The Full Federal Court has unanimously dismissed the taxpayer’s appeal from Healey v FCT [2012] FCA 269. In that case, the taxpayer, a beneficiary of a trust, was held to be assessable on a capital gain of $14m that arose from the sale of shares by the trust for $17m (which had previously been agreed to be “transferred” to the trust under an arrangement entered into 19 months earlier for consideration of $3m). In doing so, the Court at first instance ruled that the taxpayer was not entitled to the CGT 50% discount as the trust had acquired the shares within 12 months of their sale under the “acquisition” rules that apply to CGT event E2 on the transfer of an asset to a trust (and were in fact sold on the same day they were acquired by the trust). The Court at first instance also dismissed the taxpayer’s claim that, as the trust and the party from whom it acquired the shares were not dealing with each other at arm’s length, the market value substitution rules applied to impose a market value cost base for the shares of $17m (and not $3m), thereby negating any capital gain made on their sale.
On appeal, the taxpayer only challenged the dismissal of her argument that the trust and the party from whom it acquired the shares were not dealing at arm’s length. In unanimously dismissing this argument, the Full Federal Court held that the taxpayer had not discharged the onus of proving that the trust and the party from whom the shares were acquired were not dealing at arm’s length. In arriving at this decision, the Full Court emphasised that evidence could have readily been called to establish the nature of the dealings between the trust and the other party in respect of the share transfer, but wasn’t. (This evidence included, among other things, why the trust entered into an on-sale agreement before it actually acquired the shares and why the shares increased so markedly in value in just over 19 months.)
As a result, the Full Court concluded that “the paucity and the unsatisfactory nature of the evidence simply [did] not allow any inference to be drawn that the parties were not dealing at arm’s length”. At the same time, while unnecessary to decide the matter, the Court also held that the taxpayer had not established what the market value of the shares would in fact have been on the day the trust acquired the shares.
(Healey v FCT [2012] FCAFC 194, Full Federal Court, Lander, Siopis and Gilmour JJ, 21 December 2012.)
[LTN 6, 10/1/13]