The taxpayer was the beneficiary and trustee of a family trust
(ABFT), which was in turn the beneficiary of a unit trust (ETUT).
In July 2007 the ETUT sold its finance broking business for
$500,000. In its 2008 income tax return, the ETUT excluded the
capital gain from the sale of the business by applying the small
business CGT concessions.
However, the Commissioner sought to include loans of $2.3
million from the ABFT to the taxpayer. Inclusion of these loans
would have meant that the taxpayer did not qualify for the
concessions on the basis that the MNAV test was not satisfied. The
taxpayer contended that a loan of $1.14 million was statured-barred
from recovery at the time of the CGT event and should therefore
have been regarded as having nil value for the purposes of the MNAV
The AAT held that the signing by the taxpayer of the balance
sheets of the ABFT in the 2003 to 2008 income years was sufficient
acknowledgment in writing signed by him, as trustee of the ABFT,
that the loan was an asset of the ABFT. As such, it was not
statute-barred under s 35(a) of the Limitation of Actions Act 1936
(SA) (LAA). Therefore, the loan was properly included as an asset
of the ABFT in the financial accounts of that Trust in the 2008
income year and was a debt of the ABFT that was required to be
properly included in its net assets for the purposes of the MNAV
The Full Court confirmed the AAT decision, noting that:
any action by the ABFT against the taxpayer to recover the loan
would be an action to recover trust property, for which the LAA did
not prescribe a limitation period;
the 6 year limitation period in s 35(a) did not have the effect
of extinguishing a claim for repayment of a debt - s 35(a) barred
the remedy, not the cause of action; and
s 48 of the LLA empowered the courts to extend certain
limitation periods, including that fixed in s 35(a).
Consequently, taxpayers and their advisers should consider the
nature of, and ability to recover, debts owing to them by related
entities when these debts are disclosed in financial statements.
They should also consider the potential application of the
commercial debt forgiveness rules and / or Div 7A to their
circumstances when making any decisions as to whether to exclude
these debts from disclosure.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
ATO has released 2 draft fact sheets relating to the 2010 amendments to corporate law and tax in relation to dividends.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).