1. What is Tax sham and what is the effect of a sham?
2. In 1983 Bruce purchases 1o hectares of land for $ 1 million in an area that was ripe for subdivision. At the time of purchase he intended to get planning permission from the local council to develop the land by subdivision and then resell at a profit, but instead he leased it for grazing horse .3 Years ago Bruce attempted to get planning permission to subdivide his 10 hectares. But it proved very difficult and finally in March of the current tax year the local council refused permission to subdivide. Bruce reluctantly sold the land in May for $ 3 million.
What are the tax consequences of Bruce’s sale?
1. Sham Transactions has been regarded as those transactions that assert to be something that they were not, For instance, presenting a bonus (assessable) as a loan which was not assessable. Under common law, such dealings were not effectual and the factual nature would be predictable under the law.
If dealing has not been regarded as a sham, then the dealing must be effectual under the substantive law. While this may appear self-evident as it was a step that was commonly passed over by the practitioners who were often disposed to instantly apply Part IVA to analyze dealing with a tax avoidance motive (Kendall, 2009).
In the case of Faucilles Pty Ltd v FC of T it was affirmed that a sham transaction was once which was proposed to have no lawful effect, if there was a common aim of the parties that the transaction should be a veil or cover for another dealing or not a dealing at all. Although sham dealing would be lawfully unproductive but not all unproductive dealings would be sham even if the irregularity was involved.
As a result of dealing being a sham was that the dealing may be ignored without regard to any anti-avoidance provisions. However, the claim of the principles of sham to part if a dealing would not avert the application of any anti-avoidance provisions to whole of an preparations (Barlin, 2015).
2. As Bruce has not undertaken the trade of expansion, the principle from the case of FCT v Whitfords Beach Pty Ltd (1982) ATR 692 cannot be applicable. Therefore, the matter which must be measured was whether the first thread of Myer case which would make the transaction fall under ordinary income as per section 6-5 or whether it was a mere comprehension as a result of which it would be capital in nature. The first thread of the case of Myer would only be appropriate if there was a marketable dealing which has been delivered into with a target to make earnings. The earnings which were finally realized would arise from the preliminary intention.
The facts of the scenario clearly indicate that Bruce brought the land with the target of subdividing the property and selling it at earnings. However, the original arrangement never came to completion and the land has to be sold because it could not be subdivided. On the other hand, there was still the prospect of the application of the first strand of Myer case on the basis that the land was brought with an intention to develop it and sell it at a profit.
If the sale was not ordinary income by way of the discussion which has been made above then it would be subjected to the capital gain tax (Australian Taxation Office, 2016).
For Capital gains tax purposes, the original property was divided into two or more separate assets. The subdivision of the property does not end result in a CGT event if an individual keep hold of the ownership of the subdivide land. Therefore, it has been clearly mentioned that an individual cannot make a capital gain or a capital loss at the time of the subdivision. Nevertheless, an individual may make a capital gain or loss when an individual sell the subdivided blocks. If the land was originally acquired before 20 September 1985, then the Capital gain would be disregarded (Australian Taxation Office, 2016). As the Reasonable basis has been mentioned under TD 97/3 ruling (Australian Taxation Office, 2016). So, it would also be not applied.
Australian Taxation Office. (2016) Subdividing and amalgamating land.[Online] Australian Government. Available from: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Subdividing-and-amalgamating-land/ [Accessed on 19/10/16]
Australian Taxation Office. (2016) Subdividing land.[Online] Australian Government. Available from: https://www.ato.gov.au/General/Property/Land---vacant-land-and-subdividing/Subdividing-land/ [Accessed on 19/10/16]
Australian Taxation Office. (2016) Taxation Determination.[Online] Australian Government. Available from:https://www.ato.gov.au/law/view/document?DocID=TXD/TD973/NAT/ATO/00001 [Accessed on 19/10/16]
Barlin, D. (2015) Sham, Fraud & Evasion. [Online] 13 Wentworth Selborne Chambers. Available from: https://www.13wentworthselbornechambers.com.au/wp-content/uploads/2015/01/tenfraudandevasion.pdf [Accessed on 19/10/16]
Kendall, K. (2009) Tax Avoidance in Australia. [Online] Tax Institute. Available from: https://www.taxinstitute.com.au/files/dmfile/Feature_Article_Sept09.pdf [Accessed on 19/10/16]