Adaz Nominees Pty Ltd v Castleway Pty Ltd

2 The proceeding centres around disputed entitlements said by Castleway to be owed to it under an agreement with the TPC Group known as the 'Property Development Services Agreement' ('PDSA'). One of the entitlements is an annual service fee which was required to be adjusted in the final year to bring to account 'unrealised capital gains'. The Reasons set out my conclusions on the construction of the PDSA insofar as it deals with the termination adjustment.

3 Amongst the many issues that the parties tendered to the Court for resolution, one issue concerned an investment in an aged care business called IBIS Care. The investment took the form of a shareholding held by one of the TPC Group entities. The parties agreed that it was to be included in the termination adjustment. However they disagreed on whether two expenses should be included in the cost base for the purposes of calculating the unrealised gain.

4 It appears that the issue (which it might be noted concerns a disputed adjustment to the cost base of only $54,021)[2] fell through a crack when the Court was dealing with all the issues. By email dated 21 April 2023, the parties noted that this was a matter that had not been addressed in the Reasons and 'which may need to be determined'. It appears the parties wish the matter to be determined.

5 As explained in the Reasons, the correct quantification of the termination adjustment is a matter for the Court to determine on evidence.

6 Mr Skinner said that the two amounts were paid for legal fees in relation to a dispute with the former Chief Executive Officer of IBIS Care. He says that the amounts were not deductible at the time. The TPC Group has included the amounts in the cost base of the asset, apparently relying on s 110-25(5) of the Income Tax Assessment Act 1997. That section provides that the cost base includes as the 'fourth element', capital expenditure incurred for the purpose or the expected effect of which is to increase or preserve the asset's value.

7 In his statement Mr Skinner said with respect to the legal fees:

These costs were added back as not-deductible in FY2012 and FY2013 for tax purposes on the basis they were capital in nature as they were incurred to preserve the value of Tynong Pastoral's investment in IBIS Care. They were therefore added to the tax cost base of the investment in IBIS Care.

8 The expert called by TPC Group, Mr Cohilj, said 'assuming the legal fees were incurred to increase or preserve the value of the shares in IBIS Care' they should be included in the cost base.

9 In my opinion, the evidence of Mr Skinner does not establish the facts necessary to make good that assumption. The evidence does not establish that the two items of expenditure were incurred for the purpose of increasing or preserving the value of the shares held by the TPC Group. I am not persuaded that they are properly included in the cost base. The fact that this is how the nominated accountant treated the items and that they were apparently not deducted as an expense at the time provides an insufficient factual base to draw the necessary inference. The evidence of Mr Skinner is entirely conclusionary, and makes no attempt to identify any facts that support the opinion that the expenditure preserved the value of the shares.

10 The matters were not properly taken into account in calculating the cost base for the IBIS Care asset.

ADAZ NOMINEES PTY LTD (ACN 006 228 119) ATF THE RADO NO 2 TRUST

Second Plaintiff / Second Defendant by Counterclaim

ROADING GROUP PTY LTD (ACN 097 993 292) ATF THE RADO INVESTMENT TRUST NO. 2

Fourth Plaintiff / Fourth Defendant by Counterclaim

ROADING INVESTMENTS PTY LTD (ACN 104 325 797) ATF THE RADO INVESTMENTTRUST NO 3

LOOILLA PTY LTD (ACN 092 067 322) ATF LOOILLA TRUST

BELLONIC PTY LTD (ACN 092 015 828) ATF BELLONIC TRUST

Seventh Plaintiff / Seventh Defendant by Counterclaim

TYNONG PASTORAL CO PTY LTD (ACN 060 828 364) ATF TYNONG PASTORAL UNIT TRUST

Eighth Plaintiff / Eighth Defendant by Counterclaim

PIP MELBOURNE PTY LTD (formerly PARTNERS IN PROPERTY PTY LTD) (ACN 120 760 125)

TYNONG PROPERTY DEVELOPMENTS PTY LTD (ACN 081 950 647) ATF AMARCO SERVICES TRUST

CASTLEWAY PTY LTD (ACN 131 870 481) ATF THE CASTLEWAY TRUST

Second Defendant / Second Plaintiff by Counterclaim

[1] Adaz Nominees Pty Ltd v Castleway Pty Ltd [2023] VSC 129 ('Reasons').

[2] $45,591 was said to relate to an expense in 2011/2012 FY and $8,430 in the 2012/2013 FY. The amount claimable arising from this deduction will be a fraction of the deduction.