Gambling shareholders’ appeal to slash tax bill for News Corp sale dismissed

Last Friday (12 December), the Federal Court dismissed an appeal by Sarah Kilgour and Tamara Isterling to shrink their capital gains tax bill from the sale of their gambling business to News Corp under market value substitution rules.

In 2016, News Corp acquired gambling company Punters Paradise in a $31 million sale. The Punters shareholders subsequently argued that the transaction had not been at arm’s length, and that News Corp paid an inflated price for Punters Paradise.

As such, they argued that the true market value was closer to $18.2 million, and that tax should only be applied to that amount under market value substitution rules.

The market value substitution rule applies to transactions where the relationship between parties – such as a family relationship or friendship – is seen to have influenced the quality of the bargaining between them. In these cases, tax is applied according to the ‘market value’ of the asset, not the actual value received.

The Punters shares had been held by three trusts associated with Lucas and Melissa Pettett (60 per cent), Heath and Sarah Kilgour (20 per cent) and Nathan and Tamara Isterling (20 per cent).

Heath, the chief operating officer at Punters Paradise, had built relationships with News Corp and was connected to Nick Babos, the head of product strategy and distribution at an Australian subsidiary of News Corp. By 2014, Punters’ content was being published on News Corp platforms.

In 2016, Babos facilitated a meeting between Punters and News Corp, where News Corp Australia’s managing director Damien Eales expressed interest in acquiring the gambling company.

Following the $31 million sale of Punters to News Corp, the Kilgour trust (held by the Kilgours) and the Reuhl trust (held by the Isterlings) each received $6.2 million, reflecting their 20 per cent holdings.

In the 2017 income year, the capital gains from the sale were distributed to the Punters trustees, and the beneficiaries’ tax returns reflected these gains.

The beneficiaries objected to their income tax assessments. They argued that the ‘enterprise value’ of the shares was actually $18.2 million, and that News Corp purchased the shares at an additional ‘special’ or ‘strategic’ price at $12.5 million.

They relied on evidence from chartered accountant Andrew Fressl and intangible asset valuation specialist Michael Chirchill to argue that News Corp had paid more than market value due to the willingness of other shareholders to dispose of their respective parcels, and ‘synergies.’

They said the deal between Punters and News Corp was not arm’s length, and market value substitution rules should apply to revise the capital proceeds down from $31 million to $18.2 million, significantly reducing their tax bills.

Sarah Kilgour and Tamara Isterling also sought to apply small business CGT concessions to reduce or eliminate their capital gains tax, which applied to entities with an aggregated turnover of less than $2 million.

However, the court found that News Corp had prepared detailed internal documents before the sale in 2016, outlining the potential acquisition strategy, benefits, risks and financial implications of acquiring Punters Paradise. These documents valued Punters at approximately $30 million.

The lack of pre-existing relationship and News Corp’s thorough internal decision-making process supported the conclusion that News Corp was influenced by strategic commercial interests, the court found.

“Evidence of the internal deliberations showed that Punters’ business was viewed as a valuable adjunct to News Corp’s existing wagering and sports coverage business activities,” court documents read.

As such, the primary judge determined that News Corp and Punters were not related parties, and therefore the transaction was arm’s length and the market value substitution rule did not apply.

This also meant that Kilgour and Istelring were not eligible for the small business CGT concessions, as they exceeded the maximum net asset value threshold.

The appeals judge upheld this view and dismissed the appeal.