… must be one of Wilde’s …

Oscar Wilde’s quip “no good deed goes unpunished” opened Deputy President McCabe’s decision in the 2 February 2021 Administrative Appeals Tribunal (AAT) case of ZBFF v. Commissioner of Taxation [2021] AATA 275. It prefaced his introduction to the matter at hand in ZBFF: whether a good deed will go untaxed. ZBFF is an insight into the possibility of loophole, or lack of symmetry between assessable proceeds and tax allowable costs, at the heart of the capital gains tax (CGT) provisions of the Income Tax Assessment Act (ITAA) 1997. Lawyers for the taxpayer endeavoured to find what turned out to be elusive before this AAT.

A good deed for an old friend going through a divorce

The good deed for an old friend, whom the AAT referred to by the pseudonym of Mr. Green, was done by the taxpayer (the appellant), a wealthy businessman, who was willing and able to help out Mr. Green on his divorce in 2006. Rather than see Mr. Green lose his home in a divorce settlement, the taxpayer arranged for the taxpayer’s family trust (TFT):

1. to purchase Mr. Green’s home from Mr. Green for its (2006) value; and
2. to allow Mr. Green a right of occupancy so he could continue to occupy the home after the TFT’s purchase.

2016 sale of the home for a profit

The TFT sold the home in 2016 and the net proceeds of sale, being the sale price less the TFT’s cost of acquisition and its holding costs, were all paid over to Mr. Green.

The taxpayer and the TFT took nothing and sought to take nothing for their beneficence to Mr. Green.

Mr. Green not taxed on his windfall?

The decision doesn’t say as much, as the case did not concern Mr. Green’s affairs, but it might be presumed that Mr. Green wasn’t taxable or taxed on the proceeds of the 2016 sale (the Net Proceeds) paid over by the TFT to Mr. Green: going untaxed by virtue of the good deed:

Why might Mr. Green escape tax on the Net Proceeds he received? Mr. Green had no property interest or CGT asset in the home from 2006, and it would seem (presumption again) that the Commissioner sought not to assess Mr. Green on a capital gain based on the Net Proceeds he received from the TFT from the standpoint of either or both of CGT event D1 or CGT event H2 occurring. If there had been a capital gain the CGT main residence exemption could not have been applied by Mr. Green in the absence of his ownership interest in the home made out under section 118-130 of the ITAA 1997 from that time.

Instead the taxpayer, as the beneficiary of the TFT entitled, was assessed on an assessable capital gain on the 2016 sale.

In the dispute over this assessment of the taxpayer before the AAT the taxpayer was required to establish the terms of the arrangement with Mr. Green:

1. which was only partly in writing, having been put to writing sometime after the arrangement was entered into, and otherwise oral; and
2. the terms of which were contested by the Commissioner.

The AAT accepted that there was an agreement between the taxpayer and Mr. Green as contended for by the taxpayer.

Downside of leaving Mr. Green without rights to the Net Proceeds

Still the absence of a clear term in the arrangement as to what the TFT would do with the Net Proceeds (if any), after already paying the purchase price to Mr. Green back in 2006, a term that may enable the Commissioner to tax Mr. Green on his receipt of the gain; prejudiced the taxpayer who was left with a hard road to establish that the taxpayer, as a beneficiary of the TFT, wasn’t taxable on the Net Proceeds to the TFT unreduced.

The evidence before the AAT was that Mr. Green was willing to let the TFT retain the profits on a later sale, viz. retain the Net Proceeds, but, in the event in 2016, the TFT opted not to retain them. It could be inferred that the payment over of the Net Proceeds to Mr. Green following the sale in due course was a gift to Mr. Green of an amount the TFT was otherwise entitled to keep.

The hard road

Still the taxpayer contended before the AAT that the payment of the Net Proceeds to Mr. Green was a cost to the TFT which:

• increased the TFT’s cost base of the home;
• reduced the capital proceeds to the TFT from the 2016 sale; and/or
• caused the TFT to make an off-setting capital loss;

or, alternatively was a cost to which a deduction under section 40-880 of the ITAA 1997 could be applied by the TFT.

The taxpayer asserted that the payment of the Net Proceeds was fifth element expenditure “to preserve or defend your ownership of, or rights to” the CGT asset which could be included in the CGT asset’s cost base in accord with sub-section 110-25(6) of the ITAA 1997. A difficulty for the taxpayer with his fifth element argument was that the danger identified, supposedly necessitating that the TFT defend its title to the CGT asset, was the equitable interest in the CGT asset Mr. Green might have or assert under his arrangement/agreement with the taxpayer. The AAT rejected this argument as the taxpayer could not establish any interest in the home that Mr. Green might plausibly have.

The AAT disposed of the taxpayer’s other technical arguments that somehow the payment of the Net Proceeds should be allowed to/offset by the TFT to reduce the net capital gain. Some arguments of the taxpayer relied on the taxpayer’s questionable position, given the context of the good deed, that the taxpayer was dealing with Mr. Green at arm’s length.

The arm’s length obstacle

The AAT preferred the Commissioner’s contention that the parties were not dealing at arm’s length, with paragraph 112-20(1)(c) of the ITAA 1997 applicable to include market value, rather than amounts actually paid to Mr. Green, in the TFT’s cost base of the home.

The taxpayer’s contention that section 40-880 applied failed as the taxpayer could not establish, from evidence put to the AAT, that the TFT was carrying on a business and that there was any nexus between the payment of the Net Proceeds and that business.

Symmetry prevails

The taxpayer was hopeful for a mismatch or lack of symmetry between:

1. those provisions relating to CGT events in the ITAA 1997 that bring capital proceeds into net capital gains and into assessable income in section 102-5 of the ITAA 1997 and then to tax that presumably did not apply to Mr. Green’s receipt of the Net Proceeds on the one hand; and
2. the provisions which would reduce the assessable capital gain to the TFT on the other hand;

in pursuit of a reduction in the amount of the Net Proceeds assessable to him as a net capital gain by the amount of the TFT’s payment of the Net Proceeds.

According to the AAT in ZBFF the symmetry holds. The payment of the Net Proceeds by the TFT was indistinguishable from a gift by the TFT to Mr. Green in the tax law analysis. Mr. Green may not have been assessable on the gain reflected by the Net Proceeds but the taxpayer/TFT was.

Will the taxpayer, a wealthy businessman who can afford to appeal, appeal to the Full Federal Court?