Background to GYBW’s case
The facts and circumstances in GYBW’s case are as follows:
- The taxpayer, GYBW Pty Ltd, was the corporate trustee of an SMSF (‘the SMSF’). The members of the fund were Mr D (an accountant) and his wife (Mrs D). The directors of the fund trustee were Mr and Mrs D.
- In mid-2006, Mr K (an individual that was not a family relation of either Mr or Mrs D) commenced a service business with three other parties, initially operating through a partnership of discretionary trusts. The business carried out work for the Department of Defence in relation to the servicing, repair and overhaul of a helicopter landing system on a class of Australian Navy ships.
- Mr K had limited financial skills or training. Mr D, through the accountancy practice of which he was a partner, provided accounting services to the business.
- In mid-2010, following periods where shortages of work occurred, the relationship between the business partners broke down. In October 2010, Mr K bought the other three parties out of the business. Mr K’s evidence was that he regarded the value of the business to be nil and he considered payments made to the former partners to be more in the nature of recognition of the unpaid overtime they had worked.
Following the buyout, the underlying business commenced to be carried on by Mr K’s family trust (‘TK Trust’). In the part-year 16 October 2010 to 30 June 2011, the TK Trust had a turnover of $4.58 million and a profit of $1.94 million. The business subsequently commenced being carried on by another company (‘BE Pty Ltd’).