TRA finds in favour of taxpayer - no tax avoidance
2010 case note – no tax avoidance in relation to sale of a property - reversion, prepayment of rent.
The TRA found that the sale of a property on revenue account from a development company to a family trust where it was held on capital account and subject to a prepaid lease was not a tax avoidance arrangement.
Impact of decision
The decision accepts that a sale price for the reversion of less than a fair value could be a pointer to tax avoidance [paragraph 172].
In this case the notion that the valuation of a property must be at market value when between related parties was not in dispute.
It was considered that there was nothing artificial or contrived about the dispositions of property from company to family trust.
A property development company purchased a luxury lodge, it is accepted by all that this was held on revenue account. Mr T was one of two shareholders of the company, as well as one of three directors.
A separate company was later incorporated to run the business at the luxury lodge.
The development company then granted the separate company a lease for 10 years.
This lease was pre-paid by the separate company partly by a loan from the development company.
Later the development company sold the property to a family trust (the disputant) of which Mr T was settlor. Remembering the lease had been prepaid for 10 years, the family trust had really acquired a right of reversion ("the reversion") once the lease expired.
Ultimately, the trust sold the luxury lodge to a foreign company.
Judge Barber in making his decision quoted the Supreme Court in Ben Nevis that the:
- ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is inconsistent with Parliament's purpose. [paragraph 186].
In Judge Barber's opinion, on the particular facts of this case there was no tax avoidance arrangement with regard to income tax [paragraph 176] or goods and services tax ("GST") [paragraph 177].
He accepted the disputant's arguments regarding each property transfer:
- The property was bought on revenue account by a developer.
- Upgrade costs ran significantly higher than expected.
- The Trust rightly acquired the property on Capital account.
- The Trust was entitled to deregister for GST [paragraph 174].
- The Lease was not for dominant purpose of tax avoidance - it was to give Mr T and his family a suitable structure with which to renovate and operate a viable business [paragraph 178].
- Any concerns over the fixing of rent under the lease, the arithmetic regarding prepayment of rent, and the calculation of the value of the reversion are not to be treated "in this particular case" as tax avoidance - rather as matters requiring revaluation for the purposes of gift duty or dividends or such like [paragraph 178].
Accordingly, his Honour held that the income tax and GST assessments must be cancelled.
Paragraph 194 gives Judge Barber's general view:
- As a general comment, Mr T simply organised a sensible purchase of an historic property and renovated it on revenue account through his development company. The renovations probably led to overcapitalisation because they were so well done. He then transferred the property to his family trust, which he controlled, and the trust acquired the property on capital account as is usual. There is no suggestion that the property was not alienated from development company to family trust, or that the structure was a sham, or that Mr T was the alter ego of the entities involved; although the situation must have been approaching that.
Income Tax Act 1994, Goods and Services Tax Act 1985