Edited version of private ruling

Authorisation Number: 1011584319523

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Ruling

1. Is capital gains tax (CGT) rollover relief available under section 126-15 of the Income Tax Assessment Act 1997 (ITAA 1997) when a company transfers some of its assets to its shareholders because of a court order under the Family Law Act 1975 (FLA)?

Yes. Rollover relief under section 126-15 of the ITAA 1997 will be available when a company transfers some of its assets to its shareholders because of a court order made under the FLA.

2. Will goods and services tax (GST) be payable by a company when it transfers some of its assets to its shareholders because of a court order under the FLA?

3. No. The transfer is not a taxable supply and there will be no GST consequences on the transfer of the assets to the shareholders.

This ruling applies for the following period:

Income year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts

Company X has two individual shareholders - A and B.

Company A is registered for GST. Shareholders A and B are not registered for GST.

Upon the dissolution of the marriage of A and B, company X will transfer some of its assets to shareholders A and B because of a court order under the FLA.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 126-A

Income Tax Assessment Act 1997 Section 126-5

Income Tax Assessment Act 1997 Subsection 126-5(4)

Income Tax Assessment Act 1997 Subsection 126-5(5)

Income Tax Assessment Act 1997 Subsection 126-15(1)

Income Tax Assessment Act 1997 Paragraph 126-15(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(b)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-15(1)

A New Tax System (Goods and Services Tax) Act 1999 Division 72

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

Summary

Rollover relief under section 126-15 of the ITAA 1997 will be available when a company transfers some of its assets to its shareholders because of a court order made under the FLA and any capital gain the company makes will be disregarded.

Detailed reasoning

Subdivision 126-A of the ITAA 1997 provides CGT rollover relief where a marriage breaks down and assets are transferred because of a court order under the FLA. This rollover is an automatic rollover and applies whether or not a taxpayer chooses for it to apply: Taxation Determination TD 1999/60.

Rollover is available in situations where assets are transferred from a company (the transferor) to a spouse or former spouse (the transferee) of another individual because of a court order under the FLA. Subsection 126-15(1) of the ITAA 1997.

The consequences of the rollover are set out in section 126-5 of the ITAA 1997. If the rollover applies, a capital gain or capital loss the company makes from the CGT event is disregarded. Subsection 126-5(4) of the ITAA 1997.

For assets acquired by the company on or after 20 September 1985, the first element of the cost base of the property in the hands of the transferee is the asset's cost base in the hands of the company at the time the transferee acquired it. The first element of the reduced cost base is worked out similarly. Subsection 126-5(5) of the ITAA 1997.

In this case, the company will be transferring some of its assets to its individual shareholders as a result of a court order under the FLA. It is considered that rollover relief will be available under subsection 126-15(1) of the ITAA 1997 and the rollover consequences in section 126-5 of the ITAA 1997 will apply so that any capital gain that the company makes will be disregarded.

Question 2

Summary

The transfer of a company's assets to its individual shareholders because of a court order under the FLA is not a taxable supply and there will be no GST consequences on the transfer.

Detailed reasoning

As there are no specific provisions of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) covering matrimonial property distributions (MPD), the basic rules of the GST Act apply.

GST is payable on taxable supplies: subsection 7-1(1) of the GST Act. In determining whether GST is payable on the transfer of an enterprise asset as a result of property distributions under the FLA consideration must be given to whether the transfer is a taxable supply.

A taxable supply is defined under section 9-5 of the GST Act as a supply which is made for consideration in the course or furtherance of the supplier's enterprise; is connected with Australia and is made by a supplier who is either registered or required to be registered for GST. However, it is not a supply which is GST-free or input taxed.

Supply

A supply is any form of supply whatsoever. Section 9-10 of the GST Act.

Goods and Services Tax Ruling GSTR 2003/6 Goods and services tax: transfers of enterprise assets as a result of property distributions under the FLA or in similar circumstances explains the GST consequences of the transfer of enterprise assets as a result of property distributions under the FLA and discusses whether the transfer is a taxable supply under section 9-5 of the GST Act.

Paragraph 23 of GSTR 2003/6 states that a supply includes the transfer of assets and that where an enterprise asset is transferred to a spouse under an MPD there is a supply.  

Consideration

Consideration is defined in section 195-1 of the GST Act to mean any consideration, within the meaning given by section 9-15 of the GST Act, in connection with the supply.

The meaning given to consideration in section 9-15 of the GST Act extends beyond payments to include such things as acts and forbearances. It may include payments made voluntarily, and payments made by persons other than the recipient of a supply.

Section 9-15 of the GST Act further provides that a payment will be consideration for a supply if the payment is 'in connection with' a supply and 'in response to' or 'for the inducement' of a supply.

Paragraphs 23 to 37 of GSTR 2003/6 provide the ATO view regarding whether there is a supply for consideration under a MPD and clarifies the following:

· a payment, act or forbearance is consideration for a supply where there is sufficient nexus between the payment, act or forbearance and the supply

· when an MPD arises out of a court order or out of court settlement, it is appropriate to apply the principles from Goods and Services Tax Ruling GSTR 2001/4 in relation to the supply of the asset

· where an asset is received under an MPD resulting from a court order there is no consideration in the nature of forbearance or discontinuance as it is the decision of the court rather than agreement between the parties that 'settles' the dispute.

Therefore, under a property distribution resulting from a breakdown of a marriage the supply is made for no consideration for the purposes of paragraph 9-5(a) of the GST Act.

Although section 9-5 of the GST Act requires a taxable supply to be for consideration, Division 72 of the GST Act ensures that supplies to, and acquisitions from associates without consideration are brought within the GST system. However, if the supply is not made in the course or furtherance of an enterprise as required under paragraph 9-5(b) of the GST Act it is still not a taxable supply.

Course or furtherance of an enterprise 

Paragraphs 38 to 45 of GSTR 2003/6 provide the ATO view regarding whether or not an enterprise asset that is transferred as a result of an MPD is done in the course or furtherance of an enterprise.

Generally, we consider that there is no discernible relationship between the supply of an asset under an MPD and the enterprise. The supply is made due to the personal circumstances of the spouses rather than any business circumstances of the enterprise. Accordingly, the supply is not made in the course or furtherance of the enterprise. This view is based on a number of factors being:

· the private nature of a marriage breakdown

· the binding nature of a FLA order or agreement, and

· the lack of commercial flavour in the absence of consideration.

This view is extended to an enterprise asset that is supplied to a spouse by a related entity under an MPD. Additionally, there is no consideration with sufficient nexus to the supply because of the nature of an MPD.

Where the requirements in paragraph 9-5(b) are not met it is not necessary to consider Division 72 for property distributions upon marriage or relationship breakdowns. Therefore, and because paragraph 9-5(a) of the GST Act is also not met, there is no taxable supply.

As confirmed in GSTR 2003/6, property distribution resulting from a breakdown of a marriage (or other relationship) is a supply which is made for no consideration for the purposes of paragraph 9-5(a) of the GST Act.

As the supply in this case has arisen as a result of a marriage breakdown and is because of a court order under the FLA it is considered that the transfer of is not made in the course or furtherance of an enterprise. The requirements in paragraph 9-5(b) of the GST Act are not met and it is not necessary to consider the application of Division 72 of the GST Act. As a result of this and because the requirement in paragraph 9-5(a) of the GST Act is also not met, there is no taxable supply and there will be no GST consequences when a company transfers some of its assets to its individual shareholders.

Note 1 The transfer of assets from a company to its individual shareholders because of a court order made under the FLA may be treated as a dividend in accordance with subsection 109C(1) of the Income Tax Assessment Act 1936.

Note 2 Although the transfer of assets from a company to its shareholders because of a court order under the FLA is not a taxable supply, an adjustment under Division 129 or 130 of the GST Act in respect of the original acquisition may be required.

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