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13 Oct 08 Pre-CGT treaty applies to tax on capital gains - Virgin Holdings

The Federal Court (Edmonds J) has held that the Australia Switzerland Double Tax Agreement (DTA), entered into before the introduction into Australia of a comprehensive tax on capital gains, nevertheless applied to and included within its operation the tax on capital gains. The Court said, at para 44:

"...I am firmly of the view that the term ‘the Australian income tax’ in Art 2(1)(a) [of the DTA] accommodated and encompassed, at the time of the conclusion of the Swiss Agreement, the taxation of capital gains. It is true, that at the time, capital gains were not taxed on the comprehensive basis that came with the introduction of Part IIIA into the ITAA 36, but the income tax assessed under that Act accommodated and encompassed the assessment of capital gains as income, the assessment of capital receipts as income [under the former s 25A and s 26AAA ITAA 1936] and the assessment of notional amounts as income just as much as it accommodated and encompassed the assessment of income according to ordinary concepts."

This finding is contrary to the view expressed by the Commissioner in Taxation Ruling TR 2001/12.

Further, the Court held that the capital gain derived by the taxpayer was not subject to Australian tax by reason of the protection provided by Article 7 of the DTA (the business profits article), notwithstanding the provisions of Article 13 of the DTA (the alienation of property article). In holding that Article 7 applied to deny the Commissioner the ability to tax the capital gain, the Court quoted extensively from the High Court decision in Thiel v FCT (1990) 171 CLR 338, which (dealing with the same DTA) came to the same conclusion in respect of a capital gain to which the former s 26AAA potentially applied: Virgin Holdings SA v FCT [2008] FCA 1503 (Federal Court, Edmonds J, 10 October 2008).

For a copy of the decision, go here.

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