BJ McCabe SM

Administrative Appeals Tribunal


Decision date: 16 May 2007

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BJ McCabe (Senior Member):

1. Joint owners of readily divisible assets have decided to go their separate ways. If they simply divide up the property and each take half of the total, are there any capital gains tax (CGT) implications? The unhappy answer appears to be 'yes', unless roll-over relief is available.

The facts

2. Mrs Jocelyn Shand and her father owned 4000 shares in CSR Ltd. They decided to make a gift of the shares to Mrs Shand's sons, Mr Paul Johnson and his brother. The transfer was executed and the shares were duly registered in the joint names of the applicant and his brother. CSR de-merged in 2003 and the brothers received a further 4000 shares in Rinker Ltd as a result. Those shares were also registered in their joint names. In 2006, the applicant and his brother decided to each take half of the shares and go their separate ways. They duly executed transfers in respect of the shares so that each now owns 2000 shares in CSR and 2000 shares in Rinker. No money changed hands in the course of the transaction.

3. An accountant told one of the brothers there might be a capital gains tax (CGT) liability as a result of the restructuring of their holding. The applicant sought a private ruling. The ruling contained bad news: the Commissioner said the restructuring gave rise to a CGT liability. The applicant objected but the Commissioner did not change his mind. Mr Johnson asked the Tribunal to reconsider the question.

4. The matter was listed for hearing on 9 March 2007. After listening to Mr Johnson tell his story, I asked him to go away and search through his files to obtain further evidence about the circumstances of the original gift. I was particularly interested to see if he could provide evidence that would shed light on whether he and his brother took the shares as joint owners. Mr Johnson subsequently produced a letter of instruction from his mother dated 19 February 1993 together with the original share transfer form, the most recent share transfers, and affidavits from his mother and brother. The hearing resumed on 20 April 2007.

5. Mrs Shand's affidavit confirmed the shares were previously owned by her and her father. (Mr Johnson was earlier under the impression that the shares were the property of his mother.) The affidavit also said those shares were held jointly but it was always understood as between her and her father that they "both had an equal number of shares despite the fact they were registered in joint names." She said nothing turned on the fact the shares were registered in their joint names: that was a matter of convenience only. The contemporaneous documents (the letter of instruction to CSR dated 19 February 1993 and the share transfer) suggest on their faces that the donors were acting as joint owners of the share parcel.

6. Mr Johnson, for his part, said he and his brother always understood they each held 50% of the shares notwithstanding the fact the shares were registered in joint names. Mr Johnson's brother prepared an affidavit to that effect. During the course of cross-examination, Mr Johnson agreed no-one discussed how the shares would be held, and he did not give any thought to recording the ownership of the shares in a different way. He said he was unaware of any other evidence that would support his claim in this regard.

7. The applicant divided up the shares with his brother and executed transfers to give effect to what he called a "restructuring" of their holding. He said - and I accept - he was motivated by a desire to avoid the inconvenience of having to obtain two signatures on documents required by the company. He said he thought it was in order because the total value of the brothers' interests was unaffected. He said it was always intended they would each have 50% of the shares, and the restructuring simply gave effect to that intention.

8. Mr Johnson described a state of affairs like that considered recently by the Queensland Court of Appeal in
Commissioner of State Revenue (Qld) v Pryke & Ors 2007 ATC 4464; [2007] QCA 121. In that case, an individual purchased a property in his own name even though the evidence made it clear he was buying it in his capacity as a member of a partnership. When he arranged for the registered ownership of the property to be changed some 30 years later so that it was registered in the names of the four partners, the Commissioner of State Revenue claimed the

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transfer attracted stamp duty. The court found the parties to the transaction were able to rely on the exemption contained in s 152 of the Duties Act 2001 (Qld) which applied where the transfer was merely correcting an error in a previous dutiable transaction.

9. While the legislation in this case is different, I think the practical result would be the same for Mr Johnson if he could establish the paperwork filed in 1993 did not accurately describe the nature of his ownership interest. In those circumstances, his argument would be that there has not in fact been a disposition of the shares or any interest in them, notwithstanding what it says in the transfer registered in 1993. He says the transfers signed in 2006 were merely giving effect to the underlying reality and did not amount to a disposition.

10. Ms Hopton, for the Commissioner, notes s 176 of the Corporations Act 2001 provides that a register is taken to be an accurate record of the information entered into it in the absence of evidence to the contrary. In this case, the register shows the applicant and his brother registered as joint owners of the shares. That is fair enough because that is how they were described in the original transfer forms. It follows the register is accurate in the sense it faithfully records the information supplied. But is there enough evidence to undermine the underlying proposition put by the Commissioner - that Mr Johnson and his brother own the shares jointly?

11. The applicant and his brother both gave evidence that the shares were not held jointly. They both say (Mr Johnson in his sworn testimony, and his brother in a sworn affidavit) that each of them owned half of the total number of shares in the parcel - as opposed to half of each share in the parcel. Mrs Shand says it was her intention that each son would half the number of shares.

12. The evidence of the applicant and his family members about their intentions is important. But it is also evidence that must be treated with caution, as Fullagar J warned in
Pascoe v Federal Commissioner of Taxation (1956) 11 ATD 108 at 111. The original transfer occurred nearly 15 years ago, and the passage of time can distort the recollection of one's state of mind. The recent dispute with the Commissioner may have coloured that recollection, although I stress I have no reasons for doubting the applicant's essential truthfulness. More importantly, I note the applicant conceded he did not discuss the basis on which he acquired the shares, and did not turn his mind to the question of whether they were jointly or severally owned at the time they were acquired or in the decade that followed. That is not a criticism: the legal distinction, although real, is a nice one that will often be lost on the lay person. But the fact the shares were registered in joint names suggests it is more likely the applicant and his brother thought of themselves as the joint owners of a parcel of shares, rather than as the individual owners of an equal number of shares.

13. In the circumstances, I am satisfied the applicant and his brother acquired the shares as joint owners, and that the company register reflects the reality of the situation.

What are the legal consequences of distributing jointly-owned property amongst the owners?

14. Having decided the shares were held by the applicant and his brother jointly, what are the consequences? To begin with, shares are clearly CGT assets within the meaning of the legislation: s 108-5 of the Income Tax Assessment Act 1997 (ITAA97). It does not matter for present purposes whether the shares were held as joint tenants or tenants in common. Section 108-7 says individuals who hold a CGT asset as joint tenants are treated as if they were tenants in common who each owned a separate CGT asset comprising an equal interest in the asset. That means in this case each share was comprised of two CGT assets, one held by each brother. The whole parcel of 8000 shares was therefore ultimately comprised of 16,000 CGT assets, with each brother holding 8000 CGT assets (ie, a 50% interest in each share).

15. While a share may be considered as more than one CGT asset to reflect the interest of a joint owner, each share is indivisible. There may be 16,000 CGT assets but there are still only 8000 shares. Dividing the parcel in two for the purposes of a transfer to each joint owner effectively requires those owners to relinquish ownership of the CGT assets in the shares in the other parcel in return for clear title to the shares

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in the parcel they are acquiring. It is as if the CGT assets contained in each share have to be unpacked and redistributed so that the taxpayer ends up holding half the number of shares in his or her own right- and those shares do not contain any CGT assets belonging to the other (former) joint owner.

16. This rearrangement and reallocation of the ownership of CGT assets constitutes a disposition of the CGT asset, and is therefore a CGT event: s 104-10. Subject to the legislation, tax is levied on the capital proceeds from a CGT event less the cost base of the asset. The capital proceeds are the sum of the money received in respect of the transaction (no money changed hands in this case) and the market value of any other property received (in this case, the market value of the interest acquired in the shares): s 116-20.

17. I note the Commissioner's view in Taxation Determination TD 92/148 is consistent with the view of the legislation I have adopted.

18. That leaves only the question of roll-over relief. If the taxpayer is able to claim the benefit of one of the provisions that exempts the transaction from tax, he will not be liable. Unfortunately, I was unable to identify any provision that would assist him.


19. I have sympathy for the taxpayer. He has been caught by the legislation and forced to pay tax earlier than he might otherwise have expected. That is unfortunate, but the logic of the law is clear enough. The objection decision under review must therefore be affirmed.

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