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Ruling

Subject: Income Tax: Capital Gains Tax: CGT Event A1 - transfer of CGT asset

Question 1

On transfer of my shareholding in a company to my former spouse, because of a court order made under section 79 of the FLA, does CGT Event A1 happen under Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

If I make a capital gain in respect of the transfer of my shareholding in a company to my former spouse, because of a court order made under section 79 of the FLA, does the roll-over under Subdivision 126-A of the ITAA 1997 apply to disregard that capital gain?

Answer

Yes.

Question 3

Are the payments I receive in respect of the transfer of my shareholding in a company to my former spouse, because of a court order made under section 79 of the FLA, included in my assessable income under section 6-5 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2012.

The scheme commences:

1 July 2011.

Relevant facts and circumstances

You were married, however have since separated from your former spouse and are now divorced.

You hold shares in an Australian proprietary company. The company has issued shares, which are held by the following shareholders, who are also Directors of the company:

· You - 50%

· Your former spouse - 50%

You and your former spouse have been involved in proceedings for property settlement before the Family Court of Australia (the Family Court). The company will be made a party to the proceedings. Following private mediation you have reached an agreement with your former spouse and will resolve the proceedings.

You, your former spouse and the company will enter into a Consent Order (the order) to be approved by the Family Court. The order will be made with the consent of all parties under section 79 of the Family Law Act 1975 (FLA). The terms of the order include:

· You will resign as a director of the company.

· You will transfer your shareholding in the company to your former spouse.

· You will receive consideration for the transfer of your shares held in the company to your former spouse by way of cash settlement drawn from the company's after tax reserves.

· You will retain a property (the property), which forms part of the consideration for the transfer of your shareholding in the company to your former spouse. You acquired the property in your own name, which has been your main residence for the purposes of Part 3-1 and 3-3 of the ITAA 1997. The property was not used for any other purpose apart from being your main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 6-25

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-10

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Subdivision 104-A

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(1)

Income Tax Assessment Act 1997 Subsection 104-10(2)

Income Tax Assessment Act 1997 Subsection 104-10(5)

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Subdivision 126-A

Income Tax Assessment Act 1997 Section 126-5

Income Tax Assessment Act 1997 Subsection 126-5(2)

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

Income Tax Assessment Act 1997 Section 995-1.

Detailed reasoning

General discussion of the law

Capital gains tax

Section 6-10 of the ITAA 1997 provides that your assessable income includes other income that is not ordinary income however is included in your assessable income by a provision of the tax law, which is referred to as statutory income.

Division 10 of the ITAA 1997 lists particular kinds of assessable income that is statutory income, which includes capital gains.

Section 102-5 of the ITAA 1997 includes in your assessable income your net capital gain and sets out how you work out your net capital gain. Section 102-10 of the ITAA 1997 sets out how you work out if you have a net capital loss.

Section 102-20 of the ITAA 1997 provides that you make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset.

For the purpose of working out your capital gain or loss, section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. Examples of CGT assets are:

· land and buildings;

· shares in a company and units in a unit trust;

· options;

· debts owed to you;

· a right to enforce a contractual obligation;

· foreign currency.

In relation to incorporated entities, a 'share' is considered to be a piece of intangible personal property belonging to a shareholder, in particular, intangible property known as a 'chose in action'. A share can be dealt with by a shareholder in much the same way as any other property, in that it can be sold, mortgaged, or devised by will. The Macquarie Dictionary defines that a 'chose in action' is a legal term meaning:

1. an intangible form of property as debts, shares, intellectual property, contractual rights, etc., recoverable by an action.

2. a right which can be protected only by legal action.

Subsection 995-1(1) of the ITAA 1997 defines the term 'share' and includes that a share 'in a company means a share in the capital of the company, and includes stock'.

Subdivision 104-A of the ITAA 1997 deals with circumstances involving the disposal of an asset. In particular, subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset.

Subsection 104-10(2) of the ITAA 1997 provides that you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

Subsection 104-10(3) of the ITAA 1997 provides that the time of the event is when you enter into the contract for the disposal, or if there is no contract, when the change of ownership occurs.

Subsection 104-10(4) of the ITAA 1997 provides that you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

However there are certain exceptions set out under subsection 104-10(5) of the ITAA 1997, which include that a capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985.

Taxation Determination TD 1999/48 expresses the Commissioner's view that if a court makes an order under section 79 of the FLA 1975 altering the interests of a spouse in property, a CGT event can happen because of the order. For example, the court might order an individual to dispose of their interest in the property to their spouse. When the individual disposes of a CGT asset in accordance with the order, CGT event A1 happens because of the court order.

In addition, TD 1999/48 expresses that whether or not a CGT event happens because of an order under section 79 of the FLA 1975 depends on the terms of the order made by the court.

Taxation Determination TD 1999/52 expresses the Commissioner's view that a court order under the Family Law Act 1975 directs that specific assets be transferred to a spouse. A CGT event happens for each CGT asset specified and it happens because of the court order. Similarly, if a court order directs a transfer of non-specific property, a CGT event happens for each CGT asset involved and it happens because of the court order.

Application of the law

Capital gains tax

Shares are a form of property. Shares are included as an example of what is a CGT asset. Therefore, for the purposes of working out your capital gain or capital loss, shares are considered to be a CGT asset under section 108-5 of the ITAA 1997.

Prior to the court order being made, you retained legal ownership of your share in the company. The court order will direct you to transfer legal ownership of your share in the company to your former spouse. Therefore, consistent with TD 1999/52, you will make that transfer because of the court order.

The transfer of ownership of your share in the company constitutes a disposal of a CGT asset under subsection 104-10(2) of the ITAA 1997. Consequently, CGT event A1 happens in respect of your shares in The company under subsection 104-10(1) of the ITAA 1997.

Consistent with TD 1999/48 and TD 1999/52, the CGT event will occur at the time you transfer ownership of the share in the company to your former spouse, not at the time the court order is made.

As you acquired your shares in the company after 20 September 1985, any capital gain you may make will not be disregarded under subsection 104-10(5) of the ITAA 1997.

Consequently, section 102-5 of the ITAA 1997 will include in your assessable income any net capital gain you may make as a result of the disposal of your share in the company because of the court order.

Therefore, in consideration of your circumstances, on transfer of your shareholding in the company to your former spouse, because of a court order made under section 79 of the FLA, CGT Event A1 will happen under section 104-10 of the ITAA 1997.

Question 2

Detailed reasoning

General discussion of the law

Roll-over relief on marriage breakdown

Subdivision 126-A of the ITAA 1997 sets out circumstances where a rollover is available in respect of a CGT event happening to a CGT asset because of a marriage or relationship breakdown. The roll-overs available allow the individual, company or trust that is transferring the CGT asset (the transferor) to disregard a capital gain or capital loss that would otherwise arise as a result of the transfer.

Section 126-5 of the ITAA 1997 deals with a CGT event involving spouses and includes that there is a roll-over if a CGT event (the trigger event) happens involving an individual (the transferor) and his or her spouse (the transferee), or a former spouse (also the transferee), because of 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.

Subsection 126-5(2) of the ITAA 1997 provides that only these CGT events are relevant:

· CGT events A1 and B1 (a disposal case); and

· CGT events D1, D2, D3 and F1 (a creation case).

However, subsection 126-5(3) of the ITAA 1997 provides that there is no roll-over if the CGT asset involved is trading stock of the transferor; or for CGT event B1 - title in the CGT asset does not pass to the transferee at or before the end of the agreement.

Taxation Determination TD 1999/47 expresses the Commissioner's view that an order made by consent is a 'court order' in terms of paragraphs 126-5(1)(a) and 126-15(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997). If a CGT event happens because of a consent order under the Family Law Act 1975, there is roll-over under section 126-5 or 126-15 of the ITAA 1997.

In Taxation Determination TD 1999/56 the Commissioner's expresses his view on when an asset is acquired by the transferee, where the transfer happens because of a court order under the FLA, and includes that:

Post-CGT assets of transferor

3. If a CGT asset acquired on or after 20 September 1985 is transferred by one spouse to another because of a court order under the FLA 1975, the time of acquisition of that asset by the transferee depends on the provisions of Part 3-1 and Part 3-3 of the ITAA 1997.

4. A court order might be silent on when an asset is to be acquired by the transferee. It might merely specify that one spouse transfer an asset to the other spouse on or by a certain date or within a certain period of time. It might specify that one spouse create certain rights in the other spouse (e.g., a lease). Regardless of the wording of the order, it is the action taken because of the court order that must be considered to determine the time of acquisition of the asset by the transferee for capital gains purposes. Division 109 of the ITAA 1997 (about when you acquire an asset) applies and provides general acquisition rules for capital gains purposes.

Note 1

5. There is a special indexation rule for this same asset roll-over in subsection 114-10(4).

Note 2

6. A CGT event happens 'because of' a court order if the CGT event is caused by the court order.

Taxation Determination TD 1999/60 expresses the Commissioner's view that both sections 126-5 and 126-15 of the ITAA 1997 apply automatically once their requirements are satisfied. The provisions are clearly expressed in this respect and contain no scope for any election to be made. Parties to a marriage breakdown cannot agree not to apply the provisions if the requirements have been satisfied.

Application of the law

It has already been determined that the transfer of your shareholding in the company to your former spouse is because of the court order under the FLA. Also, that CGT event A1 will happen because of the transfer.

Subsection 126-5(2) of the ITAA 1997 includes that CGT event A1 is a relevant event for the purposes of section 126-5 of the ITAA 1997.

In consideration of your circumstances, a capital gain or a capital loss you make from the CGT event is disregarded under subsection 126-5(4) of the ITAA 1997.

Therefore, if you make a capital gain in respect of the transfer of your shareholding in the company to your former spouse, because of a court order made under section 79 of the FLA, the rollover under Subdivision 126-A of the ITAA 1997 will apply to disregard that capital gain.

Question 3

Detailed reasoning

General discussion of the law

Ordinary Income

Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts.

Subsection 6-5(4) of the ITAA 1997 provides that in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

Ordinary income is defined under section 995-1 of the ITAA 1997 to have the meaning given by section 6-5 of the ITAA 1997.

The courts have considered the meaning of income according to ordinary concepts and have indicated what amounts to ordinary income and what does not amount to ordinary income, where ordinary income has generally been held to include three categories:

· income from rendering personal services,

· income derived from use of assets or in the nature of a return on capital invested; and

· income from carrying on a business.

Generally, there are a number of receipts which are obviously income, for example, salaries, business proceeds, rents, interest and dividends. However, receipts such as a lump sum legacy, lottery prizes and the sale of a capital asset are not income according to ordinary concepts. The sale of an asset may result in a capital gain under Part 3-1 of the ITAA 1997.

Section 6-25 of the ITAA 1997 sets out the relationships among various rules about ordinary income and provides:

6-25(1) Sometimes more than one rule includes an amount in your assessable income:

· the same amount may be *ordinary income and may also be included in your assessable income by one or more provisions about assessable income; or

· the same amount may be included in your assessable income by more than one provision about assessable income.

For a summary list of the provisions about assessable income, see section 10-5.

However, the amount is included only once in your assessable income for an income year, and is then not included in your assessable income for any other income year.

6-25(2) Unless the contrary intention appears, the provisions of this Act (outside this Part) prevail over the rules about *ordinary income.

Note: This Act contains some specific provisions about how far the rules about ordinary income prevail over the other provisions of this Act.

Application of the law

Ordinary income

Payments you receive because of the court order are in respect of the disposal of an asset.

Section 102-5 of the ITAA 1997 includes in your assessable income your net capital gain. In working out your net capital gain, subdivision 104-A of the ITAA 1997 deals with circumstances involving the disposal of an asset.

In your circumstances, a provision of the act applies specifically to include in your assessable income any net capital gain you may make in respect of the disposal of your shareholding in a private company. Consequently, section 6-25 of the ITAA 1997 applies such that to the extent an amount is dealt with under a specific provision, that amount will not be included in your assessable income by the rules about ordinary income under section 6-5 of the ITAA 1997.