For the purpose of the market value substitution rule in subsection 116-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997), did Individual A and Individual B, deal with each other at arm's length in connection with the disposal of Individual A's interest in the Property to Individual B?
No This ruling applies for the following period : Income year ending 30 June 20XX The scheme commences on: 1 July 20XX
Individual A carried on a business with their sibling, Individual B as builders through Company X. Individual A and Individual B purchased Property A approximately X years ago with each owning a 50% interest. Company X stored building materials and equipment on Property A and paid rent to the Partnership. The Partnership also partially let the Property to a third party for the last few years. The siblings had a falling out, which resulted in a mediation and a Settlement Agreement in the 20XX-XX income year (the Settlement Agreement). Under the Settlement Agreement, Individual A transferred their interest in Property A to Individual B in exchange for a payment less than the market value at the time. The Settlement Agreement also included other property Individual A and Individual B held joint interests in.
Income Tax Assessment Act 1997 subsection 116-20(1) Income Tax Assessment Act 1997 subsection 116-30(2) Income Tax Assessment Act 1997 subsection 995-1(1)
Subsection 116-30(2) of the ITAA 1997 modifies the general rules by replacing the capital proceeds with the market value of the relevant CGT asset (worked out as at the time of the event) if: (a) some or all of those proceeds cannot be valued; or (b) those capital proceeds are more or less than the market value of the asset and: (i) you and the entity that acquired the asset from you did not deal with each other at arm's length in connection with the event; or (ii) the CGT event is CGT event C2 (about cancellation, surrender and similar endings). Meaning of 'at arm's length' Subsection 995-1(1) of the ITAA 1997 states that in determining whether parties deal at arm's length, consider any connection between them and any other relevant circumstance. The term 'arm's length', in relation to dealings, is defined in the Concise Oxford Dictionary as "with neither party controlled by the other". Osborn's Concise Law Dictionary defines 'at arm's length' as "the relationship which exists between parties who are strangers to each other, and who bear no special duty, obligation or relation to each other". In ACI Operations Pty Ltd v. Berri Ltd
(2005) 15 VR 312 (ACI Operations Pty Ltd), Dodds-Streeton J said (at [223]) that the authorities establish: ... an arm's length relationship is that of strangers, or parties who are unaffected by existing mutual duties, liabilities, obligations, cross-ownership of assets, or identity of interests which present a capacity in either party to influence or control the other, or an inducement to serve that common interest, which might operate to modify the terms on which strangers would deal. Parties will be dealing at arm's length where they act as arm's length parties would normally do, so that their dealing has an outcome that is the result of normal or real bargaining ( The Trustee for the Estate of the late A W Furse No 5 Will Trust v. FC of T 91 ATC 4007; (1990) 21 ATR 1123 and Granby Pty Ltd v. FC of T 95 ATC 4240; (1995) 30 ATR 400 ( Granby )). In Granby at ATC 4243; ATR 403, Lee J stated:
that the provision 'dealing with each other at arm's length' invited an analysis of the manner in which the parties conduct themselves in forming the transaction. The question is whether the parties behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs and the expression means, at least, that the parties have acted severally and independently in forming their bargain. Further, Lee J stated (at ATC 4244; ATR 403-404) that: If the parties to the transaction are at arm's length it will follow, usually, that the parties will have dealt with each other at arm's length. That is, the separate minds and wills of the parties will be applied to the bargaining process whatever the outcome of the bargain may be. Application to your circumstances CGT event occurred in the 20XX-XX income year when Individual A agreed to transfer their 50% interest in Property A to Individual B under the Settlement Agreement.
Under subsection 116-20(1) of the ITAA 1997, the capital proceeds for this event will include the agreed payment of market value consideration but would also include the market value of other money or property received in respect to the disposal. Applying the widest possible meaning to the words in 'respect of', as per paragraph 116 of TR 95-35, this may include the value of other property Individual A received as part of the Settlement Agreement. However, on the basis that the money and market value of other property Individual A received or is entitled to receive in respect of this disposal are not equal the market value of this interest at the time, we need to consider whether Individual A and Individual B acted at arm's length for the purpose of determining whether the market value substitution rule under subparagraph 116-30(2)(b)(i) of the ITAA 1997, applies.
At the time of the transaction, Individual A and Individual B's negotiation with respect to the consideration for Property A was heavily influenced by the settlement of their other mutual property interests. Individual A was prepared to accept below market value payment for the disposal of Property A as they were able to gain advantage in other areas of the Settlement Agreement. Our view is that Individual A and Individual B did not deal with each other at arm's length in connection with the Individual A's disposal of their interest in Property A to Individual B.