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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1051447775730

Date of advice: 6 November 2018

Ruling

Subject: Capital gains tax – marriage breakdown – roll-over relief

Question 1.

Will the capital gain that will be made by the transferor company on the disposal of the property be disregarded pursuant to subdivision 126-A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The capital gain will be disregarded pursuant to subdivision 126-A of the ITAA 1997 if the property is transferred under an order of the Family Court pursuant to the Family Law Act 1975.

Question 2.

If the roll-over provisions in subdivision 126-A of the ITAA 1997 apply to the transfer of the property, how is the cost base of the shares in the company calculated?

Answer

The cost base of the shares will be reduced under subsection 126-15(3) of the ITAA 1997 by the value of the property transferred as a result of the trigger event. Under subsection 126-15(4) of the ITAA 1997 the cost base of the shares will then be increased by the amount included in the shareholder’s assessable income because of the trigger event.

This ruling applies for the following period:

Year ending 30 June 2019.

Relevant facts and circumstances

Your Firm Pty Ltd was established in 199X and is an Australian resident company. Your Firm Pty Ltd purchased a residential property in 199Y, which has been leased to The Taxpayer since then.

The Taxpayer owns the majority of ordinary shares in Your Firm Pty Ltd.

The Taxpayer is in the process of negotiating a final divorce financial settlement with their spouse. As part of this divorce settlement it is intended that the residential property be transferred from Your Firm Pty Ltd to The Taxpayer on foot of a Family Court order and that the marriage breakdown rollover would be applied by Your Firm Pty Ltd under subdivision 126-A of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 104-10

Section 110-25

Subdivision126-A

Section 126-5

Section 126-15

Section 126-20

Section 126-25

Income Tax Assessment Act 1936

Division 7A

Section 109RC

Taxation Administration Act 1953

Schedule 1

Section 357-110

Family Law Act 1975

Section 79

Reasons for decision

126-A roll-over

As a general rule, capital gains tax (CGT) applies to all changes of ownership of assets on or after 20 September 1985. However, if you transfer an asset to your spouse as a result of the breakdown of your marriage or relationship, there is automatic rollover in certain cases.

The rollover applies if your marriage or relationship ended on or after 20 September 1985, and:

● you transfer an asset or a share of an asset to your spouse

● you receive an asset or a share of an asset from your spouse, or

● a company or trustee of a trust transfers an asset to you or your spouse.

Section 126-15 of the ITAA 1997 deals with a roll over for a CGT event involving a company or a trustee and a spouse or former spouse.

Subsection 126-15(1) of the ITAA 1997 states that the roll over consequences in section 126-5 of the ITAA 1997 apply if the 'trigger event' involves a company or a trustee and a spouse or former spouse of another individual and occurs because of:

● a court order under the Family Law Act 1975 or under a state or territory law, or foreign law relating to breakdowns of relationships between spouses

● a financial agreement that is binding under section 90G of the Family Law Act 1975 (known as a 'binding financial agreement') or a corresponding written agreement that is binding because of a corresponding foreign law

● a financial agreement that is binding because of section 90UJ of the Family Law Act 1975 (known as a 'binding financial agreement') or a corresponding written agreement that is binding because of a corresponding foreign law.

● an award made in an arbitration referred to in section 13H of the Family Law Act 1975 (known as an 'arbitral award') or a similar award under a corresponding state, territory or foreign law - such as an award made under the Western Australian Family Court Act 1997, or

● a written agreement that is binding because of a state, territory or foreign law relating to breakdown of relationship between spouses and that, because of such a law, a court is prevented from making an order

Where the conditions for the relief are met, the relief applies automatically; it is not necessary for the taxpayer to elect for the relief to apply and it is not possible to elect that it not apply (Taxation Determination TD 1999/60).

Dividends

Section 44 of the ITAA 1936 specifically includes dividends in a taxpayer’s assessable income. Paragraph 44(1)(a) provides that the assessable income of a resident shareholder in a company includes:

Dividends are defined in subsection 6(1) of the ITAA 1936 as including:

Paragraph 4 of Taxation Ruling TR 2014/5 Income Tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate) (TR 2014/5) explains that a transfer of property by a private company to a shareholder that is made in compliance with a section 79 of the Family Law Act will be an ordinary dividend to the extent that it is paid out of the private company profits. The transfer will be assessable income of the shareholder pursuant to section 44 of the ITAA 1936.

TR 2014/5 further explains at paragraph 69 that the characterisation of the transfer of property as a dividend is not altered by the fact that it is made to give effect to an order by the Family Court. That is, the cause for the directors resolving to make the transfer to the shareholder does not alter its character.

The meaning of the term ‘out of profits’ is not defined in the legislation however there has been judicial consideration of the issue which suggests that:

Further guidance on the meaning of paid out of profits is provided in Taxation Ruling TR 2003/8 Income tax: distributions of property by companies to shareholders – amount to be included as an assessable dividend (TR 2003/8). Specifically, paragraph 8 and 13 state that if the company’s assets are greater than its liabilities and share capital immediately after the payment of the dividend, then it will be considered to have been made out of profits.

Cost base adjustments

Paragraphs 132 to 134 of Taxation Ruling TR 2014/5 set out the consequences of a company asset being transferred to a shareholder under a section 79 order of the Family Law Act 1975:

Accordingly, the cost base of the shares in Your Firm Pty Ltd will be reduced by the amount included in The Taxpayer’s assessable income – in this case, the market value of the residential property. The cost base of the shares will then be increased by the value of the dividend assessed to the shareholder (The Taxpayer).

Section 109RC of the ITAA 1936 provides that deemed dividends arising from payments in respect of marriage or relationship breakdown may be frankable by the private company taken to pay the deemed dividend. The private company may frank the dividend in accordance with Part 3-6 of the ITAA 1997, subject to the dividend being franked at the private company’s benchmark franking percentage, or if no franking percentage exists, at 100%.

As Taxation Ruling TR 2014/5 makes no reference to franking credits in its discussion of cost base adjustments, we do not consider that the cost base of the shares should be increased by the value of franking credits attaching to the deemed dividend.


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