The AAT has dismissed applications from husband and wife taxpayers and found that they were each assessable on dividends of some id=”mce_marker”.8m that they did not return in their assessable income.
In doing so, the AAT dismissed the taxpayers’ argument that the shares in a family company that gave rise to the dividend income had been transferred to a family partnership as initial capital and that as a result, they had not derived the dividend income themselves.
In particular, the AAT found that the relevant partnership agreements did not have the effect of transferring the ownership of the shares to the family partnership and that therefore the shares did not become partnership property. Instead, the AAT found that while the primary “partnership agreement” required the taxpayers to contribute the shares to the family partnership agreement, the effect of an accompanying “Power of Attorney” arrangement under which a general corporate partner in the partnership had, among other things, the power to deal with the shares (eg by mortgaging them), meant that the shares at all relevant times remained owned both legally and beneficially by the taxpayers.
However, the AAT found that 50% shortfall penalties imposed for recklessness should be substituted with 25% shortfall penalties for “carelessness” essentially in view of the fact that the Commissioner’s claim that the taxpayer’s failure to seek a second opinion on the arrangement put in place by its advisers could not amount to “recklessness” in these circumstances.
(AAT Case [2014] AATA 423, Re Yazbek and FCT, AAT, Ref Nos 2010/4017-4019, Deutsch DP, 27 June 2014.)
[LTN 126, 3/7/14]
Extract from [2014] AATA 423
THE ISSUES
44. Fundamentally, there appears to be four issues between the parties.
45. First, whether the dividends can be said to have been derived and therefore are assessable for tax purposes in the hands of the Rocbit LP and not in the hands of the Applicants individually.
46. Secondly, even if the dividends are assessable only in the hands of the Rocbit LP, whether in the year ended 30 June 2005 there was a CGT Event A1, with respect to the shares that the Applicants held in Rocbit, which gave rise to a capital gain.
47. Thirdly, whether, if that is the case, the Applicants or either one of them could satisfy the statutory conditions to enable them to choose to obtain CGT roll-over relief under Sub-Divisions 124 – G and124 – M of the Income Tax Assessment Act 1997 (ITAA 1997).
48. Fourthly, whether the level of penalties was appropriate or whether they should be reduced or remitted either in whole or in part.
…
The Respondent’s View [on the first issue]
66. The Respondent argues that a different construction applies to the two paragraphs of the CC Agreement, especially when read with the Power of Attorney, which gives Vilworth as the general partner of Rocbit LP the authority to:
“deal with the (the Applicants’ shares in Rocbit) and shall permit (the shares to be mortgaged or charged) by the General Partner and shall apply any income or proceeds of sale from (the shares) to the business of the Partnership.”
67. In particular, the Respondent asserts that it is plain from reading the clause that the intention of the Applicants as to how the contribution of the shares in Rocbit was to take place was by the authority being granted to Vilworth under a power of attorney to enable it to perform certain acts on behalf of the Applicants with respect to the shares. Accordingly, although the shares had been “contributed” to the Rocbit LP by the Applicants, this did not result in a transfer of the legal and/or beneficial interest in shares by the Applicants. It merely involved an agency relationship being created by the Applicants over the shares, such that the Rocbit LP had the authority to perform certain acts with respect to the Applicants’ shares. This created something akin to a “right to use” the shares for certain purposes and a right to an application of the income of the shares. It did not create any legal or beneficial interest in the shares.
68. Furthermore, the CC agreement did not give rise to an equitable assignment of the right to receive dividends – this is clear from the language used in the CC agreement which obliges the Applicants to apply the income from shares to the Rocbit LP business.
…
THE SECOND AND THIRD ISSUES
89. As I have resolved the first issue in favour of the Respondent, it is unnecessary to consider whether a capital gain would have arisen in respect of a CGT event if the dividend had been found to have been paid to the Rocbit LP. Furthermore, it is unnecessary for me to consider whether a rollover would have applied.