Resolution was a declaration or settlement for CGT event E1, but no absolute entitlement for CGT event E5 - Oswal
01 Aug 2013
The Federal Court (Edmonds J) has answered two preliminary questions in proceedings brought by the taxpayers (who were husband and wife) in respect of various objection decisions made by the Commissioner disallowing the taxpayers' objections to assessments.
The two questions involved the taxation consequences of the following resolution made on or about 13 March 2007 by one of the taxpayers (Mr Pankaj Oswal) in his capacity of trustee of a trust known as the Burrup Trust:
"I, Pankaj Oswal, being the Trustee of the Burrup Trust and having obtained consent of the Guardian of the Burrup Trust, do hereby resolve pursuant to Clause 17.1 of the Deed of Trust, to appoint for the absolute benefit of the named beneficiaries below, a part of the corpus of the trust as detailed below. Henceforth the corpus so appointed and income or accretion of capital there from shall be held on separate trust and for the absolute benefit of the named beneficiaries in their own individual capacities.
Mr Pankaj Oswal – 574 shares in Burrup Holdings Pty Ltd
Mrs Radhika Oswal – 574 shares in Burrup Holdings Pty Ltd."
Despite the resolution, the shares the subject of the resolution were not transferred to either Mr or Mrs Oswal in 2007.
The first question considered by his Honour, the answer to which was sought by the Commissioner, was as follows:
"Whether either CGT event E1 or CGT event A1 happened in relation to any of the shares in Burrup Holdings Pty Ltd held by the trustee of the Burrup Trust at any time during the income year ended 30 June 2007, pursuant to either s 104-55 or s 104-10 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997)."
Edmonds J answered this question as follows:
"Yes; CGT event E1 happened in relation to 902 shares in Burrup Holdings Pty Ltd during the income year ended 30 June 2007 pursuant to s 104-55 of the ITAA 1997."
His Honour did so on the basis that the resolution was both a declaration of trust and a settlement within the meaning of those words in s 104-55 (CGT event E1). In this event, it was not necessary to consider whether CGT event A1 happened.
This was the answer the Commissioner was seeking.
The second question considered by his Honour, the answer to which was sought by the taxpayers, was as follows:
"Whether Mrs Radhika Pankaj Oswal and Mr Pankaj Oswal became 'absolutely entitled' within s 104-75 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) in the income year ended 30 June 2007 to any of the shares in Burrup Holdings Pty Ltd held by the trustee of the Burrup Trust."
Edmonds J answered this question in the negative, on the basis that by retaining the shares in the Burrup Trust, the shares remained subject to the trustee's indemnity for significant liabilities owed by the trustee to the ANZ Bank (in the order of $340 million, although the Commissioner disputed $75 million of this amount). Edmonds J said, at para 91:
"I have no doubt that a Court faced with the prospect that the assets of the Fund may not be sufficient to satisfy and discharge all liabilities properly incurred by the Trustee in the administration of the Burrup Trust, would not allow the Trustee to defeat the claims of creditors by repudiating an entitlement to be indemnified out of the shares in Burrup Holdings on the ground that the appointment worked a release, abandonment or waiver of that right."
This was the answer the taxpayers were seeking.
In para 9 in his introduction to his judgment, Edmonds J indicated what would follow if he found against the taxpayer on either or both questions (which he did by finding that CGT event E1 happened):
"...further questions will arise for determination – including whether the shares in Burrup Holdings were in the 2007 income year 'taxable Australian property' pursuant to s 855-15 of the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”), Item 2(a) of the table – an indirect Australian real property interest (see s 855-20). These further questions raise valuation issues which are likely to call for extensive expert evidence from both sides."
Accordingly, Edmonds J ordered as follows: "At the next directions hearing, the parties bring in short minutes of order by way of a schedule for preparing the outstanding issues in the proceedings for hearing."
Oswal v FCT  FCA 745 (Federal Court, Edmonds J, 31 July 2013).