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Edited version of your private ruling
Authorisation Number: 1012540934174
Ruling
Subject: Mistaken transfer of shares to spouse
Question
Can the Commissioner exercise his discretion to nullify the mistaken transfer of shares from you to your spouse?
Answer
No
This ruling applies for the following period:
30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
You originally owned issuer sponsored shares, which were mistakenly transferred by your stockbroker to your spouse's account.
When the mistake was discovered, your spouse acknowledged it was a mistake.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 104-55
Income Tax Assessment Act 1997 Section 104-60
Income Tax Assessment Act 1997 Section 104-75
Reasons for decision
CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happens if there is a disposal of a CGT asset. 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.
CGT event E1 in section 104-55 of the ITAA 1997 happens if you create a trust over a CGT asset by declaration or settlement. However CGT event E1 does not happen if you are the sole beneficiary of the trust and (a) you are absolutely entitled to the asset as against the trustee (disregarding any legal disability); and (b) the trust is not a unit trust.
Taxation Determination TD 2004/13 discusses CGT event E1. Paragraph 6 explains the creation of trust by declaration or settlement must identify the elements that must exist for a trust to come into existence, namely, certainty of intention to create a trust, terms, subject matter (the shares) and objects (the person to benefit). Paragraph 2 explains CGT event E1 will not happen if a mere contract to transfer shares was entered into, as this conduct would not, of itself, establish a certainty of intention to create a trust over the trust property (the shares).
CGT event E2 happens under section 104-60 of the ITAA 1997 if you transfer a CGT asset to an existing trust. However CGT event E2 does not happen if you are the sole beneficiary of the trust and (a) you are absolutely entitled to the asset as against the trustee (disregarding any legal disability); and (b) the trust is not a unit trust.
CGT event E5 happens under section 104-75 of the ITAA 1997 if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under). The time of the event is when the beneficiary becomes absolutely entitled to the asset. Unlike CGT events E1 and E2, there are no exceptions in section 104-75 that allow CGT event E5 to be disregarded.
Constructive trusts arise where it would be inequitable for a legal owner to be permitted to keep property for their own benefit. Constructive trusts are created to satisfy the demands of justice and good conscience, irrespective of any intention of the parties (this was stated by Glass JA in Allen v. Snyder (1979) FLC 90-656; (1977) FamLN N56; [1977] 2 NSWLR 685 at 690).
In your case, CGT event A1 happened when your shares were transferred (at their market value) to your spouse. CGT events E1, E2 or E5 did not happen because the mistaken transfer was not the intentional creation of a trust by declaration or settlement, was not a transfer to an existing trust and was not the creation of a constructive trust to which you became absolutely entitled to a CGT asset of a trust.
However, at a later time, CGT event E5 happened to you, at the time when the mistaken transfer was discovered. As a result, you became absolutely entitled to the trust property (for which your cost base is the market value of the shares at that time). As section 104-75 of the ITAA 1997 does not include any exceptions allowing CGT event E5 to be disregarded, it, the same as CGT event A1, cannot prevent a CGT event happening when there is a mistaken transfer of shares.
Also, when the mistaken transfer was acknowledged by your spouse, CGT event E1 happened to them, upon which they, by creating a constructive trust over the shares, disposed of their ownership of the shares at their market value (which they acquired for a cost of their market value at the time the CGT event A1 occurred).
Since you became absolutely entitled to the trust property, due to subsection 104-75(6), there will be no CGT consequences if the shares are transferred back to you.
In summary, there is no provision in the tax legislation that can operate to nullify the happening of CGT event A1 to you and the happening of CGT event E1 to your spouse. In addition, the legislation does not grant the Commissioner his discretion to disregard unintentional CGT events.