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03 Apr 1212 Capital proceeds from asset sale were price payable - Quality Publications Australia Pty Ltd

The Federal Court (Edmonds J) has confirmed the Commissioner’s assessment of a net capital gain on the sale of certain magazine assets. The court held that general rule (a) in s 116-20(1) ITAA 1997 applied, and the capital proceeds of the sale consisted of the money the taxpayer received, or was entitled to receive, in respect of the CGT event happening. Further, there was no “other property” involved, so that rule (b) in s 116-20(1) did not apply, and the parties dealt with each other at arm’s length in connection with the disposal of the assets, so that s 116-30(2)(b)(i) did not apply.

The taxpayer disposed of certain assets, including the masthead, “Property Showcase”, to Homes Pictorial Publications Pty Ltd as trustee of Homes Pictorial Publications Unit Trust, pursuant to an Asset Sale Agreement dated 21 March 2003. Homes Pictorial was a member of the Fairfax Group. In effect, the parties intended to enter into a joint venture. Under the Asset Sale Agreement, the taxpayer sold the assets to Homes Pictorial (as trustee for Homes Pictorial Unit Trust). The consideration for the sale was an overall price of $4,100,000, of which $4,099,970 was apportioned to the assets and the remaining $30 to certain restrictive covenants. It was accepted that the taxpayer’s cost base in respect of the assets was $1,000,000.

An associated Subscription Agreement provided for the issue of stapled securities in Homes Pictorial and the Homes Pictorial Unit Trust to Quality Group (as trustee of the Denise Canty Family Trust), which was wholly owned by Denise Canty, who was also the sole proprietor of the taxpayer.

The effect of these interlocking transactions was that:

  • the taxpayer’s assets were sold for consideration of $4,099,970 to Homes Pictorial (as trustee of Homes Pictorial Unit Trust). In consideration for the giving of the restrictive covenants, the taxpayer and Paul and Denise Canty each received $10.00. The total consideration payable under the Asset Sale Agreement was $4,100,000
  • the consideration of $4,100,000 payable under the Asset Sale Agreement was paid to the taxpayer by a direction given by Homes Pictorial (as trustee of Homes Pictorial Unit Trust) to Quality Group (as trustee for Denise Canty Family Trust) for payment by the latter to the taxpayer in the amount of $4,100,000, being the subscription monies payable by Quality Group (as trustee of the Denise Canty Family Trust) under the Subscription Agreement
  • Quality Group (as trustee of the Denise Canty Family Trust) thereafter owed the taxpayer a debt of $4,100,000.

The taxpayer did not include any capital gain as a result of disposing of the assets in its income tax return as lodged for the relevant income year. The taxpayer made a representation that no CGT event had occurred during the year of income. However, an amended assessment was issued to the taxpayer on 13 November 2007. The taxpayer’s assessable income was increased by an amount of $3,100,000 pursuant to s 102-5 ITAA 1997 as a result of the disposal of the assets (CGT Event A1). The net capital gain was calculated on the basis of capital proceeds of $4,100,000 and a cost base of $1,000,000 in the assets. The Commissioner also imposed a penalty of 50% for recklessness, reduced by 80% following the taxpayer’s voluntary disclosure.

Edmonds J held that, on any reading of the Asset Sale Agreement or the Subscription Agreement, there was neither any intention to make over (ie, assign), nor the effect of making over (ie, assigning), a debt to the taxpayer. All that happened was the purchaser (Homes Pictorial (as trustee)) gave a third party (Quality Group (as trustee)) a direction to pay the taxpayer. The purchaser had the right to receive $4,100,000 from the third party, and directed it to make the payment to the taxpayer.

The third party (Quality Group (as trustee)) did not pay cash to the taxpayer, but rather assumed a liability to pay $4,100,000 to the taxpayer. Nevertheless, this constituted payment to the taxpayer of consideration within general rule (a) of s 116-20(1). The court noted that an act cannot constitute payment unless money is involved, but this requirement may be satisfied not only by the transfer of money but also by the performance of some other act in fulfilment of an obligation to pay money.

Section 116-20(1)(b) did not apply in the present case because the taxpayer was entitled at all times to receive money pursuant to the Asset Sale Agreement and not “other property” in respect of CGT event A1 happening.

In respect of the question under s 116-30(2)(b)(i) ITAA 1997 as to whether the taxpayer and Homes Pictorial (as trustee) dealt with each other at arm’s length in connection with CGT Event A1 (the disposal of the assets), the evidence indicated that the parties acted in their own interests and severally and independently in forming their bargain. Section 116-30(2)(b)(i) did not apply.

Finally, on the question of penalty, the court held that the taxpayer had not suggested any error on the part of the Commissioner in relation to the penalty remission decision and had not discharged its onus as to why the penalty remission decision ought to have been made differently.

Quality Publications Australia Pty Ltd v FCT [2012] FCA 256 (Federal Court, Edmonds J, 28 March 2012).

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