The Tax Office is chasing controversial former Auburn deputy mayor Salim Mehajer for a slice of a $4 million profit after council approved planning changes boosting the value of one of his properties.
A Mehajer family company, majority owned by the 30-year-old developer, sold an industrial property in Auburn last year for $8 million after buying it for $3.65 million four years earlier.
The company claims the $4 million profit should be excluded from its taxable income.
The commercial building at 3 Mary Street was at the centre of a legal battle to suspend Mr Mehajer from council, after he voted on planning changes increasing its value without disclosing his interest in the property.
An independent valuer estimated the changes to floor space ratios and building height boosted the property's value by $1 million.
Mr Mehajer was suspended briefly from council last year over the affair, before the NSW Supreme Court overturned the ruling of the Civil and Administrative Tribunal.
The court found Mr Mehajer had not breached his pecuniary interest obligations by voting on the changes in 2012 and 2013 without revealing his family company Mehajer Bros owned the property.
In April last year the Tax Office lobbed a bill at the company, seeking its share of the $4 million profit from the sale of the building.
The company is challenging the assessment in the Federal Court, claiming the company's taxable income for the last financial year was "nil".
It is seeking an order excluding the $4.28 million from the company's taxable income.
In documents filed in court, the company says it is the trustee for a Mehajer family trust and the entire income of the trust has already been assessed for tax in the hands of its beneficiaries.
It also says the profit made was not "ordinary income" – which would be taxed at the full tax rate – but was a capital gain that would attract a 50 per cent discount.
Similar legal issues are at play in another high-profile tax battle involving members of jailed former Labor MP Eddie Obeid's family.
A preliminary hearing of the Mehajer case is slated for March 21. The company's lawyer was contacted for comment.
Auburn council was suspended by the Baird government last year ahead of a public inquiry into its planning decisions.
Under the government's council amalgamation plans, a new Cumberland Council was created from a merger of Parramatta's Woodville ward with parts of Auburn City and most of Holroyd Council.
Mr Mehajer has said he would return to local politics if new Premier Gladys Berejiklian scrapped the mergers.
The former councillor has been embroiled in a string of legal battles in his short political career.
He was charged in 2015 with more than 100 offences relating to his alleged rigging of the 2012 council ballot, including using forged documents, making false statements and giving false or misleading information.
His sister Fatima has also been charged with a string of similar offences, which carry a maximum penalty of 10 years in prison.
Both have denied the charges.
