Edited version of your written advice

Authorisation Number: 1051386819466

Date of advice: 18 June 2018

Ruling

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

Question 1

Is there a roll-over pursuant to section 126-5(1) of the Income Tax Assessment Act 1997 where the taxpayer and his wife sold land which they jointly owned to the wife at a public auction which took place pursuant to an order under the Family Law Act 1975?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20xx

The scheme commenced on

1 July 20xx

Relevant facts and circumstances

You and your ex-spouse acquired the property as joint owners.

You and your ex-spouse obtained a divorce order in the Federal Circuit Court.

The Federal Circuit Court of Australia made orders in property settlement proceedings under the Family Law Act 1975. The orders included an order that you and your ex-spouse sell the property by public auction.

Upon the sale of property the proceeds of sale be paid in the following manner and priority:

4.1 Payment of agent’s commission and auction expenses if any due on the sale of the property.

4.2 Payment of legal costs on the sale of the property.

4.3 Water rates, council rates and other applicable conveyancing adjustments.

4.4 A stipulated amount into a controlled monies account to meet the capital gains tax payable by the parties.

4.5 Balance to be divided equally between the parties.

The property was sold by public auction to your ex-spouse, who was the highest bidder.

You and your ex-spouse transferred the property to your ex-spouse pursuant to the contract.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 160D(1)(a)

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subdivision 126-A

Reasons for Decision

Summary

The transfer of the property from joint names to the former spouse occurred as a result of the former spouse being the highest bidder at the auction, not because of the Family Court order. The Court forced the sale of the property and the acquisition was a personal choice of the ex-spouse, not a condition of the Family Court. In addition, the inclusion of the third party involvement of the real estate agent or auctioneer detaches the application of section 126-5 of the ITAA 1997.

Detailed reasons

Explanation of the law

Subsection 125-5(1) provides that there is a roll-over if a CGT event happens involving an individual and his or her spouse or former spouse because of:

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

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

(c) before the 2009/10 income year, a court order under a state law, territory law or foreign law relating to de facto marriage breakdowns

(d) something done under a binding financial agreement made under FLA Part VIIIA or a corresponding foreign law

(e) something done under an award made in an arbitration under FLA section 13H or a corresponding state law, territory law or foreign law, or

(f) something done under a written agreement that is binding because of a state, territory or foreign law relating to breakdowns of relationships between spouses and that 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 Subdivision 126-A roll-over only applies where the transferee is either a spouse or former spouse. A transfer to, or the creation of an asset in, a third party under a relevant order, agreement or award will not attract the roll-over relief despite the CGT event being a consequence of the breakdown of a relationship between spouses.

As outlined in your submission, in Ellison v Sandini [2018] FCAFC 44, the Family Court, in proceedings between Mr and Ms Ellison ordered Sandini P/L as trustee for the Ellison Family Trust to transfer 2,115,000 shares in Mineral Resources Limited (Min) to Ms Ellison. In fact, contrary to the assumption in the orders, Sandini P/L was not the trustee of the Ellison Family Trust. It was the trustee of Karratha Rigging Unit Trust (KRUT). What then happened is that Mr and Ms Ellison simply agreed between themselves, after the order was made, to have Sandini P/L, in its capacity as trustee of KRUT, transfer 2,115,000 Min shares to Wavefront P/L as trustee for the Felstead Family Trust, rather than to Ms Ellison.

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:

● ‘[F]or 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]

● This causal requirement is objective, not subjective. [189]

● ‘[T]he 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] (emphasis added)

The words are to be read in their context. Section 126-15 applies in the context of provisions concerning ‘rollover relief in circumstances where…the property consequences of the dissolution of marriage are not seen to be an appropriate occasion for the imposition of a tax liability.’ In this context it is trigger events which occur as required by orders of the Family Court adjusting the property rights of parties to a marriage breakdown that are given the benefit of the provision. ‘Trigger events which occur not because the orders require it, but for some other reason…do not occur ‘because of’ the orders within the meaning of the section; they occur ‘because of’ some state of mind of the parties which may or may not be influenced by the orders.’ [191-192]

In AAT Case Re Kok Yong Tey and FCT (2004) 57 ATR 1359; [2004] AATA 1210 the taxpayer and her husband were joint owners of a block of land which they sold to an unrelated third party pursuant to a Family Court order. The taxpayer claimed that she was entitled to roll-over relief in relation to her share of the gain under Subdivision 126-A of the ITAA 1997 for assets transferred in relation to marriage breakdown. The Commissioner included the amount in the calculation of her net capital gain for the 2002 income year and disallowed her objection to that amended assessment. She applied to the Administrative Appeals Tribunal for review of that decision.

The Commissioner’s decision was affirmed: Subdivision 126-A roll-over only applies to transfer of assets between spouses or former spouses pursuant to a court approved order relating to family breakdown. As the transfer in this matter involved a transfer of the land from the taxpayer and her former husband to a third party, no roll-over relief was available.

Although in Tey the property was sold to a third party and not the former spouse, the case does highlight the fact that involvement of an unrelated third party breaks the direct link that would have been in place should the order have stated the transfer should take place from one spouse to the other.

Application to your circumstances

For the rollover in section 126-5 to apply, each of the conditions in that section must be met.

Did a CGT event (the trigger event) happen?

The sale of your 50% interest in the property to your former spouse constituted CGT event A1. This is a trigger event for the purposes of section 126-5.

Did the trigger event involve an individual and his or her spouse?

The trigger event involved you and your former spouse.

Did the trigger event happen ‘because of’ a court order under the Family Law Act 1975?

As per the decision in Ellison, there must be a relevant causal relationship between the Court order and the sale of the property. That is, the Family Court order must require the event in question to occur and that event must in fact occur. Further, ‘Trigger events which occur not because the orders require it, but for some other reason…do not occur “because of” the orders within the meaning of the section; they occur “because of” some state of mind of the parties which may or may not be influenced by the orders.’ [192]

In this case, the Family Court order required the sale of the property by public auction. The Family Court did not compel your ex-spouse to acquire the property; the decision to acquire the property was her personal choice.

It is agreed that the Family Court order did not preclude either you or your ex-spouse from bidding at the public auction. However your right to participate in the auction was indistinguishable from that of any other person who attended and who may have had an interest in acquiring the property.

Additionally, what in fact occurred was not the sale of the entire property, but rather the sale of your interest in the property only.

Hence the trigger event, being the sale of your 50% interest in the property to your former spouse did not occur because it was required by the Family Court order. What was required was the sale of the entire property by public auction. Whilst this indirectly led to the trigger event occurring, the immediate and principal cause was the personal choice of your ex-spouse to bid in the auction as the highest bidder and to purchase your interest in the property.

The decision in Ellison also stands for the proposition that the rollover provisions apply in circumstances where ‘the property consequences of the dissolution of marriage are not seen to be an appropriate occasion for the imposition of a tax liability.’ They are not intended to apply where trigger events ‘do not occur “because of” the orders within the meaning of the section; they occur “because of” some state of mind of the parties which may or may not be influenced by the orders.’ [191-192]

The Family Court order provided that after provision was made for all expenses the remaining funds from the sale would be split evenly between you and your ex-spouse. There was also the statement that a stipulated amount was to be set aside to meet the capital gains tax payable.

Further, the sale was put in the hands of a third party (i.e. the real estate agent or auctioneer). There was no instruction from the Family Court that the property was to be transferred from one spouse to the other. The Family Court ordered that the joint owners do everything and co-operate fully to have the property put out to public auction; it was to be taken out of your hands to be dealt with entirely independently. This distinguishes the transaction in question from a Family Court order that simply requires the transfer of property from one spouse to another.

Both of these factors provide evidence that the Family Court was of the view that it was not appropriate for capital gains tax relief to be available on the disposal of the property. As set out above, the trigger event did not occur because of the orders, but because of the state of mind of one of the parties, which, whilst it was influenced by the orders, was independent of them. As such, this is not a trigger event to which the rollover is intended to apply.

Taxation Determinations TD 1999/52, TD 1999/53 and TD 1999/55

You mention Taxation Determinations TD 1999/52, TD 1999/53 and TD 1999/55. We have addressed the application of these to your circumstances below.

TD 1999/52 Income tax: capital gains: does a CGT event happen for the purposes of section 126-5 or 126-15 of the Income Tax Assessment Act 1997 because of a court order, if the order directs:

(a) a transfer of non-specific matrimonial property; or

(b) a transfer of specific CGT assets?

The Commissioner states that most commonly, 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. The court order being examined here does not direct the property be transferred to a spouse.

TD 1999/53 Income tax: capital gains: if a CGT asset is transferred by agreement between spouses and a court order later sanctions its transfer, was the transfer of the asset made 'because of' the court order in terms of section 126-5 or 126-15 for roll-over to apply?

The Commissioner determined that a CGT asset transferred between spouses by agreement, before a court order made under the Family Law Act 1975, or a State, Territory or foreign law relating to de facto marriage breakdowns, is not transferred ‘because of’ the court order. Whilst not directly relevant to your case, it does support the proposition that transfer of assets independent of the requirement of a court order does not happen ‘because of’ the court order.

Conclusion

The rollover in section 126-5 does not apply to you because the trigger event involving you and your former spouse did not occur because of a court order under the Family Law Act 1975, but rather because of the choice by your ex-spouse to bid for and purchase your interest in the property.