As reported in our earlier article on Paule v FCT, the Federal Court held that the capital gains tax (CGT) discount did not apply to the sale of shares held by a trust. As expected, the taxpayer has now lodged an appeal to the Full Federal Court.
The Court’s determination was based on the fact that the shares held by the trust had been acquired through an unbroken series of s124N (or s122A in the case of one applicant) and s124M roll-overs. The roll-overs occurred within the 12 months preceding their disposal and therefore the deemed time of acquisition rules did not apply. Interestingly, had the shares been held by a company and three roll-overs under subdivision 124-M undertaken, then the result would have been a discount capital gain.
There are no clear policy reasons for excluding a scenario where there is a roll-over pursuant to subdivision 124-N (or 122-A), followed by two roll-overs undertaken in accordance with subdivision 124-M. The Federal Court acknowledged this in its decision but stated that it is not for the Court “to second guess the legislature or the Commissioner’s administration of the tax laws.”
We will be watching this appeal closely to see whether the Full Federal Court will actually look to the purpose of the legislature or the Commissioner’s administration or whether this will fall back to the legislature for a redraft in the future.
In the meantime the case acts as a cautionary tale of the devil being in the detail when undertaking restructures, particularly where a series of roll-overs are being undertaken. If you are considering a restructure and would like to understand the tax implications, or have undertaken a restructure and are concerned about tax consequences that may have been triggered, contact our tax specialists: