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Edited version of private ruling

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Ruling

Subject: Capital gains tax (CGT) - marriage breakdown roll-over - transfer of shares into a trust

Is any capital gain or capital loss made from CGT event E1 occurring on the transference of your shares into the trust disregarded?

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You own shares.

You and your spouse divorced with the property settlement occurring in the Family Court of Australia.

As part of the settlement, the court order provided that you would transfer you shares to your children, to be held on trust for them until they reach the age of 21 years, or in the event that you disposed of the shares, that you pay them the sum equal to the sale value of the shares.

For the purposed of this private ruling, the trust has been created and you have transferred the shares into the trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-15

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-100

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 126-5

Reasons for decision

Marriage breakdown roll-over

As a general rule, CGT applies to all changes of ownership of assets on or after 20 September 1985. However, if you transfer an asset to your spouse, or former spouse, as a result of the breakdown of your marriage or relationship, there is automatic rollover in certain cases. This rollover ensures the transferor spouse disregards a capital gain or capital loss that would otherwise arise.

In your case, the property settlement was finalised in Family Court of Australia. The Court issued a court order which provided that you were to transfer shares you owned into a trust, to be held for your children.

As you have transferred the shares to a trust, and not to your spouse, you will not be eligible for the marriage breakdown roll-over. Therefore, any capital gain or capital loss you make on the transfer of the shares into the trust is not disregarded.

Creating a trust over a CGT asset

CGT event E1 happens if a taxpayer creates a trust over a CGT asset by declaration or settlement. The time of the event is when the trust over the asset is created. The taxpayer makes a capital gain if the capital proceeds from the creation are more than the asset's cost base.

In your case, you have created a trust over your shares, to be held for your children until they turn 21 years of age. CGT event E1 occurred at the time the trust was created. Whether you made a capital gain on the transference of the shares will be established by comparing the capital proceeds received for transferring the shares into the trust to the cost base of your shares.

Capital proceeds from transfer of shares to trust

The capital proceeds for the transferring of shares to a trust are determined in accordance with the normal CGT rules and are subject to modifications, where applicable.

The market value substitution rule applies when you did not receive any capital proceeds from a CGT event, and you are taken to have received the market value of the CGT asset that is the subject of the event, at the time of the event.

In your case, you transferred your shares into a trust and did not receive any capital proceeds. Therefore, the market value substitution rule will apply and you will be viewed as having received the market value of the shares, on the date that the shares are transferred into the trust.

You will have made a capital gain if the market value of the shares on the date of transference was greater than the cost base of the shares.

Discount capital gain

When a capital gain has been made as a result of certain CGT events occurring, a discount is available on the capital gain where the following conditions are met:

In your case, you will have owned the shares for at least 12 months before they were transferred into the trust and CGT event E1 is a CGT event to which the discount can be applied to any capital gain. If you meet the other conditions listed above, you will be eligible to apply the 50% discount to any capital gain that you made on the transfer of your shares into the trust.

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