Talking Tax – Issue 157

Decision in Paule & Ors v FCT appealed

The taxpayers in Paule & Ors v FCT [2019] FCA 394 have appealed to the Full Federal Court.

In this case, Justice Thawley in the Federal Court held that a capital gain made on the disposal of shares acquired through a sequence of roll-overs was not a discount capital gain, as the shares were not deemed to have been held for more than 12 months. This was due to the arguably defective operation of special timing of acquisition rules in Subdivision 115-A of the Income Tax Assessment Act 1997 (Cth) (1997 Act).

Given the anomalous result, which appears to be inconsistent with underlying policy intentions, it is somewhat surprising (and concerning) that the Commissioner chose to pursue this matter through to the Federal Court. This is compounded by the fact that the result arises due to retrospective legislative changes made in 2010 that did not apply at the time of the transaction (ie 2008).

Through a series of roll-overs, firstly under Subdivision 124-N of the 1997 Act, and two subsequent scrip for scrip roll-overs pursuant to Subdivision 124-M of the 1997 Act, the taxpayers each exchanged units they held in trusts for shares in Findex Australia Pty Ltd (Findex). The original interests had been held for more than 12 months.

The Federal Court held that:

  • as the shares in Findex were ultimately acquired under a Subdivision 124-M replacement asset rollover, section 115-34 of the 1997 Act did not apply to deem the shares to have been acquired at least 12 month earlier; and
  • as the Findex shares met the description in item 2 of section 115-30 of the 1997 Act, section 115-30 did not apply to deem the Findex shares to have been acquired earlier than 15 January 2008 (ie the time of the last roll-over).

The Federal Court noted that this was a somewhat ‘unpalatable’ result, stating that:

At least in broad terms, the underlying policy which the statute reveals is to allow discount capital gains where, as a matter of economic substance rather than legal form, the assets disposed of have been held by a taxpayer for at least 12 months. That is what occurred here. Viewed from this policy perspective, the Commissioner’s position with respect to the application of the provisions to these applicants might be thought to be harsh, albeit, on the conclusions I have reached, correct.

Small business ombudsman releases full report into ATO’s debt recovery practice

Following on from our initial coverage in Issue 152 of Talking Tax, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has now released a Report into the ATO’s enforcement of debt recovery against small businesses in circumstances where there is an Application for Review of a disputed matter before the Administrative Appeals Tribunal (AAT).

In the Report, the ASBFEO highlights that ATO debt recovery action must be proportionate and reasonable, given the distinct characteristics of most small businesses. The ASBFEO accepts the limitations of its Report, noting that there are currently no statistics available on what percentage of objections lodged with the ATO (7,792 in 2017/18) are subject to debt recovery.

The Report notes that small business are placed at a severe disadvantage when pitted against powerful Commonwealth agencies, when taking into account issues such as:

… cash flow, slow payments, access to finance and working capital, technological change, workforce management and personal circumstances (such as illness).

With this in mind, the ASBFEO Report concludes that strong debt recovery action by the ATO, such as garnishee notices which effectively freeze a small business’ bank account, can and do directly cause the failure of small businesses. In this respect, the ASBFEO reached three conclusions:

  • stronger debt recovery action by the ATO can kill small businesses in certain circumstances;
  • the ATO debt recovery action needs to be proportionate, fair and consistent; and
  • the ATO does not engage with small business in the same ways that it expects small business to engage.

In the Report, the ASBFEO makes several of recommendations, notably including that:

  • small businesses should be able to seek a stay order from the AAT against any ATO debt recovery action. This would require legislative amendment;
  • a Mareva injunction or caveat on property should be preferred to an issue of garnishee notice, which if necessary, should be subject to an appropriate form of external (judicial) oversight and approval; and
  • settlement deeds for disputed matters before the AAT between a taxpayer and the ATO should be included (with confidential information appropriately concealed) as written decisions published by the AAT, to enhance accountability, consistency and transparency.


Andrew O’Bryan

Andrew specialises in taxation law. He is a CPA Australia Fellow and Chairman of its Taxation Centre of Excellence.

Adam Dimac

Adam is an experienced tax lawyer, advising on a range of matters, including Division 7A, CGT and corporate restructuring.

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