In Hart v FCT [2018] FCAFC 61, the Full Federal Court unanimously dismissed an appeal against a Part IVA determination that had the effect of including part of the earnings of a law firm in the Taxpayer’s assessable income. The Taxpayer entered into two arrangements with others called the ‘New Venture Income Scheme’ (NVI Scheme). The effect of the scheme was to divert two classes of earnings away from the Taxpayer, or entities he controlled, and into the hands of a company with carried forward tax losses. Then, following a series of gifts and subscriptions for capital, the earnings were paid to the Taxpayer in the form of loans. The Commissioner assessed the earnings as taxable income in the Taxpayer’s hands.

The Court concluded that at first instance, Justice Bromwich was correct to conclude the amount beneficially derived by the Taxpayer was a distribution to the Taxpayer and assessable as such. The Taxpayer failed to show that what was paid to him was not income according to ordinary concepts. 

In respect to the Part IVA assessments, the Taxpayer argued that the Commissioner’s counterfactual was not reasonable, being that there was no possibility that he would have ever received past income, and it would always have gone elsewhere. The Full Court found that the Taxpayer not only failed to establish that the Commissioner’s counterfactual was unreasonable, but he also had failed to adduce evidence of his own counterfactual. A 50% penalty imposed upon the Taxpayer was also upheld. 

A discussion of the trial decision of the Federal Court is provided in our earlier publication Talking Tax – Issue 81.