Edited version of private advice

Authorisation Number: 1051643650054

Date of advice: 04 March 2020

Ruling

Subject: CGT roll-over - marriage or relationship breakdowns

Question

Are you able to apply the roll-over provisions under section 126-5 of the Income Tax Assessment Act 1997 (ITAA 1997) to the disposal of your interests in a property held jointly with your former spouse?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2020

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You and your former spouse separated in the 2015-16 financial year.

You and your former spouse entered into a formal agreement (Consent Orders) pursuant to the Family Law Act 1975 regarding the split of your matrimonial property. The Consent Orders are dated in the 2016-17 financial year.

Paragraph 1.8 of the Consent Orders outlines the agreed disposal of the property.

Paragraph 1.8 of the Consent Orders state 'that the husband and wife do forthwith do all things necessary upon terms and conditions as agreed or fixed by the court to sell the property and the Furniture and effects and the net proceeds of sale shall be deposited into the wife's account'. Clause 1.9 states 'Forthwith upon compliance with paragraph 1.8 the wife shall transfer to the husband one half of the then balance...with the wife then at liberty to retain the balance'.

You and your former spouse listed the property for sale but you were unable to agree to terms between yourselves and potential purchases. The property market in Country A is also on the decline due to political and economic uncertainty.

You and your former spouse reached an agreement in the 2019-20 financial year for your former spouse to acquire your interest in the property at current market value.

The property is an investment property and has never been used as your main residence.

The property was acquired after 20 September 1985 (post-CGT asset).

Relevant legislative provisions

Reasons for decision

Summary

Section 126-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that there is a roll-over if a Capital Gains Tax (CGT) event happens involving an individual and his or her spouse or former spouse because of a court order under the Family Law Act 1975 (FLA 1975).

In your case, the transfer of your property resulted in a CGT event A1 and involved you and your former spouse. You and your spouse entered into a formal agreement by way of consent orders pursuant to the FLA 1975. Consent orders are considered a court order in terms of section 126-5 of the ITAA 1997.

However, the CGT event did not occur 'because of' the court order and instead by way of a private agreement between the parties. Therefore the roll-over provisions under section 126-5 do not apply. You will be assessed on any capital gain that arises upon the transfer between you and your former spouse.

Detailed reasoning

Subsection 126-5(1) of the ITAA 1997 provides that there is a roll-over if a CGT event (the trigger event) happens involving an individual (the transferor) and his or her spouse or former spouse (the transferee) because of:

(a)  a court order under the FLA 1975 or under a state law, territory law or foreign law relating to breakdowns of relationships between spouses; or

(b) a maintenance agreement approved by a court under section 87 of the FLA 1975 or a corresponding agreement approved by a court under a corresponding foreign law; or

(d) something done under:

(i) a financial agreement made under Part VIIIA of the FLA 1975 that is binding because of section 90G of that Act; or

(ii) a corresponding written agreement that is binding because of a corresponding foreign law; or

(da) something done under:

(i) a Part VIIIAB financial agreement (within the meaning of the FLA 1975) that is binding because of section 90UJ of that Act; or

(ii) a corresponding written agreement that is binding because of a corresponding foreign law; or

(e) something done under:

(i) an award made in an arbitration referred to in section 13H of the FLA 1975; or

(ii) a corresponding award made in an arbitration under a corresponding State law, Territory law or foreign law; or

(f) something done under a written agreement:

(i) that is binding because of a State law, Territory law or foreign law relating to breakdowns of relationships between spouses; and

(ii) that, because of such a law, prevents a court making an order about matters to which the agreement applies, or that is inconsistent with the terms of the agreement in relation to those matters, unless the agreement is varied or set aside.

CGT event

The transfer of your property to your former spouse constitutes a CGT event A1 (disposal). This is a trigger event for the purposes of section 126-5 of the ITAA 1997.

Court Order

An order made by consent under the FLA 1975 is a 'court order' in terms of paragraph 126-5(1)(a) of the ITAA 1997 as per Taxation Determination TD 1999/47 Income tax: capital gains: is there roll-over under section 126-5 or 126-15 of the Income Tax Assessment Act 1997 if a CGT event happens because of a court order under the Family Law Act 1975 made by consent?

'Because of'

The CGT event must have occurred 'because of' a court order under the FLA 1975.

Ellison v Sandini Pty Ltd [2018] FCAFC 44

In Ellison v Sandini Pty Ltd [2018] FCAFC 44 (Ellison v Sandini), the parties agreed between themselves, after the order was made, to transfer shares to a company as trustee for the trust rather than to Ms Ellison as stated in the court orders.

The Family Court made orders by consent under section 79 of the FLA 1975 that within seven days, Sandini Pty Ltd (Sandini) as trustee of the Ellison Family Trust, do all acts and things and sign all documents necessary to transfer to the wife 2,115,000 Mineral Resources Limited (MIN) shares. Sandini was not the trustee of the Ellison Family Trust. Sandini was the trustee of the Karratha Rigging Unit Trust (KRUT) and, in that capacity, owned over 35 million MIN shares.

Ms Ellison asked that the MIN shares be transferred to Wavefront Asset Pty Ltd (Wavefront) as trustee of the Felstead Family Trust rather than to her. The shares were transferred by way of private agreement after the formal consent orders were made.

The Court considered the 'because of' requirement. In this case, the Family Court order was 'inefficacious in all relevant respects'. It required Sandini, in a non-existent capacity, to do things. The fact that Mr and Ms Ellison may have agreed that Sandini do things in another capacity does not mean that the orders had any effect.

In reaching her conclusion (with which Siopis J agreed) that the CGT event in question was not subject to rollover relief under section 126-15, Jagot J made the following observations relating to the meaning of 'because of' in that provision:

·         'For the provision to be satisfied the relevant causal relationship must exist in respect of a transfer involving a company or trustee as transferor and a spouse or former spouse as transferee'. [188]

·         The two parties 'both believed they were giving effect to the 21 September 2010 orders is immaterial to the question whether the there was a trigger event as required because of an order of the Family Court. Section 126-15 is not concerned with the subjective states of minds of the transferor or transferee. It is concerned with an objective state of affairs which requires the existence of an order of the Family Court and the occurrence of the trigger event involving a company or trustee as transferor and spouse or former spouse as transferee "because of" the order. The requirements are all objective, including the causal requirement'. [188]

·         'The provision requires the causal relationship described by the words 'because of' to be understood as involving a trigger event required by an order of the Family Court. ...I consider that a trigger event involving the transferor and transferee as identified in section 126-15 occurs because of an order of the Family Court if the order requires that event to occur and the event occurs.' [190]

As the shares were not transferred 'because of' the order, this requirement was not satisfied and the roll-over was disallowed.

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 is in relation to companies and shareholders; however the same principles apply to all taxpayers. Paragraph 136 of this ruling states that Subdivision 126-A of the ITAA 1997 does not apply if the transfer of property is not 'because of' the section 79 order (that is, if the transfer of property is not in compliance with that order). For example, if the section 79 order requires that money be paid, and the parties separately agree to satisfy that obligation by the transfer of property, the transfer of property is not 'because of' the order in the strict sense, and Subdivision 126-A does not apply. Instead, the company will be assessed on any capital gain that arises upon that transfer.

Taxation Determination TD 1999/55 Income tax: capital gains: if a CGT asset other than one specified in a court order under the Family Law Act 1975 is transferred between spouses, is the asset transferred 'because of' the court order for the purposes of section 126-5 or 126-15 of the Income Tax Assessment Act 1997?

TD 1999/55 discusses when a different CGT asset, other than the one outlined in the court order, is transferred between spouses. Example 1 of this determination states that the parties should obtain a variation to the original court order so that the roll-over may apply to the amended agreement.

Application to your circumstances

As per the decision in Ellison v Sandini and TR 2014/5, there must be a relevant causal relationship between the Court order and the disposal of the property. That is, the family court order must require the event in question to occur and that exact event must in fact occur.

In your case, the Consent orders state that you must do all things necessary to sell the property. This requires both you and your former spouse to dispose of your interest in the property. What occurred in your situation was not the sale of the entire property, but rather your interest in the property only. This decision was a private agreement between you and your former spouse, not because it was required by the family court order. As per TD 1999/55, a variation to the original court order would be required.

Therefore the roll-over provisions under section 126-5 of the ITAA 1997 do not apply. You will be assessed on any capital gain that arises upon the transfer between you and your former spouse.

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