Background

The Brisbane Club acquired land at 241 Adelaide Street, Brisbane in 1963. Subject to various ‘loss of pre-CGT status rules’, that land was therefore a pre-CGT asset.

On 8 May 1985, the Club entered into a Deed with the Developer for the redevelopment of the site. A separate Building Agreement followed on 10 January 1986. Construction commenced in February 1986 and the Brisbane Club Tower reached practical completion in February 1988.

In 2021, the Club sold the land, the building, and two subleases in the building and made a significant capital gain ($32 million). Before lodging its return, the Club made an early engagement application with the ATO. The Commissioner’s view was that the building and the two subleases were post-CGT assets, and therefore that a portion of the sale proceeds would need to be apportioned to the building and the subleases. The Club lodged its tax returns on that unfavourable basis, then objected and appealed.

The Club argued that the building and subleases should be treated as acquired before 20 September 1985, so that any capital gain should be disregarded under paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (Cth).

Key Issues

The case raised two distinct CGT questions:

1. did paragraph 108-55(2)(a) apply so that the building was ‘taken to be a separate CGT asset’ from the pre-CGT land because the Club entered into a ‘contract for the construction’ on or after 20 September 1985? That issue turned on whether the relevant contract was the Deed entered on 8 May 1985, or the later Building Agreement entered on 10 January 1986; and
2. when did the Club acquire the two subleases for CGT purposes? The Club argued that its rights to those subleases traced back to the pre-CGT Deed, including an option said to have been exercised before 20 September 1985. The Commissioner argued that the relevant CGT event was the actual grant of the subleases in June 1986.

Key Findings

On the building issue, the Club succeeded.

Wheatley J held that the Deed was the relevant ‘contract for the construction’ for the purposes of paragraph 108-55(2)(a). Although the Building Agreement was executed after 20 September 1985, the Court did not treat it as a standalone contract that displaced the earlier Deed.

Instead, the Court held that the Building Agreement was a condition to performance under the Deed, and not a new contract that altered the Deed’s formation. On that construction, the relevant contractual source of the obligation to construct the building arose before 20 September 1985.

That meant paragraph 108-55(2)(a) did not operate to separate the building from the land. The building therefore retained the pre-CGT character of the land, and the capital gain on its disposal was disregarded under paragraph 104-10(5)(a).

However, the Commissioner succeeded on the subleases issue.

The Court held that the subleases were post-CGT assets. The decisive point was that the actual subleases were granted on 18 June 1986 by City Mutual Life Assurance Society Ltd (CML) to the Club. Therefore, there was a disconnect between the parties to the Deed, being the Club and the developer, and the parties to the subleases, being the Club and CML.

As there was no evidence of an assignment from the developer to CML, and no pre-CGT contract between CML and the Club for the grant of the subleases, the subleases were post-CGT assets.

Takeaways

Brisbane Club shows how statutory construction and contract characterisation can determine CGT outcomes. The drafting of the redevelopment documents some 40 years earlier proved decisive to the tax treatment of the later disposal.

Taxpayers dealing with pre-CGT land and later redevelopment should review the full contractual suite that gave rise to the relevant assets, not just the final construction or lease document, to determine the correct tax treatment.

While the facts in Brisbane Club are unusual, the case should not be read in isolation. The Commissioner’s broader focus on pre-CGT assets continues. For taxpayers who hold land acquired before 20 September 1985, the passage of time invariable means that significant events have happened during that time period (for example, death of an individual). For many groups, that broader risk review also includes Division 149 and CGT event K6, particularly where ownership, underlying interests, or asset composition have shifted over time.

To discuss the CGT treatment of pre-CGT assets, please contact Velocity Legal’s tax team.