*Healey v FCT – Trust agreed to buy shares and took a transfer 18 months later just prior to on-selling –No CGT discount as E2 event more specific than A1 and market value cost base (at later E2 time) not established [C7]

The Federal Court has held that a beneficiary of a trust was assessable on a capital gain of $14m to which she was presently entitled that arose from the sale of shares the trust had previously acquired under a “transfer agreement” for consideration of $3m – albeit, the shares were only transferred to the trust at about the time of their later sale. At issue was whether the trust acquired the shares within 12 months of their later sale pursuant to the “Acquisition rules” in Div 109 of the ITAA 1997 for CGT event E2 (ie when they were “transferred” to the trust), in which case the 50% discount would not apply. This was opposed to the case that the shares were acquired 18 months before their sale pursuant to the acquisition rules that apply to CGT event A1 (ie when the contract for disposal was “made”) and that, therefore, the 50% discount applied.

In noting that there was no existing authority on the issue, and that the issue would have to be determined as a matter of statutory construction, the Federal Court found that the proper construction of the term “transfer” in CGT event E2 encompassed a “conveyance by way of sale” and that, furthermore, it was the more specific CGT event to apply in the circumstances and context of the provisions. Accordingly, it held that the shares had been sold by the trust within 12 months of their acquisition and that therefore the beneficiary was not entitled to the CGT 50% discount.

The Federal Court also dismissed the beneficiary’s alternative claim that because the trust and the parties from whom it acquired the shares were not dealing with each other at arm’s length, then the market value substitution rules should apply (which would give the shares a cost base equal to the amount they were sold for, thereby negating any capital gain). In dismissing this argument, the Court found that the taxpayer had not discharged the onus of proving that the parties were not dealing with each other at arm’s length.

(Healey v FCT [2012] FCA 269, Federal Court, McKerracher J, 23 March 2012.)

[LTN 59, 27/3]