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.
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:
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 taxpayers contested the amended assessments, leading to a review by the AAT. The two critical issues were:
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.
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.