Court dismisses appeal in CGT case involving investment management scheme

The Federal Court of Australia has upheld an objection decision made by the Commissioner of Taxation in the recent case, Aitken v Commissioner of Taxation [2025] FCA 372.

The case examined the income tax consequences for a taxpayer after they ceased their participation in a forestry management investment scheme, called the AgriWealth 2011 Softwood Timber Project.

The applicant, Michael Aitken, invested a total of $10,143,700 to acquire 337 timber lots in the forestry investment project.

The forestry interest offered as part of the project comprised the right to timber as well as a right to carbon sequestration and salinity rights and credits.

As part of the purchase, Aitken also acquired corresponding put options allowing him to sell the timber lots back to the forestry manager, AgriWealth Capital Limited, for for $14,000 per timberlot, a total of $4,718,000.

Four years later, in July 2015, Aitken exercised this option and then, on the same day, novated the timber component of his forestry interest to the forestry manager, receiving $4,718,000 to his benefit. Those proceeds were directed to discharging the loans given to him by the forestry manager, rather than being paid to him.

The main issue in the case concerned the determination of the market value, or reduction in market value of Aitken's forestry interest in the project.

Aitken contended that the market value of the timber component of his forestry interest at the time of its novation was the sum of approximately $300,000. He argued that this amount only should be included as assessable income as part of his 2015-16 income tax return.

Following an audit by the ATO, the Commissioner issued an amended assessment. In the amended assessment, the Commissioner included $4,718,00 as assessable income based on the sum of:

a) The decrease in the market value of Aitken's forestry interest as a result of the exercise of the put option; and

b) The market value of Aitken's forestry interest at the time of its novation.

Aitken lodged an objection to the amended assessment. On 31 August 2023, the Commissioner disallowed the objection in respect of the income tax assessment, but allowed a reduction in penalties. Aitken then commenced proceedings in the Federal Court.

The court outlined that Aiken needed to establish an error by the Commissioner in how the reduction in the market value or subsequent market value of his forestry interest in the project was determined.

Aitken argued that the only relevant transaction for the purpose of calculating his assessable income was the execution of the Novation Deed novating the timber component of his forestry interest, as an event happening directly to his forestry interest, such that it is either CGT event A1 or C2.

The Commissioner, however, stated that there were two relevant transactions. The first transaction was the exercise of the put option, which happened in relation to Aitken’s forestry interest, such that it was CGT event C2. The other relevant transaction was the execution of the novation deed, resulting in the the novation of Aiken's rights in relation to the put option property and and the Forestry Management and Timberlot Agreements, which was a cancellation or discharge of those rights, such that it was also a CGT event C2.

The Federal Court agreed with the Commissioner that Aitken’s assessable income for the 2015-2016 financial year was affected by two separate CGT events.

"The first CGT event was the exercise of the put option, giving rise to assessable income equal to the decrease in the market value of Mr Aitken’s forestry interest," said Justice Bromwich.

"The second CGT event was Mr Aitken’s novation of the rights (and obligations) over the timber component of his forestry interest, but not those over the carbon sequestration and salinity rights and credits component, giving rise to assessable income equal to the market value of that part of the forestry interest he no longer held any rights over as a result of the CGT event."

The Court found that Aitken had failed to establish that the amended assessment sum of $4,718,000 was excessive and stated that the available evidence to court strongly indicated that this sum was correct anyway.

"Aitken has not established that the Commissioner’s amended assessment was excessive by reason of including $4,718,000 as the sum of the reduction of market value of his forestry interest as a result of the exercise of the Put Option, and the market value of his forestry interest resulting from the execution of the Novation Deed, both on 1 July 2015. The appeal must therefore be dismissed," said Justice Bromwich.