AAT Rejects Commissioner’s Amended Assessments: A Win for the Moloney Trust
The Administrative Appeals Tribunal (AAT) has overturned the amended assessments issued by the Commissioner of Taxation, who had applied the market value substitution rule in section 116-30 of the Income Tax Assessment Act 1997 (ITAA 1997). This rule was used to significantly increase the valuation of shares in a share sale agreement involving the Moloney Trust. Despite claims that the parties did not deal at arm's length, the AAT sided with the taxpayers, accepting their expert witness's valuation of the business. This decision allowed the Moloney Trust to satisfy the maximum net asset value test, ensuring small business concessions were applicable.
Case Overview
The case centered around the Moloney Trust, a discretionary family trust that operated a bulk haulage freight business, Mt Noorat Freighters (MNF), in western Victoria from 1996 to 2015. Key figures in the trust were Raymond and Anthony, who also held shares in JG Moloney & Co (Noorat) Pty Ltd (JGM), the trustee company.
Starting in 2014, the business underwent restructuring. The steps included:
- June 2014: Registration of Mt Noorat Freighters Pty Ltd, with Raymond and Anthony as directors.
- March 2015: The initiation of a contract where JGM, as trustee of the Moloney Trust, sold the MNF business to JGM in its own right for $3.5 million. On the same day, JGM sold its shares to Mt Noorat Freighters Holdings Pty Ltd for the same amount.
- March 2015: Raymond and Anthony replaced JGM as trustees of the Moloney Trust.
- June 2015: Distribution of the trust’s net income and capital gains to the beneficiaries, after applying CGT discounts and small business concessions.
The Moloney Trust declared a net income of $1,287,955 in its 2015 tax return, distributing $321,989 to each taxpayer. However, following an audit, the Commissioner challenged the entitlement to small business concessions and recalculated the market value of the shares sold, setting it at $10,640,000. This adjustment dramatically increased each taxpayer's assessable income by $872,185.
The Dispute
The taxpayers contested the amended assessments, leading to a review by the AAT. The two critical issues were:
- Application of the Market Value Substitution Rule: The Commissioner used the market value substitution rule, arguing that the parties did not deal at arm's length, thus justifying a higher valuation of the shares.
- Eligibility for Small Business Concessions: The taxpayers needed to prove that the net asset value of the trust's CGT assets did not exceed $6 million before the share sale agreement.
AAT's Decision
The AAT found that while related parties may deal at arm's length, this was not the case here. The expert valuation provided by the taxpayers was deemed more realistic and aligned with the business's economic and commercial context. The AAT agreed with the taxpayers’ expert, PKF, who had a more grounded approach to valuing the MNF business, considering its cyclical nature and sector-specific factors.
The valuation differences were mainly due to the interpretation of the business's economic conditions and maintainable EBITDA. The AAT favored PKF’s higher capitalisation multiple of 4.25, resulting in a business valuation of approximately $7,012,500. Deducting liabilities and adding the connected entities' CGT assets led to a total value well below the $6 million threshold, confirming the eligibility for small business concessions.
Implications
This ruling emphasises the importance of robust, independent valuations in tax matters, especially when transactions occur within connected parties. The decision highlights that even if the parties are related, the essence of the dealings and the quality of the evidence can tilt the balance in favor of the taxpayer. The AAT's rejection of the Commissioner’s inflated valuation provides a precedent for similar cases, reinforcing the necessity for a realistic and comprehensive approach to business valuation in tax assessments.
Source: Moloney & Ors v FC of T 2024 ATC ¶10-726; [2024] AATA 1483, 7 June 2024.
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