Federal Commissioner of Taxation V Peabody - Assessment and Court

Assessment and Court

The Australian Taxation Office (ATO) took the view that the mechanism was a tax avoidance scheme, a scheme which came under Part IVA of the Income Tax Assessment Act 1936. The ATO treated the transaction as Kleinschmidt selling to the Peabody trust, and then on-selling to the public in the float, making a profit of the difference. This was a capital gain, and the 1/3 of that attributable to Mary Peabody as trust beneficiary was $888,005. The ATO added that to her return for the year ending 30 June 1986.

Mary Peabody lodged an objection to the ATO assessment, which the ATO disallowed. She then asked the ATO to refer it to the Federal Court (as any taxpayer may do). Her argument was that the transaction was structured as it was for the commercial reasons of confidentiality and the cost of financing, as described above.

Justice O'Loughlin in the Federal Court agreed with the ATO that the devaluation to Z-class shares was a scheme, and considered the argument about non-disclosure to be a "red herring".

Mrs Peabody appealed to the full bench of the court, and they instead considered the transfer, financing and float together, and found for her. The ATO went to the High Court, which upheld the full bench decision.