Gerard Cassegrain & Co Pty Ltd (ACN 000 342 174) v Commissioner of Taxation; Clos Farming Estates Pty Limited (ACN 003 435 256) v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 117 of 2010; NSD 118 of 2010)
Judgment date: 10 February 2011
Date published: 2 June 2011

Summary of decision:
Outlines the ATO's response to this decision, which concerned the issue of how much of an undissected lump sum payment made under a deed of settlement is assessable to the first applicant under the CGT provisions in the ITAA 1936.

Overview of facts:
1. Gerard Cassegrain & Co Pty Limited (GCC) made an arrangement with the CSIRO to conduct research and development activities in connection with soil improvement technology known as "slotting", carried out by the joint venture company, Cassiro Ltd. | 2. The joint venture failed and the differences between the parties were settled through a Deed of Settlement and Release. | 3. Pursuant to that Deed, CSIRO paid $9.5m to the Cassegrain parties, of which $8,835,083 was referable to full and final discharge of all liabilities, as well as for the benefit of covenants, releases, indemnities and warranties. This amount is the subject of the proceedings. | 4. GCC only included $5.25m as its assessable income in the 1994 income year due to a letter setting out an agreement between two of the shareholders of GCC (Claude and Gerard Cassegrain) at an extraordinary meeting. Under that agreement $5.25m was received by GCC in respect of damages and the sale of GCC's shares in Cassiro and $4.25m was received by Claude Cassegrain in respect of personal damages, which was argued to constitute an exempt capital gain under section 160ZB of the ITAA 1936. | 5. The deed of settlement provided that $8,835,083 of the sum paid was referable to the discharge of the compensation claims of any of the parties to the deed and to the restrictive covenants, releases, indemnities and warranties given by the Cassegrain parties. The remaining amount was referable to the transfer of certain technologies, plant and other goods. | 6. The deed did not further apportion the $8,835,083 between the various assets "disposed of" by GCC and Claude Cassegrain, namely the discharge of the right to seek compensation (paragraph 160M(3)(b)) and the giving or creation of contractual rights in CSIRO against GCC and Claude Cassegrain, such as the restraints of trade, indemnities, representations, warranties and other undertakings (sections 160M(6) and (6A)). | 7. The decision under appeal and cross-appeal was the second decision of the Tribunal. The first decision was successfully appealed to the Federal Court, and Lindgren J referred it back to the Tribunal for a fresh determination. The second Tribunal proceedings were limited to apportionment of the $8,835,083 under subsection 160ZD(4). | 8. The second Tribunal held that $7,236,753 was attributable to disposals of assets by GCC under subsection 160ZD(4). The remaining $1,598,328 was held to be attributable to disposals of assets by Claude Cassegrain, namely his right to claim damages for defamation (including costs) and his undertaking in restraint of trade. | Issues decided by the court | The taxpayer appealed the second Tribunal decision on a number of grounds, including that the Tribunal had misconstrued the settlement deed, that the Tribunal had not taken account of all of the assets to be valued, and that the Tribunal had erred in the way it approached the valuation of certain undertakings and the right to claim damages. None of these grounds were considered to give rise to an error of law and in any event the Full Court thought the approach taken by the Tribunal to be generally satisfactory. In particular, the Full Court agreed with the Tribunal that the discharge of the Cassegrain parties' rights to damages and the contractual undertakings given by the Cassegrain parties were compensated for under clause 2.2(a) of the Deed and not clause 2.2(b). | The Commissioner's cross-appeal was concerned with aspects of the Tribunal's approach in valuing the defamation claim given up by Claude Cassegrain and the restraint of trade made by him. The Full Court considered that the grounds of cross appeal did not disclose an error of law. In any event the task called for by subsection 160ZD(4) involves judgment in circumstances where precision is impossible; the task involves a degree of estimation and inference at the best of times. The Full Court were of the view that the Tribunal was entitled to use the methodology it did, that the evidence justified the Tribunal's finding and that detailed reasons were not necessary, because the Tribunal does not have to explicitly address every proposition put to it.

Issues decided:
The taxpayer appealed the second Tribunal decision on a number of grounds, including that the Tribunal had misconstrued the settlement deed, that the Tribunal had not taken account of all of the assets to be valued, and that the Tribunal had erred in the way it approached the valuation of certain undertakings and the right to claim damages. None of these grounds were considered to give rise to an error of law and in any event the Full Court thought the approach taken by the Tribunal to be generally satisfactory. In particular, the Full Court agreed with the Tribunal that the discharge of the Cassegrain parties' rights to damages and the contractual undertakings given by the Cassegrain parties were compensated for under clause 2.2(a) of the Deed and not clause 2.2(b). The Commissioner's cross-appeal was concerned with aspects of the Tribunal's approach in valuing the defamation claim given up by Claude Cassegrain and the restraint of trade made by him. The Full Court considered that the grounds of cross appeal did not disclose an error of law. In any event the task called for by subsection 160ZD(4) involves judgment in circumstances where precision is impossible; the task involves a degree of estimation and inference at the best of times. The Full Court were of the view that the Tribunal was entitled to use the methodology it did, that the evidence justified the Tribunal's finding and that detailed reasons were not necessary, because the Tribunal does not have to explicitly address every proposition put to it.

ATO view of decision:
The ATO respectfully accepts the Court's decision that there was no error of law in the decision of the Tribunal that $1,598,328 of the settlement proceeds was attributable to disposals of assets by Claude Cassegrain. This decision was based on the specific facts of this case. It is considered that this decision will not have any impact on any existing or future litigation matters. The decision will not result in any change to current Tax Office practices.

Administrative treatment:
Implications on current Public Rulings & Determinations | None

Legislative references: Administrative Appeals Tribunal Act 1975 44(1) Income Tax Assessment Act 1936 160M(6) 160M(6A) 160ZD(4)
Case references: Gerard Cassegrain & Co Pty Ltd v Commissioner of Taxation [2007] FCA 415 2007 ATC 4341 66 ATR 198
Subject references: Capital Gains Tax lump sum payment pursuant to deed interpretation of deed apportionment of sum between payees no error of law by Administrative Appeals Tribunal