17 Jan 07 No CGT on deferred settlement contract - Lend LeaseThe Federal Court (Conti J) has upheld the objection of the taxpayer, Lend Lease Custodian Pty Limited, to an assessment issued by the Commissioner, in which the Commissioner sought to assess the taxpayer to tax on a capital gain of $110,645,599 calculated by reference to the value of the property sold, rather than the cash consideration received by the taxpayer. Significant penalties were also imposed by the Commissioner. The taxpayer's position was that it had incurred a capital loss on the sale of the property.
The property sold by the taxpayer was 100 million shares in Westpac Limited. The market value of a Westpac share at the time of the sale was approximately $5.39 each. The cash consideration received by the taxpayer approximated $3.53 per share. However, completion of the sale contract was deferred for approximately 4 years, with the taxpayer retaining the right to receive any dividends declared on the shares in the meantime. Total dividends received during this period, and returned by the taxpayer as income, amounted to $162 million. Except for $24 million, all dividends were fully franked and therefore fully rebateable.
The Commissioner submitted that in addition to receiving the cash consideration for the sale of the shares, the taxpayer had received additional non-cash consideration, being property in the form of the rights to retain the Westpac dividends during the period pending completion of the sale contract. The Commissioner valued this non-cash consideration at $144,236,243. This submission was rejected by the Court, which said, at para 88:
"In my opinion, reliance on that postulated right of Lend Lease to share in dividends, in support the Commissioner’s assessment of capital gains tax presently contested, was misconceived by the Commissioner as satisfying the description of ‘property other than money’ within the scope of the capital gains tax provisions of s 160ZD(1)(c) of Part IIIA of the Tax Act...There was no right to share in Westpac dividends conferred upon Lend Lease, expressly or by implication, by the terms of the [sale contract] or otherwise by the general law, such as to constitute an ‘asset’ of the nature identified by the Commissioner as a capital gain taxable under Part IIIA of the Tax Act."
The Court distinguished the High Court decision in Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd (2005) 221 CLR 496.
In the alternative, the taxpayer relied on the former s 160ZA(4) to eliminate the capital gain on the basis that the dividends of $162 million, which had been included in assessable income, were "a part or a so-called 'manifestation' of" the additional non-cash consideration of $144,236,243. The Commissioner argued that s 160ZA(4) could not apply because the dividends had not been included in assessable income "as a result of the disposal of" an asset. The Commissioner's arguments in this regard were also rejected by the Court.
Finally, it may be noted that the Commissioner accepted that the taxpayer and the purchaser of the shares were acting at arm's length, and did not seek to invoke the market value substitution rules. Further, the Commissioner abandoned an earlier attempt to assess the taxpayer under Part IVA.
Lend Lease Custodian Pty Limited v FCT  FCA 1790 (Federal Court, Conti J, 21 December 2006).
For a copy of the decision, go here