The Federal Court has held that a taxpayer who owned land in Melbourne, and who transferred it to a “joint-venture trust” established for that purpose in the 1999 income year (together with other adjacent land-holders who did likewise for the purpose of the commercial development of the parcels of land), was liable for CGT made on the transfer of the land to the trust. In doing so, the Court dismissed the taxpayer’s arguments that neither CGT event A1 (disposal) nor CGT event E1 (creation of trust over land) applied to the transaction.

At the same time, the Court found that the exceptions in CGT events A1 and E1 for the transfer of an asset where there is no change in the beneficial ownership did not apply, essentially because the taxpayer did not remain absolutely entitled to the land as the sole beneficial owner of it, but the beneficial ownership, instead, was now divided amongst the other joint venturers under the terms of the arrangement. For the same reasons, the Court dismissed the taxpayer’s argument that the exemptions applied under s 106-50 (absolutely entitled beneficiaries) and s 112-25 (the splitting of a CGT asset without change in beneficial ownership).

In addition, the Court ruled that the market value capital proceeds substitution rules applied to the transfer as the joint-venture trust was a related party and the transfer was not at arm’s length value. Moreover, in determining the market value capital proceeds, the Court generally relied on expert evidence and the previous decision of the Victorian Court of Appeal in Comr of State Revenue v Victoria Gardens Developments Pty Ltd (2000) 46 ATR 61 in which it was held that the taxpayer was liable for stamp duty on the transfer by reference to its market value of some id=”mce_marker”7m. This resulted in a capital gain of some $7m to the taxpayer by reference to its original cost base of some $9m – which the Court indicated should be adjusted for a relevant proportion of development costs.

Finally, the Court upheld the imposition of 25% short-fall penalties imposed for failing to adopt a “reasonably arguable position” (or for “failing to take reasonable care”, as the Court suggested). It did so mainly on the basis that the taxpayer knew, or should have known, that the stamp duty decision was evidence there had been a change in the beneficial ownership of the land.

(Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v FCT [2014] FCA 1, Federal Court, Kenny J, 14 January 2014.)

[LTN 18, 29/1/14]