27 Sep 10 Arrangement to avoid CGT on sale of shares was tax avoidance scheme - MacMahon
A contrived and artificial arrangement primarily designed to avoid the incurring of a capital gain on the sale of shares in a company has been found to be a "scheme" conferring a "tax benefit" within the general anti-avoidance provision of Pt IVA of the Income Tax Assessment Act 1936. Certain "sign-on fees" and amounts paid in respect of the taxpayer's credit cards were also found to have been the assessable income of the taxpayer. In the result, the Commissioner’s objection decisions, including the imposition of penalties, were affirmed by the Administrative Appeals Tribunal.
The MacMahon brothers, Gregory and Peter, were equal shareholders in a company. They agreed to sell their shares to another company, on the basis that they would be retained as employees. Having obtained professional advice, they then entered into an arrangement involving the creation of a unit trust of which the brothers were trustee and the purported vesting of the beneficial interest in the shares in that trust. Family trusts were created which subscribed for units in the unit trust. Consideration for the units was by means of a promissory note made by the taxpayer (Gregory) as trustee of the family trust in favour of the brothers as trustee of the unit trust by way of subscription for units; the amount of the promissory note was used to redeem the taxpayer’s units in the unit trust and the promissory note was thus endorsed in favour of the taxpayer. He then endorsed the promissory note in favour of the family trust by way of gift and thus completing the circle. No amount changed hands; the promissory note was made and endorsed on the same day in such manner that it was made by the family trust and ended in the hands of the family trust.
The taxpayer contended that these arrangements were entered into primarily for asset protection reasons, against the possibility of a breach of warranty action by the purchaser of the shares.
The shares were duly transferred to the purchaser for agreed consideration, the brothers, however, selling their shares in their personal capacities, not as trustee.
On the basis of the evidence, the Tribunal found:
- in the course of the trust transactions, the applicant was throughout the legal and beneficial owner of his shareholding; there was never any change in either the legal or the equitable estate in the shareholding
- in the course of the trust transactions, no relevant CGT event was triggered; this was so simply because nothing was ever transferred
- there was a "scheme" within s 177A
- there was a "tax benefit", namely, the non-inclusion of the net capital gain in assessable income
- in the Tribunal’s words, "we can say without hesitation that if there has been a more straightforward case under Part IVA we are not aware of it".
In the event, the Tribunal determined under s 177F(2) that the amount of the Event A1 capital gain caught by s 104-10 of the Income Tax Assessment Act 1997 should be included in the net capital gain brought into assessable income by s 102-5 of that Act.
The agreement for the sale of shares to the purchaser included a requirement for the payment of a "sign-on fee" to the taxpayer. The taxpayer had directed that the fee be paid by instalments into a "stichting", an organisation formed under the law of the Netherlands. The objects of the stichting were expressed to be "to grant pensions or distributions or cause pensions or distributions to be granted to individuals who may make a claim thereon according to the Pension Regulations". The Tribunal, however, had no difficulty in finding that the sign-on fee was a reward for services to be provided and constituted assessable income according to ordinary concepts in the taxpayer’s hands.
The taxpayer had purported to enter into a loan agreement whereby the stichting would lend him money by paying off his credit card on agreed terms. The Commissioner treated these payments as assessable income of the taxpayer. The Tribunal found no evidentiary link between the sign-on fees and the credit card payments. The taxpayer chose not to furnish the necessary evidence and it followed that he did not discharge the onus of proving that the assessments in respect of the credit card payments were excessive: Re MacMahon and Commissioner of Taxation  AATA 724 (Julian Block DP and S E Frost, Senior Member, 23 September 2010).