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The Federal Court (Greenwood J) has dismissed the taxpayer's appeal from the decision of the AAT which held that Part IVA applied to an elaborate scheme devised by the taxpayers' solicitors to eliminate a potential capital gain on the sale of shares to the taxpayers' in-laws. The first step in the scheme was the sale of shares by the taxpayers to a wholly owned company, and the election for roll-over relief under Subdiv 122-A of ITAA 1997. Thereafter, further steps in the scheme involved declarations of trust, changes of trustees, the receipt by the taxpayers of the proceeds of sale of the shares, but the ultimate derivation of a substantial capital gain by a trust under the control of the taxpayers' solicitors.

The Court held that the exclusion provided by s 177C(2)(a)(i) (ie "the non-inclusion of the amount in the assessable income of the taxpayer is attributable to the making of an agreement, choice, declaration, election etc) was not made out and each taxpayer obtained a tax benefit in connection with the scheme for the purposes of s 177C(1)(a) and s 177D, enlivening the power of the Commissioner to make a determination pursuant to s 177F(1)(a). In particular, the Court held that the Tribunal correctly determined that no nexus was made out between the choice or election made by each taxpayer and the non-inclusion of the relevant capital gain in the assessable income of the taxpayers.

However, the Court upheld the Commissioner's cross appeal on penalties. The AAT had held that as the taxpayers' had a reasonably arguable case, with the result that the 50% penalties imposed by the Commissioner should be reduced to 25%. The Court held that the taxpayers' argument in relation to the construction and application of s 177C(2)(a)(i) is not objectively about as likely as not correct, with the result that the Commissioner's decision on penalties was affirmed: Walters v FCT [2007] FCA 1270 (Federal Court, Greenwood J, 20 August 2007).

For a copy of the decision, go here

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