The Administrative Appeals Tribunal (AAT) has confirmed that a company that was a partner in a shopping centre development business was not entitled to deductions for carried-forward losses of over $25 million incurred from carrying out those activities in the 1990 to 1995 income years. The AAT found that the company did not satisfy the relevant "continuity of ownership" and "same business" tests that applied in relation to the 1996 to 2003 income years, when it sought to recoup the losses.

Background

The taxpayer company was part of a complex family corporate structure that included interposed trusts and subsidiary companies. In the 1990 to 1995 income years, it was a 50% partner in a shopping centre development business. However, by the time the development was completed, the combination of increasing interest rates, overruns in development costs and the receipt of lower-than-expected rental income meant the company was in a difficult financial position. A receiver and manager was appointed to the partnership and the company went into administration. The taxpayer later claimed a deduction for carried-forward losses of $25 million from the venture, which it sought to recoup in the 1996 to 2003 income years.

The issue for the AAT's consideration was whether the taxpayer satisfied the "continuity of ownership" test that applied for the 1996 and 1997 income years, the 1998 and 1999 income years and the 2000 to 2003 income years in order to be entitled to a deduction for the carried-forward losses. Alternatively, the taxpayer was required to satisfy the "same business" test that applied for the relevant years.

For the 1996 and 1997 income years, the continuity of ownership test under s 80A of the Income Tax Assessment Act 1936 (ITAA 1936) required the same persons to beneficially own more than 50% shareholding in the company in both the year the loss was incurred and the year it was sought to be recouped. For the 1998 and 1999 income years, the test under ss 165-12 and 165-165 of the Income Tax Assessment Act 1997 (ITAA 1997) required the same persons to beneficially own more than 50% shareholding in the company in the both the year the loss was incurred and the year it was sought to be recouped, as well as during any intervening period. For the 2000 to 2003 income years this test (under amended ss 165-12 and 165-165) applied in the same manner, but with the additional requirement that the exact same interests must be owned by the same persons over the relevant period.

Decision

In confirming that the taxpayer had not discharged the burden of proving it had satisfied the "continuity of ownership" test or the "same business" test for the years in question, the AAT first found that, for the 2000 to 2003 income years, the requirements in amended s 165-12 and s 165-165 were clearly not met because interests held by the relevant shareholders during the loss years were fundamentally different from interests they held in the 2000 to 2003 income years. The AAT also took into account the lack of specific records about the shareholdings at the relevant times, and noted gaps in the documentation and other evidence. At the same time, the AAT dismissed the taxpayer's claims that the amendments to ss 165-12 and 165-165 did not apply to the years in question, because the legislation clearly stated they were to apply to income years ending after 21 September 1999.

Likewise, the AAT found that the continuity of ownership test applicable for the other years (the 1996 to 1997 years and the 1998 to 1999 years) had not been satisfied either for similar reasons.

The AAT noted the taxpayer's concern that the burden of proof it bore in the circumstances placed "a weight upon the taxpayer similar to that placed upon Atlas, who carried the whole weight of the heavens as well as the globe of the earth upon his shoulders". However, the AAT said this does "not excuse a taxpayer from the obligation to make good its case on some satisfactory basis other than speculation, guesswork or corner-cutting". The AAT further noted that "even allowing for the fact that the first claimed loss year (1990) is now over a quarter of a century ago, it is surely not unreasonable to expect that a case put forward in support of tax losses of almost $5 million should be supported by more than assertions and broad-brush submissions" – especially considering the taxpayer was part of a large, sophisticated corporate group that would be expected to keep proper accounting and corporate records.

The AAT then found that the taxpayer had not met the requirements of the "same business" test as it variously applied to the years in question. The Tribunal noted that the company's originally stated objective in the loss years was "investment in shopping centre and building construction", but by the time of the recoupment years its stated objective was "investment in units in a trust", with no element of property development. Furthermore, from the time the shopping centre was sold in 1993, there was no evidence of business activity being carried on until some three years later, when the taxpayer began to invest in a number of service stations to be leased to a major oil company and from which it derived rent.

Finally, the AAT found that the shortfall penalties the Commissioner of Taxation had imposed for "intentional disregard of the law" should be reduced to penalties for "recklessness", although it agreed to retaining various uplift components. The Tribunal noted an anomaly in the penalty calculation in these circumstances which resulted in a 100% increase in the uplift factor for certain years, but left this matter for the Commissioner to address when recalculating the penalties.

Re RGGW and FCT [2017] AATA 238, AAT, File Nos: 2015/4095-4102, Frost DP, 20 February 2017, http://www.austlii.edu.au/au/cases/cth/AATA/2017/238.html.