer successfully bid for a casino licence offered by the NSW State Government, granted in December 1994. It was required to lease land, make an upfront payment of $253m for the licence plus $120m in prepaid rent covering the first 12 years.

The Commissioner argued the payment was not incurred in gaining or producing assessable income and was an outgoing of a capital nature incurred to secure the licence.

The Court found the prepayment was of a capital nature made to secure a licence and obtain the exclusive right to operate a casino. The Court explained that this was evidenced by the fact that the prepayment was not refundable if the lease was terminated and that the prepaid rent had no correlation with the remainder of the lease payments after the 12 year period as set out in the lease agreement.

At first instance, this case appears to be a substance over form decision. However, the referencing by the Full Federal Court to the terms of the agreement, illustrates that the terms of the agreement ultimately determined the taxation consequences that flowed from the transaction.

Loss Rules – Same Business Test
Lilyvale Hotel  Pty Ltd v FCT [2009] FCAFC 21

The Full Federal Court has unanimously allowed the taxpayer's appeal from the Federal Court decision in Lilyvale Hotel Pty Limited v FCT [2008]. It held that the taxpayer was entitled to recoup $10,579,458 in tax losses on the basis that the requirements of the Same Business Test as set out in sections 165-13 and 165-210 of the ITAA 1997 had been satisfied.

The taxpayer owns and operates the Shangri-La Hotel located in the Rocks, Sydney Harbour. In August 2002, all the shares in the taxpayer were acquired by Reco Harbour Grande Pty Ltd. 

The Commissioners argument was that the taxpayer company did not satisfy the "same business test" as it used a hotel management company to manage the daily operations of the hotel after the relevant change in ownership of the taxpayer company. 

The taxpayer argued that at all relevant times its business was to be that of the owner and operator of the hotel and it submitted uncontested evidence that the management agreement between the company and itself was disregarded in the conduct of the hotel business. In addition, the Court noted that the full audited financial accounts of the taxpayer for various income years did not indicate that the taxpayer derived revenue from any sources other than the operation of the hotel.

The Court accepted the taxpayers arguments in finding that the business carried on by the taxpayer was that of "owning and operating a hotel to derive revenue from its guests and profits from its operation" and it found that the fact the taxpayer used a management company to operate the business after the change in ownership did not mean it was carrying on a different business, thus satisfying the test.

Whilst the taxpayer was successful in its appeal to the Full Federal Court, the case highlights the significance of having a full appreciation of the taxation consequences that can flow from restructuring the operation and structure of a business or asset holding entity.