On 10 February 2022, the AAT upheld the Commissioner’s assessment of a gain made on a complex arrangement from an exchange of shares and options, was assessable as ordinary income – as profit making arrangement or scheme. To uphold the assessment, the AAT also had to find that the taxpayer was resident, in the relevant year (2010-11). The AAT agreed that he was resident according to ordinary concepts, at least from May 2010 (the prior year) when he shipped his goods back from Monaco.
The facts were these:
- In the 2010-11 income year, the taxpayer exchanged shares and options in CLNR Holdings, a shelf company he incorporated for the purpose of the arrangement, for valuable shares and options in Rialto Energy.
- The exchange occurred pursuant to a complex share purchase and merger agreement in October 2009 (the “SP&MA”), under which the taxpayer obtained an effective interest in a company that had rights to explore for and produce oil and gas off the west coast of Africa.
- The difference between the value of the interests obtained and the nominal value of the shares in CLNR Holdings (approximately $13m) represented the gain made by the taxpayer on the transaction.
The ATO assessed the gain under s 6-5 of the ITAA 1997 as ordinary income. The taxpayer contended the gain was of a capital nature.
The taxpayer conceded that the shares in CLNR Holdings were ventured in a commercial transaction and that the prospect of an exchange of nominal value shares for shares in a listed company of substantially greater value was contemplated by the terms of the SP&MA.
The AAT agreed with the ATO. The AAT was satisfied that, at the time the CLNR Holdings shares were ventured into the arrangement, the taxpayer had a “not insignificant purpose” of making a profit. The gain was therefore assessable as ordinary income (this is under the principle that a profit on an isolated transaction can be ordinary income if it was part of a ‘profit making scheme or arrangement’). The taxpayer contended that the subjective intention had a greater role than the Commissioner was prepared to concede but the taxpayer did not, on the evidence, discharge his onus of showing that the assessment was excessive.
Residency issue – there was a question whether the taxpayer was a tax resident of Australia for the 2020-11 income year.
- In 2005, he had moved with his family to Monaco for business reasons.
- His family returned to Australia in 2009 and in April 2010 he decided to leave Monaco.
- After contemplating Singapore as his next destination, the taxpayer decided to return to Australia. He did so in late May 2010, surrendering his rented accommodation in Monaco and shipping belongings to Australia.
- For the next 2 months, he spent time in Australia, Monaco (to say goodbye to friends) and New York.
- He finally settled back in Australia with his family in late July 2010 (just after 30 June in the year when he wanted to be non-resident).
The AAT concluded that the taxpayer was a tax resident of Australia for the 2010-11 income year – ‘resident’ according to ordinary concepts, from at least May 2010, when he shipped his goods back to Australia.
Finally, the AAT upheld a shortfall penalty imposed for failing to take reasonable care.
(Whiddon and FCT [2022] AATA 197, AAT, Olding SM, 10 February 2022.)