The Federal Court has dismissed the appeal of a taxpayer who claimed that the capital proceeds it was entitled to receive for the sale of its publishing business was less than the $4.1m assessed to it by the Commissioner.
The taxpayer broadly argued that the effect of a “payment by direction” mechanism, whereby a related party of the taxpayer was required to pay the capital proceeds to the taxpayer, meant that the capital proceeds it was “entitled to receive” pursuant to s 116-20(1) of the ITAA 1997 was something less than the $4.1m as set out in the “Asset Sale Agreement”.
However, the Court held that the “payment by direction” of the capital proceeds to the taxpayer did not have the effect of changing or extinguishing the entitlement of the taxpayer to receive an amount of money in the sum of $4.1m in respect of the disposal of the assets, and that this entitlement to the sum of money arose directly pursuant to the Asset Sale Agreement. The Court also noted that the “payment by direction” order explicitly stated that the amount was to be paid by the related party to the taxpayer and that, as a result, the taxpayer remained at all times entitled to receive the amount of money.
The Court also dismissed the taxpayer’s argument that it and the related party were not dealing with each other at arm’s length and that therefore the market value substitution rule applied to impose capital proceeds of less than $4.1m. Instead, the Court found that the evidence indicated the parties acted in their own interests and severally and independently in forming their bargain.
(Quality Publications Australia Pty Limited v FCT [2012] FCA 256, Federal Court, Edmonds J, 28 March 2012).
[LTN 57, 2/4]
[2012] FCA 256 – Scope Note
INCOME TAX – Part 3-1 Income Tax Assessment Act 1997 (Cth): Capital Gains and Losses – CGT Event A1: Disposal of a CGT asset (s 104-10) – cost base of assets under Division 110 – capital proceeds under Division 116 – whether general rule (a) in s 116-20(1) applied – whether money received or entitled to be received in respect of event happening – or whether general rule (b) in s 116-20(1) applied – whether receivable received in respect of event happening and, if so, the market value of that receivable – alternatively whether market value substitution rule in s 116-30(2)(b)(i) applied – whether taxpayer and acquiring entity were dealing with each other at arm’s length in connection with the event
Held:General rule (a) in s 116-20(1) applied; assessment of income tax not shown to be excessive.