The Federal Court has dismissed 2 taxpayers’ appeals and held that income they received as beneficiaries of a number of trusts was income according to ordinary concepts and not gains of a capital nature.
This was a factually complex case. The taxpayers were beneficiaries of a number of trusts of which Toorak Management Pty Limited (Toorak) was the trustee. They acquired properties in the Canberra suburb of Melba which they subsequently leased. They also acquired several properties in a joint venture arrangement with others in Mitchell and Hume in the ACT. The Melba and Hume properties, and one at Mitchell, were later sold.
The taxpayers had appealed against the Commissioner’s decision refusing to uphold objections to income tax assessments issued to each of them in respect of the 2006 and 2007 financial years. The appeals give rise to 2 main issues:
- whether profit derived by Toorak as a result of the sale of property (shops) at Melba in the ACT was income according to ordinary concepts or gains of a capital nature. The Commissioner assessed the taxpayers on the basis that the profit was income according to ordinary concepts. The taxpayers contended that the property was acquired by Toorak as a long-term investment, and that the profit arising as a result of the sale of the property was of a capital nature;
- whether profit made by a company called Dimensional Developments Pty Limited (Dimensional Developments), formed to act as manger of a joint venture that was established as trustee for Toorak and another trust, upon a sale of land at Hume was income according to ordinary concepts or a gain of a capital nature. Again, the Commissioner assessed the taxpayers on the basis that the profit was income according to ordinary concepts. The taxpayers maintained that the property at Hume was acquired as a long-term investment and that the profit arising as a result of the sale was of a capital nature.
After considering at length the evidence and issues involved, the Federal Court said it was not satisfied that the Melba shops were acquired as long-term investments. Rather, the Court considered it more likely than not that they were acquired by Toorak as part of a profit-making scheme with the principal intention that they be developed, tenanted and sold for a profit.
Similarly, the Court said it was not satisfied that Hume was acquired as a long-term investment. Rather, its view was that Hume was acquired for profit-making purposes. In particular, the Court said it was satisfied that the Hume property was acquired so that the land could be developed and sold for a profit, or developed, leased and sold for a profit. Either way, the Court said the purpose to make a profit from the sale of Hume, which it was satisfied existed at the time of acquisition, “was a substantial one”.
(August v FCT [2012] FCA 682, Federal Court, Nicholas J, 28 June 2012; Corrigendum dated 3 July 2012.)
[LTN 126, 3/7]
Taxpayer appeals to Full Federal Court
The taxpayers have appealed to the Full Federal Court against the decision of Nicholas J in August v FCT [2012] FCA 682. The Federal Court had dismissed husband and wife taxpayers’ appeals and held that income they received as beneficiaries of a number of trusts was income according to ordinary concepts and not gains of a capital nature. The income arose from the sale of properties.
[LTN 142, 25/7]