The CGT provisions provide small business owners with concessions in relation to capital gains made on the disposal of certain assets which may lead to no tax being payable on those capital gains.

One of the alternative tests for the availability of the concessions is that the taxpayer must satisfy the maximum net asset value test. In working out the maximum net asset value of the assets of a taxpayer, you deduct the taxpayer’s liabilities relating to those assets (amongst other things) from the sum of the market value of those assets.

The question of what liabilities are related to an asset for the purpose of these provisions has recently been considered by the Full Court of the Federal Court.

At the time of the events in this case, the maximum net asset value test threshold was $5 million (it is currently $6 million). In determining a liability of the taxpayer for the purposes of determining the net value of the CGT assets of the taxpayer, it is necessary to establish whether the contended liability is a liability of the taxpayer just before the CGT event. The critical date for the CGT event is the date of the contract for the disposal and not completion of that contract.

This issue was critical in this case because the taxpayer was either above or below the threshold depending upon whether or not certain liabilities could be deducted from the market value of those assets.

The taxpayer in this case worked out their maximum net asset value by deducting the agent’s commission and certain legal and accounting fees related to the sale of assets from the market value of the assets. Although such expenditure clearly could be taken into account in working out the capital gain or capital loss arising from the disposal, the issue was whether or not they could be deducted as a liability of the taxpayer just before the disposal.

Due to its quantum, the critical expense was the agent’s commission. However in relation to this commission, no obligation arose for the taxpayer to pay that commission until the sale completed which of course was not just before the CGT event. There was some conjecture on the Bench as to the whether or not the liability for the commission could then have arisen just before the CGT event.

However Justice Greenwood (within whom Justice Dowsett concurred) held that “the liabilities of the entity”, not being a defined term, must bear its broad understanding. Therefore that expression included contingent liabilities such as the kind of burdens arising out of performance of a contract pre-dating the CGT disposal event over a reasonably lengthy time. The agency agreement which pre-dated the CGT event involved a provisional obligation on the taxpayer to pay a commission subject to certain events being satisfied, including the agent being the effective cause of the sale.

Therefore the agent’s commission could be included in the liabilities to be deducted from the market value of the assets of the taxpayer.

In relation to the legal fees incurred on the asset sale, some of these involved work after the CGT event and therefore this part of the fees were not allowed to be deducted in calculating the net asset value.