1052298196526 | Legal database

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Edited version of private advice

Authorisation Number: 1052298196526

Date of advice: 4 September 2024

Ruling

Subject: Subdivision 126-A - marriage or relationship breakdowns

Question 1

Will the marriage breakdown same-asset roll-over provisions under Subdivision 126-A of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard the capital gain on the future disposal of Company A shares by the Family Trust?

Answer

Yes.

Question 2

Will the marriage breakdown same-asset roll-over provisions under Subdivision 126-A of the ITAA 1997 apply to disregard the capital gain on the future disposal of shares in Company A by the Family Trust to a newly established family trust that includes Person B as an ultimate beneficiary?

Answer

No.

Question 3

Answer

Yes.

This ruling applies for the following period(s)

Income year ending DD MM YYYY

The scheme commenced/s on

DD MM YYYY

Relevant facts and circumstances

An ATO Notice of Decision letter was issued on DD MM YYYY, confirming the Family Trust and its ultimate beneficiaries were entitled to a tax offset and modified capital gains treatment for shares in Company A.

Person A and Person B are the ultimate beneficiaries of the Family Trust.

Person A and Person B have had a relationship breakdown and are separating.

Person A and Person B have utilised an online website to negotiate and document the separation agreement. This process includes a formal money and property agreement and an application for Consent Orders.

Person A advised that under a formal agreement as part of the separation, the Family Trust will be transferring X% of its Company A shareholding to Person B.

Person B will be removed as a beneficiary of the Family Trust.

Person A on DD MM YYYY engaged the services of a law firm to finalise the application for consent orders initially drafted using an online website.

The lawyer advised that greater clarity is required on the proposed separation of the Company A shareholdings held by the Family Trust.

Person A advised the separation has been agreed to by both parties and will be finalised once the response to this Private Ruling application is received.

Assumption

This ruling is made based on the assumption that an Application for Consent Orders will be filed with the Federal Circuit and Family Court of Australia and a Court Order made under the Family Law Act 1975.

Relevant legislative provisions

Income Tax Assessment 1997 section 102-20

Income Tax Assessment 1997 section 104-10

Income Tax Assessment 1997 section 104-15

Income Tax Assessment 1997 Subdivision 126-A

Income Tax Assessment 1997 section 126-5(1)

Family Law Act 1975

Reasons for decision

Question 1

Summary

The proposed future disposal of shares in Company A by the Family Trust will satisfy the marriage breakdown same-asset roll-over provisions under Subdivision 126-A of the ITAA 1997 to disregard the capital gain.

Detailed reasoning

All legislative references are to the ITAA 1997 unless otherwise stated.

Section 102-20 states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The shares in Company A held by the Family Trust are a CGT asset.

Under section 104-10, CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity. The future transfer of the shares in Company A by the Family Trust will therefore be a CGT event A1.

CGT generally applies to all changes of ownership of assets on or after 20 September 1985. Subdivision 126-A outlines the circumstances where a capital gain may be disregarded following a marriage breakdown.

Subsection 126-15(1) provides that there is a same-asset roll-over if a CGT event happens involving a trustee and a spouse or former spouse of another individual because of:

(a) a court order under the Family Law Act 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 Family Law Act 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 Family Law Act 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 Family Law Act 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 Family Law Act 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.

The same-asset roll-over relief under Subdivision 126-A applies where a CGT asset is transferred to a spouse as a result of the breakdown of a marriage or a relationship, or where certain CGT assets are 'created' in the spouse or former spouse. The relief extends to the situation where a CGT asset is transferred to (or created in) a spouse or former spouse from a company or the trustee of a trust. A 'spouse' for these purposes includes a de facto spouse and, from 1 July 2009, a partner of the same sex.

The same-asset roll-over relief is dependent on certain conditions being met. Chief among these is that the transfer or creation of the CGT asset occurs 'because of' a relevant court order or binding legal agreement. Where the same-asset roll-over relief applies, there will be no CGT implications for the transferor.

Special rules apply to preserve the modified CGT treatment for qualifying shares when you apply a CGT roll-over. For a same asset roll-over applied to a qualifying share, the share is taken to have been acquired by the new entity at the same time as when it was originally issued by the ESIC to the original investor. Therefore, the modified CGT treatment is preserved in the hands of the new entity.

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

Person A and Person B have not filed with the Federal Circuit and Family Court of Australia and therefore, do not have a court order made by consent under the Family Law Act 1975.

There will be a CGT event when the future transfer of the shares in Company A by the Family Trust occurs to Person B.

The future transfer of the shares will happen due to a future binding financial agreement made under Part VIIIA of the Family Law Act 1975. As such, the marriage breakdown same-asset roll-over provisions under subdivision 126-A of the ITAA 1997 will apply, allowing any capital gain or capital loss made from the future transfer of the shares in Company A by the Family Trust to Person B be disregarded. In addition, the modified CGT treatment of the shares in Company A is preserved in the hands of Person B.

Question 2

Summary

The marriage breakdown same-asset roll-over provisions under Subdivision 126-A of the ITAA 1997 will not apply to disregard the capital gain on the future disposal of shares in Company A by the Family Trust to a newly established family trust that includes Person B as an ultimate beneficiary.

Detailed reasoning

A Federal Court case and its subsequent Full Federal Court appeal case, cast some light on the interpretation of matters relating to the marriage breakdown same-asset roll-over provisions under Subdivision 126-A of the ITAA 1997. In the case of Ellison v Sandini Pty Ltd [2018] FCAFC 44 (Sandini), the Full Federal Court found that same-asset roll-over relief cannot apply where CGT assets are transferred from a company, trust, or spouse to a trust rather than to a spouse or former spouse.

The Full Federal Court held that the taxpayer was not entitled to a CGT same-asset roll-over relief under section 126-15 of the ITAA 1997 on assets transferred to the corporate trustee of a trust controlled by the wife and was therefore required to pay CGT on the transfer. This decision confirmed that the same-asset roll-over relief under section 126-15 of the ITAA 1997 is only available where the assets are transferred to a former spouse personally rather than to a company or trust.

If the asset is not transferred to a spouse or ex-spouse, the marriage breakdown same-asset roll-over provisions under Subdivision 126-A of the ITAA 1997 will not be available.

Question 3

Summary

The same-asset roll-over will be available providing the future consent orders state that the shares in Company A will be transferred to Person A by the Family Trust. If the shares are transferred to a spouse, the marriage breakdown same-asset roll-over provisions under Subdivision 126-A of the ITAA 1997 will apply.

Detailed reasoning

As discussed at question 1, the shares are CGT assets, and the disposal of those shares constitutes a CGT event. Provided that a court order is made by consent under the Family Law Act 1975 stating that the shares in Company A are to be transferred to Person A, the conditions of section 126-15 of the ITAA 1997 will be satisfied. As such, the marriage breakdown same-asset roll-over provisions under subdivision 126-A of the ITAA 1997 will apply, allowing any capital gain or capital loss made from the future transfer of the shares in Company A by the Family Trust to Person A to be disregarded. In addition, the modified CGT treatment of the shares in Company A is preserved in the hands of Person A.

ATO view documents

Taxation Determination TD 1999/47 Income Tax: capital gains: is there a same-asset roll-over under section 126-5 or 126-15 of the Income tax Assessment Act 1997 if a CGT event happened because of a court order under the Family Law Act 1975 made by consent?

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