G Cassegrain and Co Pty Ltd and Anor and Commissioner of Taxation
[2005] AATA 72
•18 January 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 72
ADMINISTRATIVE APPEALS TRIBUNAL
TAXATION APPEALS DIVISION
NT2002/289-290
Re: G Cassegrain & Co Pty Ltd
(Administrator Appointed)
Clos Farming Estates Pty Ltd
Applicants
And:Commissioner of Taxation
Respondent
DECISION
Tribunal: P.J. Lindsay, Senior Member
Date: 18 January 2005
Place: Sydney
Decision:The objection decisions under review are affirmed.
. . . . . . . . . . . . . . . . . . . . . . . .
P. J. Lindsay, Senior Member
© Commonwealth of Australia (2005)
CATCHWORDS
Income tax – capital receipt received jointly – unequal contributions made to rights given up in consideration of capital sum – attribution of disposal consideration according to contribution to rights given up – alternative bases for upholding decision under review - sham agreement – application of s.160M(6) – decisions under review affirmed
Administrative Appeals Tribunal Act 1975 s.25
Income Tax Assessment Act 1936 ss. 6, 160A, 160M, 160Z, 160ZD,160ZH,160ZN
Taxation Administration Act 1953 s.14ZZA
Advanced Prosthetic Centre P/L v. Appliance & Limb Centre (Int) P /L [2002] NSWSC 515
Guthrie v ANZ Banking Group (1991) 23 NSWLR 67
FCT v McDonald 87 ATC 4541Cranstoun v FCT (1984) 75 FLR 220
Patrick Anthony Cassegrain & Ors v Claude George Rene Cassegrain & Ors [1998] 811 FCA
A.W. Furse No 5 Will Trust v. Commissioner of Taxation 91 ATC 4,007
Calverley v Green (1985) 155 CLR 242
Equuscorp Pty Ltd and Anor v. Glengallan Investments Pty Ltd (2004) 211 ALR
Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243
Albion Hotel Pty Ltd v Federal Commissioner of Taxation (1964-1965) 115 CLR 78REASONS FOR DECISION
P.J. Lindsay, Senior Member
1. There are two matters before the tribunal. The first, NT 2002/289, is an application by G Cassegrain & Co Pty Ltd (GCC) for review of an objection decision dated 7 November 2002. The objection was against an amended assessment raised for the year of income ended 30 June 1994 that included the sum of $4.25m in assessable income and resulted in an amended taxable income of $3,186,712. Due to consequential adjustments to GCC’s accumulated losses, an amended assessment was made for the 1996 income year increasing taxable income by $404,494. In addition, the objection decision disallowed the objection to the 1996 amended assessment.
2. Clos Farming Estate Pty Ltd (CFE) seeks review of an objection decision, also dated 7 November 2002. The decision disallowed an objection against amended assessments that were raised in consequence of adjustments made to GCC’s losses, due to the increase in that company’s taxable income from the 1994 amended assessment and thus reducing the losses available for transfer to CFE to nil. The amended assessment in respect of the 1994 income year increased taxable income by $194,987 and that for the 1995 income year increased taxable income by $364,938. It is matter NT2002/290 that relates to CFE’s application to the tribunal.
3. At the hearing, Mr C Bevan of counsel appeared for the applicants and Mr M Brabazon of counsel appeared for the respondent. The tribunal heard oral evidence from the following: Claude Cassegrain, John Garrett, Winifred Gibson, Timothy Castle, Andrew Walmsley, Steven Rares SC, and Claude Griffith. Apart from Mr Griffith, witness statements by each witness were received in evidence. The tribunal had before it the documents (T documents) lodged pursuant to s.37 of the Administrative Appeals Tribunal Act 1975 (the AAT Act) and the exhibits tendered at the hearing.
4. During the 1990s the respondent carried out an examination of the Cassegrain group of companies, including the applicants (T15). Consequently, the respondent formed the view that GCC had incorrectly excluded an amount from its assessable income for the year ended 30 June 1994, being part of a settlement sum of $9.5m paid by the Commonwealth Scientific and Industrial Research Organisation (CSIRO). The payment was made pursuant to a deed of settlement dated 27 September 1993. The parties to the deed of settlement were GCC and Claude Cassegrain, the CSIRO and Sirotech Limited, and Cassiro Pty Limited. GCC’s return for the 1994 income year disclosed only $5.25m of the settlement sum as assessable income. The respondent issued an amended assessment to GCC on 17 November 2000 (T16-236) on the basis that the entire settlement sum was assessable income and/or consideration in respect of the disposal of an asset giving rise to an assessable capital gain.
5. The respondent treated a letter from Claude Cassegrain dated 22 August 2001 (T18) as an objection to the amended assessments issued to the applicants. The notice of decision on objection, dated 7 November 2002 (T19-291), informed Claude Cassegrain that the objection against the amended assessment to GCC had been disallowed. In the accompanying ‘reasons for decision’ document (T19-298), the respondent wrote (footnotes excluded):
Subject
Capital Gain Exemption
We refer to your letter dated 7 December 2000.
Issues
1. Whether the $4,250,000 settlement payout was properly derived by GC & Co Pty Ltd rather than Claude Cassegrain.
2. Whether the $4,250,000 settlement payout is assessable to GC & Co Pty Ltd under;
(i) s 25, or
(ii) in the alternative s160M(3)(b) of Part IIIA of the Act
3. Whether the $4,250,000 settlement payout is an exempt capital gain under s160ZB of the Act because it was made to settle a defamation action.
Answers to Issues in Question
1GC & Co Pty Ltd rather than Claude Cassegrain derived the $4,250,000 settlement payout received from CSIRO.
2. This amount is assessable to GC & Co Pty Ltd under s25 or in the alternative under s160M(3)(b) of the Act.
3. The exemption, under s160ZB of the Act, is not available to GC & Co Pty Ltd for the following reasons;
1. If the $4,250,000 settlement payout, in question, is in the nature of income rather than capital, representing a lump sum payment for the loss of future income, then s.160ZB has no application as it only applies to capital gains otherwise assessable under Part IIIA.
2. Where the amount received constitutes an undissected sum, no part can be said to relate to any personal injury suffered so that the exemption under 160ZB(1) is not available.
3. Although an incorporated body may institute proceedings under the Defamation Act 1901(NSW) the exemption under s 160ZB is not available if it was paid to the company. The wrong or injury suffered, which includes defamation must be to a natural person.
6. In the respondent’s statement of reasons for the objection decision lodged with the tribunal under s.37 of the AAT Act, the issues posed for decision were the same as those in the letter sent to Claude Cassegrain on 7 November 2002. The answer and reasons, however, were a little different from those in the letter. The document provides a summary of the basic factual background to the amended assessments (T2), although more will have to be said later about the circumstances leading up to the payment of the $9.5m:
Background
In or about May 1987 representatives of Gerard Cassegrain & Co Pty Ltd (“GC&Co”) and representatives of CSIRO began discussions on the possible application of soil improvement technology CSIRO was developing, known as slotting, to land on which GC&Co proposed to develop vineyards. On or about 10 July 1987, GC&Co and CSIRO entered into a written agreement for the conduct of research and development concerning slotting and associated activities.
Soon after a joint venture company called Cassiro Pty Ltd was formed. Latter [sic] there was a falling out between GC & Co Pty Ltd and CSIRO. Litigation continued, with interruptions, for a period extending from 26 October 1992 to its suspension after 28 June 1993. The parties took part in mediation presided by Sir Lawrence Street. These negotiations and events resulted in, a deed of settlement and release (“the Deed”) being entered into, on the 27 September 1993, by the following parties:-
Gerard Cassegrain & Co Pty Ltd (GC&Co);
Claude Cassegrain (director of GC&Co and son of Gerard Cassegrain);
Commonwealth Scientific and Industrial Research Organisation (“CSIRO”);
Sirotech Limited;
Cassiro Pty Limited.
This deed together with the Deed Poll made with the State Bank of New South Wales (the State Bank had a mortgage debenture over the assets of GC & Co) on the same date sets out the terms of the settlement.
Clause 2.2 of the Deed states that CSIRO is to pay the Cassegrain Parties the amount of $8,835,083 for:-
… the full and final discharge of any and all liabilities for which any party to this Deed has or, but for the execution of this Deed would have had, to pay costs or damages to any other party to this Deed,…
… and the benefit of the various covenants, releases, indemnities and warranties entered into, given and made by the Cassegrain Parties under the terms of this deed…
The balance totalling $664,917 was broken up as follows:
$503,667 for the transfer of technologies held by GC&Co and Cassiro
$155,000 for the transfer of slotting machine
$6,250 the difference in value of the goods transferred from GC&Co to CSIRO
$664,917 Total
$8,835,083 Add, settlement payout mentioned above
$9,500,000Total payout
The Deed Poll with the State Bank, states at paragraph D that:
The provisions of the Settlement Deed do not become binding on the parties to the settlement until CSIRO had paid by cheque or at the direction of GC&Co and Mr Claude Cassegrain the sum of $9,500,000 (the Settlement Sum).
According to the Deed Poll, the $9,500,000 was applied as follows:-
$8,309,502 paid to cover State Bank mortgage debentures on assets held by GC&Co.
$1,170,000 paid for legal fees on behalf of GC&Co and Mr Claude Cassegrain
$20,498 to be held in trust to pay any tax liability incurred by Cassiro, for which an advice from Coopers & Lybrand was prepared.
In his letter of 16 December 1996 and in his telephone conversation on 18 March 1998 with Leon Bonaccorsi of the Australian Taxation Office (“ATO”), Claude Cassegrain explained how the $9,500,000 payout was divided between the Cassegrain Parties:-
$4,250,000 to Claude Cassegrain (non-taxable) on which $200,000 was paid personally for legal costs. This was loaned to GC&Co to satisfy the Deed Poll with the State Bank mentioned above.
$5,250,000 to GC&Co returned as assessable income;
Less the following deductions:
$2,503,449.63 Legal expenses (which is being challenged as excessive)
$165,873.34 Cassiro Plant
$50.00 Sale of shares in Cassiro
$2,580,727.03 Net gain returned by GC & Co.
7. By the time the matter was being prepared for hearing, the respondent had re-stated the issues in its Statement of Facts and Contentions filed on 9 August 2004 as follows:
·whether for the purposes of Part IIIA of the Income Tax Assessment Act 1936 (the Act) the consideration in respect of the disposal by GCC of assets under the deed of settlement was $9.5m as assessed by the respondent or $5.25m as returned (as income) by GCC. That is, the respondent accepted that as the deed of settlement did not dissect revenue receipts from all capital receipts, the proper tax treatment of the settlement sum lies under the capital gains tax provisions of Part IIIA and not under the ordinary income provisions.
·whether GCC has shown that the consideration is any amount other than which the respondent has assessed.
·whether, in calculating the amount of such consideration the respondent is bound by the purported agreement between GCC and Claude Cassegrain to divide the settlement sum $5.25m : $4.25m.
·whether the purported agreement gave rise to a capital gain of GCC.
8. The applicant submitted that the tribunal’s jurisdiction on review is determined by reference to the terms of the decisions under review, being the original statement of reasons. I do not accept the submission. Under s.25 of the AAT Act, an enactment may provide that applications can be made to the tribunal for review of decisions made in the exercise of powers conferred by that enactment. The Taxation Administration Act 1953 (the Administration Act) is such an enactment that gives the tribunal jurisdiction to review certain decisions made by the respondent, such as the objection decision dated 7 November 2002 (s.14ZZA). As for the significance or otherwise of the reasons for the original decision, the relevant principles are set out by Professor D Pearce as follows:
When it comes to the hearing before the AAT, the decision-maker is not obliged to rely solely on the reasons formerly advanced to support the decision under review: Re Jeans and Secretary, Department of Housing and Construction (1979) 2 ALD 337; Re Greenham and Minister for Capital Territory (1979) 2 ALD 137; Re Parisi and Australian Federal Police (1987) 14 ALD 11. If, however, the decision-maker intends to alter the grounds relied upon at the time of making the decision, notice should be given to the applicant and the AAT ‘well in advance of the hearing’: Re Geoffrey Thompson & Growers Co-op Pty Ltd and Export Markets Development Grants Board (1985) 7 ALN N242. (DC Pearce, Administrative Appeals Tribunal, LexisNexis Butterworths, 2003, p 137).
I am satisfied that the respondent gave sufficient notice of the change in its reasons through the Statement of Facts and Contentions.
evidence
9. There were three statements by Claude Cassegrain tendered in evidence: a statement dated 18 February 2004 (exhibit A1), an affidavit sworn on 4 June 2004 (exhibit A2) and a supplementary statement dated 6 December 2004 (exhibit A3).
10. Claude Cassegrain is 57 and the second eldest of the six children of Gerard and Francoise Cassegrain, both now deceased. Gerard brought his wife and family, at the time comprising his children Catherine, Claude and Patrick, from France to live in Australia in 1951. The family settled in an area to the west of Port Macquarie in New South Wales, known as the Hastings district. His father established a business in earthmoving equipment and a truck wrecking yard. The wrecking business was conducted by Expressway Spares Pty Limited (Expressway Spares).
11. GCC was incorporated in 1960 to takeover logging operations previously conducted by his parents in partnership. His parents each held one ordinary share in GCC's issued capital. In 1966 GCC sold its interest in the log hauling business and invested the proceeds in the acquisition of 150 acres of forest and farming land adjoining land already owned by his parents.
12. Claude Cassegrain graduated Bachelor of Commerce in 1974. His father had a heart attack in 1975. Claude took leave from his employment at the time with BHP, to assist in the running of family businesses. Gradually he became the financial controller and business developer for the family businesses, GCC, Expressway Spares and CTK Engineering Pty Limited. He stated that between 1975 and September 1985 he negotiated the purchase of 2,000 acres of adjoining land, largely purchased in the name of GCC. He said his parents and siblings, who each held shares in the company, acquiesced in his conduct of GCC in acquiring the land. He remains a director of GCC and CFE.
13. Most of Claude Cassegrain’s time from 1975 to 1985 was devoted to work in relation to Expressway Spares Pty Limited. Between 1986 and 1988 he devoted most of his time to the establishment of the winery industry in the Hastings. From 1989 to 1993 he was mostly involved in GCC and CSIRO related matters.
14. In around May 1987, GCC and CSIRO began discussions on the possible application of a soil improvement technology that CSIRO had been developing, known as slotting, to land on which GCC proposed to develop vineyards. GCC and CSIRO entered a written agreement on 10 July 1987 for the conduct of research and development into slotting and associated activities. GCC expended funds on developing potential commercialisation of slotting. Around March 1989 the CSIRO initiated discussions with GCC concerning a proposed collaboration in the conduct of research and development in relation to a waste water treatment system known as vertical upflow artificial wetlands (VFW). GCC and CSIRO varied their earlier agreement by memorandum of commercial understanding executed on 19 June 1989 that provided for the transfer of GCC’s and CSIRO’s joint venture activities to a company known as Cassiro Pty Limited. Cassiro was to undertake research and development into soil slotting, VFW and develop scanning software known as ‘Sci-Scan’. The issued capital in Cassiro was held equally by GCC and CSIRO.
15. GCC funded certain expenditure by Cassiro and CSIRO contributed staff and resources.
16. GCC and Claude Cassegrain convened a steering committee for a project known as the Hastings 2000 which was planning the construction of an Ecotechnopolis in the Hastings region. The steering committee contemplated that the CSIRO and Cassiro might perform some role in Hastings 2000.
17. Claude Cassegrain describes himself as the alter ego of GCC. He said he deposited $866,306, being his own funds, with GCC in around June 1987 for use by the company as working capital and in his view these funds “ … permitted me to have GC&Co enter and fund the Joint Venture Agreement with CSIRO in July 1987 without any need for me to refer to any of the members of GC&Co. I could have had the 50% of the shares in CASSIRO limited issued to me personally rather than GC&Co. In effect GC&Co’s interest in CASSIRO was more or less as if it was held in trust for me to direct as I wished.” (exhibit A1)
18. Claude Cassegrain became concerned that CSIRO was not giving proper recognition to contributions that had been made to the joint venture. In around February 1992 he had discussions with John Garrett, a solicitor in Port Macquarie who had acted for GCC and Claude Cassegrain in the late 1980s, providing corporate advice relating to winery investments in the Hastings district. Mr Garrett’s evidence was that Claude Cassegrain consulted him about problems with Cassiro’s funding and management and in relation to its conduct of a number of projects. Claude Cassegrain was involved personally and through GCC and through Cassiro itself. He recalled that Claude Cassegrain wanted to keep involved with CSIRO in relation to a number of technology projects and Hastings 2000 and Mr Garrett advised Claude Cassegrain that if he commenced an action personally against CSIRO that would obviously jeopardize their future working relationship.
19. Claude Cassegrain instructed his solicitor to commence action in the name of GCC against CSIRO. As a result of the legal advice, on 8 April 1992 GCC commenced legal proceedings in the Federal Court (G3062/92) against CSIRO and its subsidiary Sirotech for oppression, breach of contract and breach of duty, and sought relief by way of injunctions, account of profits and other relief. In cross-examination Claude Cassegrain agreed that the entity that retained the lawyers was GCC. On 7 May 1992 CSIRO began an action in the Federal Court (G3095/92) to have Cassiro wound up on the just and equitable ground.
20. Both actions were set down for hearing over six weeks to commence in October 1992. The matters did not conclude. Mr Garrett said CSIRO aggressively defended the proceedings brought by GCC. He said GCC had great difficulty obtaining proper discovery and inspection of documents. A further amended statement of claim was filed on 18 December 1992 in matter G3062.
21. Mr Garrett said that documents produced by CSIRO in the early months of 1993 in response to many notices to produce, raised the issue whether the pleadings should be amended to include actions for defamation and injurious falsehood. The material that was produced included CSIRO documentation with respect to their dealings with Claude Cassegrain, the assets of the joint venture and the use of technology in various applications. By early April 1993 GCC’s counsel were considering an amendment to the claim seeking exemplary damages. A meeting was held on 26 April 1993 between Professor Adrienne Clarke, Chair of CSIRO, a director of CSIRO, the QCs representing each side and Claude Cassegrain. Following the meeting Mr Gyles QC for GCC, asked Claude Cassegrain to consider one scenario for settling and to put a dollar figure on a possible claim regarding loss of reputation. Some days later, on 5 May 1993 GCC wrote a without prejudice letter to Professor Clarke claiming a total of $56,033,000, of which sum $5m was apportioned to the following head of loss:
Damage to the name, reputation and standing of GC & Co, Cassegrain Family name, Cassegrain Group of companies, and Claude Cassegrain and his family as a result of being publicly associated with a failed venture involving bitter litigation and disruption to the family and their associated companies’ business activities. (ex R1, tab 22)
It was Claude Cassegrain’s evidence that prior to sending the letter he was aware of the need to be clear about the tax effect of any settlement payment.
22. A written settlement offer was made by CSIRO’s solicitors on 18 May 1993. It was also proposed that the issue of damages be referred for mediation. CSIRO’s solicitors informed GCC’s solicitors on 2 June 1993 that the mediation should be conducted on the basis that CSIRO has a liability to GCC. The CSIRO was insistent that Claude Cassegrain be a party to any deed of settlement and release. Mr Garrett received a letter dated 16 June 1993 from CSIRO’s solicitors marked ‘without prejudice except as to costs’ (document 6 to his statement, exhibit A 5) noting their instructions, and subject to obtaining Ministerial approval, CSIRO and Sirotech would settle the proceedings on the basis of paying GCC the sum of $7.25 million. That amount represented damages of $4.32m in respect of damages claimed by GCC, $2m in costs and $930,000 for transfers to CSIRO of interests in technologies. CSIRO would freely transfer its shares in Cassiro to GCC and GCC would covenant to use its best endeavours to procure that Cassiro covenants not to conduct any future business activities representing any connection between the business of Cassiro or GCC, and the CSIRO. GCC had to transfer any intellectual property in the soil slotting and vertical upflow artificial wetlands (VFW) technology, and any rights of GCC or Cassiro in respect of SCI-scan. The letter went on to state:
GC and its relevant associates (including Mr Claude Cassegrain) and Cassiro will grant comprehensive releases and indemnities to CSIRO and Sirotech, their officers, employees and agents, and CSIRO and Sirotech will grant similar release and indemnities to GC, its officers, employees, and agents, in respect of all dealings, events, transactions and representations up to the date on which the settlement agreement takes effect including, but not limited to, those dealings, events, transactions and representations that are the subject of the Court proceedings and also in respect of all subjects that are in any way referred to directly or indirectly, in your client’s letter to Professor Clarke of 5 May 1993 and all aspects of the project known as Hastings 2000.
23. The mediation was held over three days from 28 June 1993 to 2 July 1993 and the parties settled in principle and both proceedings were adjourned. Mr Garrett attended the mediation that took place on 28 and 29 June and 2 July 1993. In cross-examination he was asked whether he recalled that just prior to the mediation, Claude Cassegrain had made it clear that the settlement had to be tax effective. Mr Garrett did not express any view to Claude Cassegrain about the differential tax consequences of amounts received under the deed of settlement by way of damages or amounts in respect of the transfer of technologies, but he presumed there would have been tax issues from the different allocation of the settlement sum. He said negotiations were protracted but eventually a sum of $9.5m was agreed. In cross-examination Claude Cassegrain agreed that prior to 2 July 1993 he was concerned about the impact of tax on the settlement, especially if GCC received the entire amount of the settlement. He denied, however, that for that reason, it was important to try to have part of the settlement sum apportioned to himself as damages for defamation.
24. Mr Garrett received a letter from GCC dated 6 July 1993 that had been signed by Gerard Cassegrain and Patrick Cassegrain (document 4 to his statement, exhibit A 5). The letter reads:
It was resolved at an extraordinary meeting held by the shareholders on Saturday 3 July 1993 that the following offer in settlement of the dispute would be accepted by Gerard Cassegrain & Co Pty Ltd –
- $5.25m to Gerard Cassegrain & Co Pty Ltd ($4.32 in respect of damages $.930m sale of GC&Co’s share in Cassiro Pty Ltd).
- $4.25m personal damages payable to Claude Cassegrain.
The legal costs will be apportioned in a manner that is yet to be discussed between the company and Claude Cassegrain.
It was Claude Cassegrain’s evidence that apportionment of the settlement sum was discussed on 2 July 1993 by Sir Lawrence Street, the mediator, and the parties’ legal representatives. The context to that discussion was the demand by CSIRO that Claude Cassegrain had to be a party to the settlement documentation.
25. On 6 July 1993 Mr Garrett wrote to CSIRO’s solicitors proposing a number of points for inclusion in the settlement documentation that were the subject of Claude Cassegrain’s instructions (ex R1 tab 47)
1. Payment of $9.5 million to occur on execution and exchange of settlement documentation and in accordance with the written authority of Gerard Cassegrain and Co Pty Ltd (“GC”).
2. In consideration of the personal releases etc by Claude Cassegrain the amount of $9.5 million be paid as follows:-
a) $5.25 million to Gerard Cassegrain and Co Pty Ltd ($4.32 million on account of damages and $930,000 consideration for share transfer);
b) $4.25 million to Claude Cassegrain.
3. GC to transfer all of its shares in Cassiro Pty Limited (“Cassiro”) to the CSIRO or its nominee. We understand there is 1 ordinary share and 49 B class shares in Cassiro.
4. GC to transfer to CSIRO all its rights to the intellectual property of the two technologies, and in respect of the Vertical Flow Wetlands agreement of 21 December 1990 together with the Memorandum of Commercial Intent dated 19 June 1989 which agreements are otherwise terminated. …
26. CSIRO’s solicitor submitted a draft deed of release on 7 July 1993. On 8 July 1993 Mr Garrett wrote to CSIRO’s solicitors (exhibit R1, tab 59) which was a response, on a ‘without instructions’ basis, to the draft deed of settlement dated 7 July 1993, that the solicitors had forwarded to him. Mr Garrett addressed a number of matters. One concerned GCC’s proposal that it sell its shares in Cassiro to CSIRO. Another was that the “settlement must be structured as far as practicable in a manner which is tax effective for GC&Co.” Mr Garrett’s letter also proposed alterations to the draft deed. He proposed that the payment clause read ”CSIRO must pay GC&Co or at its direction the sum of $9,500,000 together with interest thereon …”. CSIRO’s solicitors accepted that alteration.
27. Mr Garrett said that the parties could not reach agreement in relation to apportionment. On 6 August 1993 he wrote to Claude Griffith and Winifred Gibson of Griffith Sallaway Pty, the accountants who did the Cassegrain companies’ financial and taxation work, to confirm a few points about the settlement process, including:
Attached please find a copy of Claude Cassegrain’s letter to John Garrett and Tim Castle dated 5 August 1993 on the subject of clause 2.1 of the settlement deed together with the writer’s reply of even date.
The writer indicated to Win that CSIRO’s position with respect to Clause 2.1 is that on any view of the litigation, even if Claude Cassegrain were a party to the proceedings and in consideration of the far reaching indemnities and warranties that he is providing, he would not receive more than approximately $500,000 in damages. In those circumstances the CSIRO do not wish to be a party to a document that has the effect of not fully representing the true position, as they see it, and for which criticism may be made. They say they are a Federal Government instrumentality and have to be mindful of their responsibilities. (exhibit R1 tab 67)
28. The letter referred to therein from GCC to Mr Garrett and Mr Castle, counsel for GCC, stated as follows:
Prior to the drafting of any Deed of Settlement the question of the apportionment of the damages was resolved at a meeting on … 3 July 1993. This was communicated to Mr Garrett and in case it has been lost, I have attached a copy of the resolution and the acceptance by Cassegrain.
We insist the draft of 2.1 reflects quite clearly this result.
You will note that we have, for settling the litigation, accepted CSIRO’s offer of $930,000 in respect of CASSIRO and our interest in the technologies.
We do not accept that there be any disagreement and any further legal cost expended on this clause. For CSIRO to do so, we consider it to be yet another deliberate attempt to frustrate and oppress.
We are prepared to accede if CSIRO finds difficulty in embodying ‘ … payment by cheque to GC & Co $5.25m, Cassegrain $4.25m,’ as 2.1; to the clause being amended to read ‘ … the payment by cheque jointly to GC & Co and Cassegrain $9.5m …”. In the latter instance we shall account to our parties privately. (ex R1, tab 66)
29. Amendments were made thereafter until the deed of settlement was executed on 27 September 1993 (T4).
30. Claude Cassegrain was a party to the deed of settlement, he and GCC being referred to as the Cassegrain parties. Clauses 2 and 3 of the deed of settlement read (T4) as follows:
2. CONDITION PRECEDENT
2.1 The provisions of this Deed do not become binding on the parties unless and until CSIRO has paid by cheque to or at the direction of the Cassegrain Parties the sum of $9,500,000.
2.2 If the condition precedent referred to in Clause 2.1is satisfied, the payment of the sum referred to in Clause 2.1 will be referable:
(a) as to the amount of $8,835,083- to:
(i) the full and final discharge of any and all liabilities for which any party to this Deed has or, but for the execution of this Deed would have had, to pay costs or damages to any other party to this Deed, whether pursuant to Proceedings 3062, Proceedings 3095 or otherwise; and
(ii) the benefit of the various covenants, releases, indemnities and warranties entered into, given and made by the Cassegrain Parties under the terms of this Deed;
(b) as to the amount of $503,667- to:
(i) the transfer of the GC&Co Technologies (other than GC&Co’s right, title and interest in slotting machines) as referred to in Clause 4.2; and
(ii) procuring the transfer of the Cassiro Technologies (other than Cassiro’s right, title and interest in slotting machines) and of the right, title and interest of Cassiro in certain contracts and arrangements as referred to in Clause 4.3;
(c) as to the amount of $155,000- to:
(i) the transfer of the slotting machine referred to in Part 2 of Schedule F; and
(ii) procuring the transfer of the slotting machines referred to in Part 1 of Schedule F,
which transfers are pursuant to Clause 4.2, 4.3 and 4.4; and
(d) as to the amount of $6,250- to the net difference between the value of:
(i) the goods, wares and merchandise which are transferred to GC&Co as referred to in Clause 15.9(a)(ii) and 15.9(a)(iii) (which are valued in aggregate at $3,390); and
(ii) the goods, wares and merchandise which are transferred to CSIRO as referred to in Clause 15.9(b)(i) (which are valued in aggregate at $9,640).
3. AGREEMENT BINDING ON OTHER PARTIES PRIOR TO EXECUTION BY CASSIRO
3.1 It is the intention of the parties that each of them should execute this Deed, but where the CSIRO Parties and the Cassegrain Parties have all executed this Deed it binds those parties inter se (subject to Clause 2.1) from the time of execution by the last of those parties to execute, notwithstanding that Cassiro has not yet executed this Deed.
3.2 Each of GC&Co and CSIRO will take all action within its power to procure that Cassiro executes this Deed.
…
31. In cross-examination Claude Cassegrain agreed that at no time did he write a letter of demand for damages for defamation and the closest he came to doing so was the letter of 5 May 1993 to Professor Clarke. He admitted that he had not received legal advice regarding the amount of damages he might receive for defamation. He gave evidence of an hour long discussion he had with his parents on 3 July 1993 in the presence of Andrew Walmsley, a solicitor in partnership with Mr Garrett. Claude Cassegrain said the conversation was in French, the language in which he habitually communicated with his parents. His father did not discuss the apportionment with any other family member apart from Claude’s mother. Claude Cassegrain denied that a purpose of the apportionment, that he discussed with his father, was to obtain the advantage of the tax free amount of damages received by an individual in respect of defamation.
32. It is common ground between the parties that the settlement sum of $9.5m paid by CSIRO under the terms of settlement dated 27 September 1993 is not income in character.
33. Counsel for the applicants referred to the respondent’s reasons for the objection decision in the respondent’s statement of facts and contentions and noted that they were limited only to the capital gains tax (CGT) provisions of the Act. Counsel submitted that the respondent must assess income tax on the affairs of a taxpayer as he finds them, subject to two exceptions: where Part IVA ‘Schemes to reduce income tax’ is invoked to permit reconstruction of the taxpayer’s affairs; and where the taxpayer’s affairs involve sham transactions. Since the respondent had not made a determination under s.177F in Part IVA of the Act to cancel a tax benefit received by GCC, it was submitted that he could not reconstruct on that basis. However, the respondent has contended that the agreement to divide the settlement money between GCC and Claude Cassegrain was a sham. It was submitted for the applicants that if the respondent’s argument that the agreement to divide the settlement sum between GCC and Claude Cassegrain was a sham did not succeed, the objection decision must be set aside and the objections allowed.
34. Further the applicants submitted that, as a result of the agreement to apportion the settlement sum, GCC and Claude Cassegrain jointly received the amount of $9.5m. Consequently that amount was received by the taxpayers jointly (Guthrie v ANZ Banking Group (1991) 23 NSWLR 672; Advanced Prosthetic Centre v Appliance & Limb Centre (INT) Pty Ltd [2002] NSWSC 515). The passage below from Bryson J’s judgment in Advanced Prosthetic Centre sets out the applicant’s submission regarding the effect of joint receipt of the settlement sum:
[9] In cl.3 the agreement to pay money is an agreement to make a payment to the APC parties (meaning APC, Mr Howells and Mr Muenger) or as they direct. There is no agreement to pay any particular part of the $315,000 to any one of them. It is a promise to pay to them jointly and if it were to be enforced it would have to be enforced by them jointly; and in these proceedings they all join as plaintiffs. Within the terms of the Agreement no particular one of the APC parties has any entitlement to all or part of the $315,000 which is to be paid, and within the terms of the Agreement there is no way of discerning any relation between the $315,000 and the claims made by any one of the APC parties, or the various bases on which they made claims. …
35. Counsel identified the relevant asset as the entitlement to receive jointly the $9.5m, which arose under the deed of settlement and in particular clause 2.1. Joint receipt does not result in a capital gain accruing to each party in respect of the entire joint sum because it was submitted that the effect of s.160ZN(1)(a) of the Act is to allow the joint consideration, the settlement sum, to be divided equally between the joint recipients. Such an outcome was argued to be in conformity with the analysis by Beaumont J in FCT v McDonald 87 ATC 4541 in relation to the receipt of income jointly. Such receipt of consideration for disposal of a right arising under the deed of settlement, being a right to receive $9.5 m jointly, results in GCC and Claude Cassegrain each receiving $4.75m, being half of the joint consideration of $9.5m. Further, the assessment was misconceived because the apportionment between GCC and Claude Cassegrain was of no effect for tax purposes because it occurred after the capital gain had accrued jointly in equal shares. Accordingly, the objection decision must be set aside because GCC did not receive the full settlement sum for CGT purposes, half of that amount being taken to have been received by Claude Cassegrain.
36. For the respondent it was submitted that the purported agreement to divide the settlement sum between GCC and Claude Cassegrain had no effect for tax purposes because it was a sham. The respondent adopted and relied on the findings in the judgment of Davies J in proceedings in which Claude Cassegrain, his sister and mother were sued by a number of his siblings (Cassegrain v Cassegrain [1998] 811 FCA). Moreover, the agreement to apportion or divide the settlement sum had no legal effect because it was merely an agreement between two natural persons, Claude Cassegrain and his father (Gerard), and not an agreement between Claude Cassegrain and GCC.
37. The respondent’s statement of facts and contentions accepted that under the deed of settlement, GCC gained a joint interest in the right to the $9.5m (and Advanced Prosthetic Centre was cited). The respondent submitted that GCC and Claude Cassegrain made unequal contributions to the consideration given to CSIRO as the purchase money for the settlement sum that leads to equity’s intervention to undo the legal position of one purchaser vis a vis the other (cf Calverley v Green (1985) 155 CLR 242). Therefore their respective interests in the settlement sum were proportionate to the value of rights and other property conferred on CSIRO and Sirotech which they each provided under the deed. The respondent made alternative submissions that ss.160M(3)(b), 160M(6) and 160M(7) of the Act applied to the settlement transaction.
38. In reply, the applicants submitted that the judgment of Davies J lends no support to an argument based on sham. It was submitted that Davies J would have declared a trust in respect of the $4.25m, rather than finding that the increase in Claude Cassegrain’s loan to GCC was oppressive conduct. The finding of oppressive conduct supported the submission that the apportionment and subsequent book entry to Claude’s loan account with GCC arising from his directing most of the $4.25m to repay the loan from the bank to GCC, reflects a legally effective agreement to apportion the settlement sum.
39. It should be noted that the decision in McDonald turned on the nature of the definition of partnership in s.6 of the Act. Beaumont J found that there was a receipt of income jointly from investment properties. There was a derivation of income and incurrence of losses by a tax law partnership, the husband and wife taxpayers not carrying on business with a view of profits and thus not a partnership under the general law. The amount jointly received by GCC and Claude Cassegrain is not a receipt of income and McDonald may be distinguished. The applicant submitted that s.160ZN(1)(a) of the Act has the effect of treating each joint recipient of consideration in respect of the disposal of an asset, as having received an equal amount of the capital sum. I note that this issue did not arise in Advanced Prosthetic Centre so that case is of less direct relevance to the matter at hand. Section 160ZN(1)(a) states:
SECT 160ZN Application to joint owners
(1) Subject to subsection (2), where an asset is owned by persons as
joint tenants:
(a) this Part applies as if those persons owned the asset as tenants in
common in equal shares;
…
40. As against the CSIRO parties, GCC and Claude Cassegrain had a joint entitlement. But they had a side agreement to share the whole settlement amount between themselves unequally; ostensibly $5.25m:$4.25m. The respondent submitted that in circumstances where persons make unequal contributions to the acquisition of an asset, there being no presumption of advancement, a resulting trust is presumed for them as tenants in common in proportion to the value of their contributions (Calverley v Green). Each could enforce their interest in the property, being the entitlement to receive the settlement sum, in equity against their co-owner. Counsel submitted that this equitable principle should apply to displace the legal notion that the amount has been received as joint tenants, and thus equally. I accept the submission and agree that it would be an absurd result that $4.75m would be the disposal consideration accruing to Claude and $4.75m similarly would be GCC’s disposal consideration, despite their grossly disproportionate contributions. I accept the submission that the interest that GCC and Claude each had in the consideration received from CSIRO, should be proportionate to the rights given up on settlement to obtain that consideration. There was some evidence as to the value of the contribution made by Claude, being his possible claim for defamation, which he never commenced. Its value was by no means close to $4.25m. I accept the submission that the onus is on the applicants to establish the value of those rights. Thus it is reasonable to attribute the entire $9.5m of the disposal consideration to the share of the rights given up by GCC, pursuant to s.160ZD(4) which reads:
SECT 160ZD Consideration in respect of disposal
…
(4) Where any consideration paid or given in respect of a transaction
relates in part only to the disposal of a particular asset, so much of that
consideration as may reasonably be attributed to the disposal of the asset
shall be taken to relate to the disposal of the asset.
41. The evidence of Claude Griffith was that GCC had claimed deductions for most of its expenses incurred in the joint venture and Cassiro’s activities, including concessional deductions for research and development under s.73B of the Act. Claude Cassegrain’s evidence was that an important objective of the settlement was to recover the GCC’s costs invested in Cassiro. There would be double counting to allow those costs to be included in the cost base of the asset (rights) given up by GCC. Consequently I find that the cost base of GCC’s rights disposed of in the settlement, by reason of s.160M(3)(b), (which effectively treats a release of GCC’s rights as a disposal of the right) is nil given the acquisition costs are either not capital in nature or would be double-counted. A capital gain of $9.5m accrues to GCC under s.160Z of the Act, this being the excess of the disposal consideration over the cost base of the assets given up to acquire the settlement sum.
42. I have reached a similar conclusion, that the entire sum of $9.5m should be attributed to GCC, on an alternative ground, that the agreement between Claude Cassegrain and his father was a sham. The Cassegrain litigation before Davies J was an oppression suit brought by some of Claude Cassegrain’s family against him. Counsel for the applicants challenged the findings made by Davies J that would support characterising the apportionment agreement between Claude Cassegrain and his father as a sham. The case before Davies J ran for twelve days and his Honour had the advantage of hearing evidence from witnesses including Patrick Cassegrain, a co-signatory to the letter of 6 July 1993 to Mr Garrett that referred to the resolution of the extraordinary general meeting of GCC on 3 July 1993 when the apportionment of $5.25m : $4.25m was agreed. Davies J made the following findings:
Claude has given evidence that he considered the $4.25m to be his fair share of the settlement and that he could not recall discussing any issue of capital gains tax with Claude Griffith or with his father. I reject Claude's evidence on these matters and also that of Mrs Cassegrain. I am satisfied that the split was agreed to between Claude and his father with a view to reducing the capital gains tax otherwise payable on the $9.5m. I am satisfied that Gerard and Claude did not at the time regard the sum of $4.25m as Claude's money.
…
I am satisfied that there was never any agreement between Claude and GC & Co with respect to the payment of interest on the $4.25m. I am satisfied that neither Gerard nor Patrick, who signed the letter to Garrett & Walmsley of 6 July 1993, looked upon the $4.25m as Claude's money, nor had any conversation with Patrick with respect to interest.
…
Claude's actions in arranging for the purported division of the $9.5 into $5.25m for GC & Co and $4.25m for Claude, his drawing upon that sum at his will as if it were his entitlement to do so and his arranging for the passing of the resolution which made provision for the payment of retrospective interest was exemplary of oppressive behaviour.
In the result, Davies J gave relief in the form of a declaration that Claude Cassegrain, in treating the $4.25m loan account with GCC as his entitlement to be drawn down at will, was oppressive of and unfairly prejudicial to the members of the company.
43. It was submitted for the applicants that neither the deed of settlement dated 27 September 1993 nor the agreement for the apportionment was a sham according the test expressed by the High Court as follows:
Each of these transactions was legally effective. None of the transactions that took place on 30 June 1989 could be said to be a sham. The primary judge was wrong to characterise them, as he did by his references to "artifice", "façade" and "charade", as shams. "Sham" is an expression which has a well-understood legal meaning. It refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences. (Equuscorp Pty Ltd and Anor v. Glengallan Investments Pty Ltd (2004) 211 ALR 101 at 111)
As Davies J found that there was oppressive behaviour on the part of Claude Cassegrain, it could not equally be the case that his actions were a sham.
44. Other judicial guidance in relation to sham, in the taxation context, are found in the judgment of Carter J in Cranstoun v FCT (1984) 75 FLR 220:
If two persons sign a document which on its face purports to be a loan agreement evidencing a loan from one to the other for $180,000 but it is agreed either expressly or impliedly that the document is intended to give the appearance only of a loan transaction then it is, in my view, a sham; it is something devised to delude, it is a trick or a hoax, an imposture, it is something that is intended to be mistaken for something else, it is not really what it purports to be, it is a spurious imitation or a counterfeit … .However one defines it, it is in law nothing, nor, in my view, can it be elevated to be something which the law will recognise and enforce merely because documents which are drawn in legal language appear, a series of book-keeping entries is made and extensive use made of the banking system involving debits and credits of the order of hundreds of thousands of dollars. No amount of professional ingenuity will make the agreement into what in fact it is not if the parties do not so intend.(at 228)
and in the dictum of Hill J that “[a] common intention between the parties to the apparent transaction that it be a disguise for some other and real transaction or for no transaction at all” (Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 at 258) I do not discern any difference in principle in Cranstoun and Richard Walter from that enunciated in Equuscorp.
45. In reaching a conclusion about the effect of the agreement to apportion the settlement sum as between the Cassegrain parties and the subsequent treatment of the $4.25m as a loan by Claude Cassegrain to GCC, his $4.25m was effectively paid over to GCC’s bank in reduction of its indebtedness, I am mindful of the following passage from the High Court’s judgment in Albion Hotel Pty Ltd v Federal Commissioner of Taxation (1964-1965) 115 CLR 78 that “ …entries in books of account should evidence real transactions. They are evidence only. Their proper purpose is to record transactions having legal consequences. Making entries does not make such transactions” (at 92).
46. I have taken into account the written and oral evidence and submissions made at the hearing in reaching my decision. I make the following findings:
·as a result of the discussion between Claude Cassegrain and his father on 3 July 1993, the day following the conclusion of the mediation, it was agreed that $4.25m of the settlement sum would be treated as Claude Cassegrain’s even though he was not a party to the litigation. He was, of course, at the insistence of CSIRO a party to the deed of settlement. I find that the agreement between the Claude and his father was not intended to confer on Claude beneficial entitlement to the sum of $4.25m. Rather the intention was to maximize the after tax amount of the settlement sum. Both men were aware of GCC’s delicate position with its bank. The bank had kept a close eye on the litigation and the threat of receivership was present. Pressure from the bank was also referred to in Mr Garrett’s evidence. My reasons for this finding are as follows:
Claude Cassegrain’s statement referred to the pressure from the bank in these terms:
The Bank’s threat to foreclose on all the Family companies and my parents and siblings losing their homes was worse to me than if the bank had a gun at my head or subjected me to physical torture.
During the almost two years, from the time the CSIRO skulduggery started to this time [June 1993], all my time, energy and efforts had been misdirected and wasted in protecting CASSIRO and ‘Hastings 2000’. Time and energy that would otherwise have been directed into retiring the State Bank debt …
I went into the mediation with a bottom line view of recovering net non-taxable damagers [sic] of around $15m from CSIRO – the $15m also being the figure required to pay out the State bank due on 30.6.1993 pursuant to the cross company and shareholders’ agreement with the Bank dated 3 July 1991.
·Claude Cassegrain had been aware of the liability for tax that would be incurred by GCC if the settlement sum were attributed to the disposal of assets by the company. Claude Griffith’s evidence was that he raised the tax problem of GCC‘s receiving $15m in about early 1993 and I so find. Further I accept his evidence that he advised Claude Cassegrain at some point prior to the mediation that money received in respect of personal injury was not taxable. I accept that evidence of Mr Griffith, which was tested in cross-examination. Where the evidence of Mr Griffith and Claude Cassegrain conflicts, I prefer the evidence of the professional accountant, who impressed as having presented his advice at the time, accurately and in the interest of his client. I should add that the evidence of Winifred Gibson does not assist in making findings as to the state of Claude Cassegrain’s knowledge, including the timing of his obtaining that knowledge, of a tax problem and options for maximizing GCC’s after tax return so that the bank debt could be paid down. I consider Mr Griffith, as the senior taxation professional at Griffith Sallaway at the time, who had acted for Gerard and the family for some time, to have had the greater input to these issues. (His affidavit – exhibit R1 tab 90 - in the Cassegrain case refers to his having regular discussions with Gerard about all Cassegrain affairs from around the mid 1980s).
·I find that the intention of Gerard Cassegrain and his son Claude was to reduce the level of tax on the settlement sum, so that as much as possible would be available to be paid to the State Bank. I find that the purported division of the $9.5m settlement sum, in particular $4.25m payable to Claude Cassegrain was not intended to have legal effect. Further I find the increase by $4.25m in the debit balance of Claude’s loan account was not intended by Gerard and Claude to have legal effect.
·I accept that par 39 of Mr Griffith’s affidavit sworn for filing in the Cassegrain case before Davies J accurately records Claude Cassegrain’s intention, and by inference his father’s (ex R1, tab 90):
“When I expressed my concern to Claude about the apportionment of legal costs, he said to me on a number of occasions words to the following effect:
‘This amount is not mine. It’s the family’s money. I am holding it for the family. It is better from a tax point of view for us to make the nett sum as large as possible.’”
·Claude Cassegrain’s own evidence is also telling. On 3 February 1994 he wrote a memo to other family members (ex R1, tab 90):
“GC & Co … invested some $7.5m with CASSIRO, a project that had potential huge benefits for all of the family’s businesses – OK it failed – but, I did recover $6.8m of the investment but I lost my time and energies.”
He agreed in cross-examination that the $6.8m refers approximately to the settlement sum less the legal fees of the litigation. I infer that Claude Cassegrain recognised that he was treating the $4.25m that had been apportioned to himself, as being a recovery by the company.
·Claude Cassegrain’s statement dated 3 February 2004 (ex A1 pars 77ff) expressed the view that he considered GCC as his alter ego. In that statement he also said that he took the view that he could have had half the issued shares in Cassiro allotted to himself and not GCC. He also took the view that GCC’s interest in Cassiro was more or less as if it were held in trust for Claude to do as he wished. I find that this evidence of Claude’s supports the finding that, at the time of the agreement to make the apportionment, there was no true independent bargaining between him and his father. They did not negotiate or deal with one another over an apportionment in any real sense because they intended to exploit the tax advantage available to damages for defamation or other personal injury.
·A further reason for finding the apportionment agreement was a sham is that there was no real relationship between the amounts agreed and any reasonable entitlement of GCC and Claude Cassegrain respectively. The evidence is that GCC invested over $7m in the joint venture including the activities of Cassiro. CSIRO’s solicitors considered that Claude would not receive more than $0.5m in damages for defamation and the other releases and warranties he had to provide under the deed of settlement. The evidence of Mr Rares SC was that at the time of the settlement, September 1993, the record highest verdict for defamation was $0.6m, albeit excluding a claim for economic loss which in Mr Rares’ opinion, Claude could have successfully claimed.
·Despite the book entry to increase the loan account giving the legal form of a loan to the payment that Claude Cassegrain made in reduction of GCC’s debt to the bank, the book entry did not reflect the intention of Gerard Cassegrain and his son Claude, which was to treat the entire $9.5m as the company’s for immediate use in paying down the company’s debt.
·I do not accept the submission that the finding of sham is affected by Davies J’s being unaware of the fact that Claude Griffith knew the amounts of the apportionment at the time that he wrote to Deloittes (6 July 1993) for advice about the taxation treatment of the apportioned amounts.
·Further support for the conclusion that the purported apportionment was a sham is found in the findings made by Davies J in the Cassegrain case that are quoted above. In particular I note that his Honour found that neither Gerard nor Patrick Cassegrain looked on the $4.25m as Claude’s, despite their giving an outward appearance to the contrary by their letter dated 6 July 1993 to Mr Garrett. It was a purported division of funds because at the time of their discussion, neither Gerard nor Claude regarded the money as Claude’s.
47. Contrary to my finding that the agreement to apportion was a sham, I would have found that s.160M(6) of the Act, as amended by Taxation Laws Amendment Act (No 4) 1992 would apply to the agreement to apportion. That is, the following should be read on the assumption (and nothing else) that the apportionment agreement is legally effective and is an alternative basis (an alternative as well to s.160M(3)(b) discussed earlier) for upholding the objection decision that affirmed the assessment that GCC accrued a capital gain of $9.5m.
48. Section 160M(6) and related provisions read as follows:
(6) Subject to this Part (other than subsection (7) of this section), if:
(a) a person creates an asset that is not a form of corporeal property; and
(b) on its creation, the asset is vested in another person;
then subsections (6A) and (6B) apply.
(6A) If subsection (6) applies:
(a) the person creating the asset is taken to have acquired, and to have
commenced to own, the asset at the time applicable under subparagraph 160U (6)(a) (ii) or (b) (ii); and
(b) the person creating the asset is later taken to have disposed of the asset to the other person mentioned in paragraph (6) (b) of this section at the time applicable under subparagraph 160U (6) (a) (iii) or (b) (iii); and
(c) the person so taken to dispose of the asset is taken not to have paid or given any consideration, or incurred any costs or expenditure, referred to in any of paragraphs 160ZH (1) (a) to (d) (inclusive), (2) (a) to (d) (inclusive) and (3) (a) to (d) (inclusive) in respect of the asset; and
(d) paragraph 160ZD (2) (a) does not apply to that disposal of the asset.
(6B) Also, if subsection (6) applies:
(a) the other person mentioned in paragraph (6) (b) is taken to have acquired the asset from the person creating it, and to have commenced to own it, at the time applicable under subparagraph 160U (6) (a) (i) or (b) (i); and
(b) paragraph 160ZH (9) (a) does not apply to that acquisition of the asset.
(6C) Subsection (6) applies to the creation of an asset:
(a) whether or not the asset is created out of, over or otherwise in connection with, an existing asset; and
(b) whether or not the person creating the asset owned or disposed of anything at the moment of creation of the asset.
(6D) In subsections (5) and (6):
"vest", in relation to an asset, means:
(a) in the case of an asset that is not a right - confer ownership of the asset on a person; or
(b) in the case of an asset that is a right - create the right in a person (whether or not conferring ownership of the asset on the person).
49. GCC owned shares in Cassiro and was the applicant in the litigation against the CSIRO entities, claiming to have rights against them. In total CSIRO was prepared to pay $9.5m to GCC, but Claude Cassegrain had to be a party to any settlement. The apportionment agreement vested an incorporeal asset in Claude Cassegrain, being his entitlement to $4.25m of the $9.5m settlement sum that was agreed at the mediation, whenever that amount might become payable in consequence of the settlement of GCC’s legal action. I am satisfied that Claude Cassegrain’s entitlement to a share of the settlement sum would otherwise have been substantially less than $4.25m, according to the evidence of Mr Rares.
50. GCC created an asset that vested in Claude Cassegrain, enforceable against GCC, for payment of $4.25m of the total of $9.5m. The right is not a form of corporeal property. On creation of that right, it is vested in Claude Cassegrain. Under the amended, and extended, definition of asset in s.160A, there is included:
In this Part, unless the contrary intention appears, "asset" means any form of property and includes:
(a) any of the following:
(i) an option;
(ii) a debt;
(iii) a chose in action;
(iv) any other right;
whether legal or equitable and whether or not a form of property;
(aa) goodwill or any other form of incorporeal property; …
51. The machinery provisions in s.160M(6A) are then engaged. The effect of their operation is to deem GCC to have disposed of the created asset at the time of its vesting in Claude Cassegrain. But GCC’s cost base in that asset would be nil, by reason of s.160M(6A)(c).
52. Section 160M(6A)(d) deals with the consideration for the disposal of the asset vested in Claude Cassegrain. The respondent submitted that GCC and Claude were not dealing with each other at arm’s length in connection with the apportionment and thus the disposal of the right or asset. The question whether persons are dealing with each other at arm’s length in relation to a transaction or some other course of action was discussed by Hill J in A.W. Furse No 5 Will Trust v. Commissioner of Taxation 91 ATC 4,007:
The first of the two issues is not to be decided solely by asking whether the parties to the relevant agreement were at arm's length to each other. The emphasis in the subsection is rather upon whether those parties, in relation to the agreement, dealt with each other at arm's length. The fact that the parties are themselves not at arm's length does not mean that they may not, in respect of a particular dealing, deal with each other at arm's length. This is not to say that the relationship between the parties is irrelevant to the issue to be determined under the subsection.
…
What is required in determining whether parties dealt with each other in respect of a particular dealing at arm's length is an assessment whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining. (at 4014-5)
53. Thus, it was argued, GCC would be deemed to have received the market value of the right. It was further submitted that the market value would be $4.25m. I accept that submission. I am satisfied that Claude Cassegrain and his father were not acting at arm’s length in connection with the apportionment agreement. The context to their dealing was such that there was no independent bargaining positions brought on the part of the company, on the one hand, and Claude, on the other. On balance, I find the evidence demonstrates that Claude and his father were acting in concert and not at arm’s length.
54. Accordingly, there is a capital gain of $4.25 accrued to GCC on the disposal of the created asset that was vested in Claude Cassegrain.
55. It follows that for the above reasons that the objection decisions should be affirmed because the applicants have not discharged the onus of proving that the assessments were excessive.
I certify that the preceding 55 paragraphs are a true copy of the decision and reasons for decision of P.J. Lindsay, Senior Member:
Signed:
..................................................................................……………………………….Associate
Hearing 6-9 December 2004
Date of Decision 18 January 2005
Applicant’s counsel C Bevan
Respondent’s counsel M Brabazon
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