A taxpayer includes a net capital gain in assessable income. That is well known. But can an agreement to remit an amount from sale proceeds reduce the amount of a net capital gain?
In ZBFF v Commissioner of Taxation [2021] AATA 275 (ZBFF) the Administrative Appeals Tribunal (AAT) held not. In ZBFF the AAT held that a taxpayer’s capital gain on the sale of a property was not reduced by remitting the sale proceeds to another party under an agreement.
In ZBFF, a discretionary trust (trust) of which the taxpayer was a beneficiary purchased a property from a friend of the taxpayer, “Mr Green", for $1.4 million. The sale included an agreement to at a later time either sell the property back to Mr Green or on-sell the property at the direction of Mr Green. In case of a sale, the trust would pay the net proceeds to Mr Green.
The trust sold the property in 2016 for $2.45 million and remitted the net proceeds to Mr Green.
The taxpayer said that no capital gain would arise from the sale. The payment to Mr Green would have the effect of either increasing the property’s cost base or reducing the capital proceeds. The Commissioner disagreed, and increased the net capital gain by the amount of the remittal.
The AAT affirmed the Commissioner’s decision and held the existence of the agreement did not affect the tax treatment of the sale proceeds. The capital proceeds were the whole amount under the contract for sale and was not affected by the agreement between the taxpayer and Mr Green.
The taxpayer’s alternative argument that the payment of the proceeds to Mr Green increased the cost base was also rejected. The AAT determined the payment to Mr Green was not fifth element expenditure to “preserve or defend your ownership of, or rights to” the property as there was no interest in the property that Mr Green may plausibly have. Moreover, the payment of proceeds would not have contributed to the first element of the cost base as it was never money which the taxpayer was required to pay to Mr Green.
ZBFF highlights the need for taxpayers to investigate the tax treatment of capital proceeds which are remitted under another agreement. The existence of such an agreement may not reduce capital gains.
For more information please contact:
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Eliza Millen
Graduate Lawyer
E emillen@sladen.com.au
