The AAT has confirmed that a taxpayer was not entitled to the CGT small business concession in respect of the gain he made on selling two $1 shares in a company for some $4.9m on the basis that he failed the maximum net asset value test. The issue to be determined by the AAT was whether the market value of a motel and caravan park that the company held through a chain of unit trusts met the (then) $5m threshold for the maximum net asset value test.

After indicating that the taxpayer bore the onus of establishing the market value, the AAT ultimately rejected the valuations supplied by the taxpayer (as opposed to the $11.9m calculated by the Commissioner) on a number of grounds, including the following.

First, although one of the taxpayer's valuation was said to have been made on a "going concern basis", there was no attempt to estimate future profits and the AAT said that a valuer choosing to undertake a valuation by reference to the "income generating potential" of a business must ascertain the income stream which the business may be expected to generate. As a result, the AAT said the valuation was worthless as it made no attempt to consider this matter.

Secondly, the valuations were not made "just before the CGT event" (ie, the sale of the shares) as required - but in one case some 17 months after time, while another valuation was not produced until years after the relevant event. Furthermore, the two valuations were prepared in accordance with an inspection which was according to the AAT "almost certainly, the same inspection for both valuations" and made in compliance with instructions to value the assets on a historical basis.

Thirdly, one valuation separated the properties while another combined them and at the same time failed to properly account for improvements. In this regard, the AAT found there was no valid reason why the two assets could not be valued separately.

For these reasons, the AAT found that the taxpayer's valuations were flawed and could not be accepted and that, as a result, the taxpayer had failed to discharge the onus which he bore. Furthermore, the AAT stated that it seemed the sale of the shares was undertaken with one end in mind, and that was to obtain the concession. It also noted that the taxpayer's accountant admitted that the sale price was calculated so as to obtain the small business concession.

Finally, the AAT noted that the taxpayer had probably incorrectly taken into account only half the value of the motel and caravan held by the final unit trust in the chain in view of the 50% holding in that unit trust. In this regard, the AAT said the effect of the legislation was that the full value of the unit trust's net assets must be taken into account in these circumstances.

AAT Case [2011] AATA 588, Re Venturi and FCT, AAT, Ref No 2010/1378, Block DP and Frost SM, 25 August 2011