Commissioner of Taxation v Byrne Hotels Qld Pty Ltd: Commission and legal fees are liabilities “just before” the CGT event

The Full Court of the Federal Court has held that legal fees for completed work and a Real Estate Agent’s commission in selling property are liabilities incurred “just before” the CGT event for the purposes of s 152-20(1) of the Income Tax Assessment Act 1997 (Cth).

Byrne Hotels had tried to take advantage of the 50% CGT concession available to small businesses whose assets totalled below $5M. In calculating the maximum net asset value in s 152-15 of the Income Tax Assessment Act 1997, they had taken into account the legal and agent fees in the sale of the property giving rise to the CGT event.    

The Full Court of the Federal Court held that those legal fees which were payable just before the sale of property satisfied the definition of liability, because even though there was no obligation on Byrne Hotels to pay for the work at the relevant time, the invoices which were issued on a periodical basis stated that the amounts were payable within 7 days.  Thus, the inference was drawn that “that the retainer was not an entire contract but one under which the solicitors had an entitlement to charge and recover on the basis of work done”. (at 35)

However, legal work completed after the CGT event could not be considered a liability even though the Tribunal had found that the work was “closely connected to the sales of the Business and the Land” (at 71).

The majority also held that the real estate agent’s commission was a liability (at 122, with Justice Bennet disagreeing) .   

Despite this, recalculations of the assets meant that the Court ruled that relevant assets of the business were still over $5M and thus, remitted the matter back to tribunal.

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