Tax & Accounting Blog

CGT upheld for transfer of land to joint venture trust

CGT, News January 31, 2014

The Federal Court has held that a taxpayer who transferred land to a joint venture trust for the purpose of developing of the land (together with adjacent landowners), was liable for CGT arising from the transaction.

As reported in Thomson Reuters Weekly Tax Bulletin (Issue 5 of 2014), the taxpayer acquired the land in Melbourne in 1995 for $8.5m including stamp duty and other transaction costs. In 1997, the taxpayer began discussions with the owner of adjoining land with the idea of commercially developing the combined lots and selling them off. In August 1998, the taxpayer and the adjacent landholders executed a joint venture agreement for this purpose whereby a “joint venture trust” was effectively created over all the land of the parties. The Commissioner subsequently assessed the taxpayer for the capital gain on the transaction.

The Court found that CGT event E1 (creation of trust over land) and CGT event A1 (disposal) applied to the transaction. The Court ruled that the exceptions in those events (and other areas of the CGT law) for “no change in the beneficial ownership of a CGT asset” did not apply as the taxpayer was not “the sole beneficiary” of the joint venture trust and was not “absolutely entitled to the land”. Rather, the Court said that, “plainly enough”, a trust was created over the land by the combined operation of the relevant trust deed, the joint venture agreement and the transfer executed by the taxpayer in favour of the joint venture trust.

The Court also found ruled that the market value of the land was some $16.6m at the relevant time. This resulted in a capital gain of some $7m to the taxpayer by reference to the land’s original cost base of some $9m (as adjusted for some development costs).

In the course of the decision, the Federal Court quoted Thomson Reuters Cooper and Evans on CGT (Thomson Reuters, 4th ed, 2012) by Gordon Cooper and Chris Evans in relation to the uncertainty about whether s 106-50 of the ITAA 1997 applies where a taxpayer is jointly absolutely entitled to the asset against the trustee (albeit, finding it unnecessary to determine the matter). Cooper & Evans on CGT is now in its 5th edition as the Australian CGT Handbook 2013-14.