Coronica v FCT — latest Tribunal decision provides important tips regarding valuations and related-party acquisitions
Earlier today, the Administrative Appeals Tribunal (Tribunal) handed its decision in Coronica and Commissioner of Taxation (Taxation)  AATA 745. It resulted in the commissioner’s decision to make an SMSF non-complying being affirmed.
The decision is lengthy (103 pages) and covers many interesting issues. In this article, we focus on one particular issue: valuation of shares.
Mr Coronica was an accountant and tax agent. He started his accounting practice in 1970. His structure involved:
- an SMSF, and
- a related company.
Mr Coronica relied on a misinterpretation of the law to form the view that the SMSF could acquire the shares in the company from a related party. The commissioner submitted that in regard to Mr Coronica’s interpretation, Mr Coronica’s “explanation ‘beggars belief’ for ‘a tax agent of 50 years standing’.”
In 2009, the SMSF acquired the shares in the company for $100,000. However, the company’s retained profits were $410,169.02.
The commissioner took issue with (among other things) the $100,000 valuation.
Mr Coronica’s explanation regarding value
Mr Coronica attempted to explain the $100,000 valuation as follows.
The company’s retained profits were indeed $410,169.02. This appears to be the starting point. However, the company also had an unrealised loss of $162,000. If this loss is applied to the retained profits, then the retained profits decrease to $248,169.02.
Mr Coronica assumed that a purchaser would be on a marginal tax rate of 45 per cent. Mr Coronica stated that this meant the purchaser would be subject to a 15 per cent “top-up” tax of $37,225.35, calculated as 15 per cent of $248,169.02.
Mr Coronica went on to state, “[s]ubtracting the tax detriment away from the asset values above, I obtained net values for the company of $74,996.07 and $109,996.07”.
For those interested, Mr Coronica’s verbatim evidence in this regard is replicated in paragraph 81 of the Tribunal’s decision.
We do not consider in this article whether the calculation of the “tax detriment” is accurate or not. However, we do consider the Tribunal’s comments regarding “tax detriment” at a conceptual level.
The Tribunal noted that the SMSF was not a 45 per cent tax-paying entity, but rather “complying funds get a refund (credit) of tax as their tax rate is less than the franking credit attached to the dividend paid by the company”.
Therefore, the Tribunal found that:
In accordance with the definition of “market value”, “reasonable” willing buyers would not seek discounts for a non-existent future tax liability, especially when there are in fact valuable credits. To reinforce this, the definition requires an objective assessment of proper marketing of the asset, and the buyer and seller acting knowledgeably and prudently in relation to the sale.
Similarly, a well-informed “reasonable” vendor would never agree to giving a discount to a purchaser they knew would receive a future benefit, not a future impost allowed for in the discount. To the contrary, a well-informed vendor would have sought some arbitrage for the benefit of refundable franking credits being acquired. [Emphasis added]
There can be some very limited circumstances where SMSFs can acquire shares in related private companies, even from related parties. The ATO alluded to this in Taxpayer Alert TA 2012/7 where the ATO states “the general prohibition on SMSFs acquiring assets from a related party does not apply where the SMSF’s investment is in a unit trust which complies with those requirements [i.e. the requirements in div 13.3A of the Superannuation Industry (Supervision) Regulations 1994 (Cth)]”. Although these ATO comments mention a unit trust, they would equally apply to a company that complies with div 13.3A, acquired at market value etc.
If engaging in such a course of action, in valuing the shares, it appears that there is prudence in adjusting the value of the shares for any tax effect that the purchasing SMSF is likely to experience.
However, there is an important warning. Extreme care needs to be taken when acquiring any assets — particularly shares in private companies — from a related party.
Among other things, if the company is a “div 7A” corporate beneficiary, such an arrangement might constitute dividend stripping and thus should not occur. See Taxpayer Alert TA 2015/1.
Therefore, before engaging in such conduct, taxpayers should strongly consider prospective:
- detailed legal and tax advice,
- expert valuation advice, and
- ATO input by way of private ruling and SMSF-specific advice.
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
Tony Zhang is a journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.
Since joining the Momentum Media team in 2020, Tony has written for a range of its publications including Lawyers Weekly, Adviser Innovation, ifa and SMSF Adviser. He has been full-time on Accountants Daily since September 2021.