CGT Events at Date of Transfer: Taras Nominees on Appeal

Friday 30 January 2015 @ 10.37 a.m. | Taxation | Trade & Commerce

In Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v Commissioner of Taxation [2015] FCAFC 4 (28 January 2015), the full court of the Federal Court of Australia has dismissed an appeal from the decision of Kenny J in Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v Commissioner of Taxation of the Commonwealth of Australia [2014] FCA 1 (14 January 2014) which found that taxpayer (Taras) had made a capital gain at the date of the transfer of certain lands, notwithstanding that there was no monetary proceeds received at that time of the dealings.

Background

Taras, as the owner of land at 27-45 Burnley Street Richmond on 20 August 1998, entered into a joint venture agreement with the owners of adjoining land to rezone and develop their respective land. To this end, on 25 August 1998, by deed, Taras transferred legal title of the land to Victoria Gardens Developments Pty Ltd (Victoria Gardens) who was to act as trustee of the land and as nominee of the joint venture.

The Commissioner of Taxation (the Commissioner) subsequently treated the transfer of the land by Taras as a CGT event taxing it at the market value of the land upon its disposal.

At Trial

At trial, Kenny J accepted the Commissioner’s argument that Taras in relation to the transactions in August 1998, had made a taxable capital gain under Part 3-1 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act), on the basis that CGT events E1 and A1 had occurred but that the former (CGT event E1) applied as the more specific to the current dealings (see section 102-25(1) of the 1997 Act). Taras, it was found, had made a capital gain at the date of transfer, notwithstanding that there was no monetary proceeds received at that time.

The relevant provisions of the 1997 Act are:

Section 104.55 "Creating a trust over a CGT asset: CGT event E1" which provides in subsection (1) that a "CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement" (note a CGT event E1 will not happen merely because of a change in the trustee).

Section 104.10 "Disposal of a CGT asset: CGT event A1" which provides in subsection (1) that a "CGT event A1 happens if you dispose of a CGT asset" (note under subsection (2) "a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner"and as with an event E1 a CGT event A1 will not happen merely because of a change in the trustee).

Her Honour found that on the sale or disposal of any part of the land, a landholding party was entitled to be credited with an amount based on agreed prices and the parties were not entitled to a transfer back of their respective portions of the land. This was contrary to intention claimed by Taras that there was to be no change in beneficial ownership of the land. Her Honour found that the effect of the transfer was that ". . . the company held the land upon trust for the Taras and the two other parties equally and collectively".

In holding that CGT event E1 occurred, Her Honour dismissed Taras' argument that it did not create a trust over the land that it had transferred by “settlement”.

Taras also argued that the exception provided in s 104-55(5) of the 1997 Act applied because it was the sole beneficiary of the trust over the land that it had transferred and that it was absolutely entitled to that land against the trustee of the trust. This argument was rejected by Her Honour who also considered that a CGT event A1 had occurred but that a CGT event E1 was should be be used as it was more specific to the taxpayer’s circumstances (see section 102-25(1) of the 1997 Act).

On appeal to the Full Federal Court

In dismissing the appeal, the Full Court considered and decided the following issues:

  • whether transfer of land was a “settlement” giving rise to a CGT event

The Full Court found the transfer of land was a "settlement" stating at paragraph [9] of the decision:

"The transfer by Taras of its land to the trustee was, therefore, relevantly a settlement of the land and not excluded from CGT Event E1 by s 104-55(5) because Taras was not the sole beneficiary of the trust pursuant to which the trustee held the Taras land. Taras was not absolutely entitled to the Taras land as against the trustee because it did not have a vested, indefeasible and absolute entitlement to the Taras land and could not deal with the land other than in accordance with the rights and obligations which had been created by the deed of trust and the joint venture agreement. . . ."

  • whether transferor retained the beneficial ownership of the land

As to "beneficial ownership" the Full Court says at paragraph [12] referring to other cases on the point, said:

"Furthermore, a fundamental difference between the facts in that case and those in this appeal (and which points against the policy of non-assessability of a gain until receipt of “capital proceeds” which Taras sought to invoke), is that Taras did receive something in return for the transfer of its land because upon transfer it became entitled to the benefits flowing from the contributions to the joint venture of the land of others as well as the commercial advantages flowing from participation in the joint venture."

Further, in the same paragraph the Full Court indicates a wide scope applies to the the receipt of capital gains, saying:

It would not, therefore, be “capricious and unreasonable” for the legislature to contemplate the occurrence of a CGT event upon a transaction of the kind entered into by Taras and the other joint venturers because the disposal made by Taras of its land was in return for the acquisition of interests in the land of others and the commercial benefits from the bargain. Those interests and benefits included rights to the development of the land and to distributions of cash determined under clause 6.2 of the joint venture agreement. The restrictions that Taras had upon its beneficial interest in its land by these arrangements were matched by restrictions in its favour upon the rights attaching to the land contributed to the joint venture by the other land owners."

  • the method of valuing land for purposes of calculating taxable capital gain

The initial principles applied by Her Honour were upheld by the Full Court see paragraphs [13] - [15] of the decision.

  • whether the development costs ought be taken into account for purposes of cost base.

The Full Court found for Taras on this issue subject to Taras' confirmation of the amount sought to be included in the cost base, see paragraphs [17] and [18] of the decision.

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