Edited version of private advice

Authorisation Number: 1052097373972

Date of advice: 23 October 2023

Ruling

Subject: CGT event D1 upon a court order

Question 1

Will CGT event D1 happen for Party A pursuant to section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997) at the time the Final Orders are made by the Court?

Answer

No.

Question 2

Will CGT event E1 happen for Party A pursuant to section 104-55 of the ITAA 1997 at the time the Final Orders are made by the Court?

Answer

No.

This private ruling applies for the following periods:

Income year ended 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

Background

Party A is an Australian tax resident.

Party A and Party B are involved in a dispute.

Draft Final Orders have been provisionally agreed to by both parties and provides that Party A will pay Party B three settlement amounts in accordance with the terms and conditions of the Final Orders. It is intended by both parties that the Final Orders will be made by the Court.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 subsection 104-35(1)

Income Tax Assessment Act 1997 subsection 104-35(3)

Income Tax Assessment Act 1997 subsection 104-35(5)

Income Tax Assessment Act 1997 section 104-55

Question 1

Summary

CGT event D1 will not happen for Party A pursuant to section 104-35 of the ITAA 1997 at the time the Final Orders are made by the Court.

Detailed reasoning

CGT event D1 happens under section 104-35 of the ITAA 1997 if you create a contractual right or other legal or equitable right in another entity. The time of the event is when you enter into the contract or create the other right. However, CGT event D1 does not happen if any of the exclusions listed in subsection 104-35(5) apply.

Subsection 104-35(3) of the ITAA 1997 provides that you make a capital gain if the capital proceeds from creating the right are more than the incidental costs you incurred that relate to the event. You make a capital loss if those capital proceeds are less.

In this situation, Party A will have an obligation to pay Party B the three settlement amounts when the Final Orders are made by the Court. Conversely, Party B will have the right to receive these amounts from Party A when the Final Orders are made by the Court.

Although Party A and Party B have both provisionally agreed to the Final Orders, 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? confirms the Final Orders will still be a court order and not made as a result of any actions of Party A or Party B.

In light of the above discussion, it is evident that Party A will not create the right in Party B to receive the three settlement amounts, the right emanates from the Final Orders made by the Court. Despite consenting to the Final Orders, they do not impose any obligation on Party A to do anything that may create a right in Party B at the time the orders are made.

This view is supported by ATO Interpretative Decision ATO ID 2009/129 Does CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happen if the Supreme Court of Queensland makes an order pursuant to section 38 of the Property Law Act 1974 (Qld) appointing statutory trustees for the sale of a co-owned property? where it relevantly states:

CGT event E1 did not happen when the trust was created over the property. That event happens if you create a trust over a CGT asset by declaration or settlement: subsection 104-55(1) of the ITAA 1997. It is considered that this event has no application where the trust is created by order of a court, rather than by the actions of the owners of the property. That is, given the court's role, it is impossible to cast the co-owners in the role of 'you' for the purpose of CGT event E1.

This view was also taken in the Decision Impact Statement for the Sandini Pty Ltd atf the Karratha Rigging Unit Trust & Ors v Ellison & Ors v Commissioner of Taxation of the Commonwealth of Australia & Ors [2018] HCA Trans 190 [2018] FCAFC 44 where it states:

CGT event A1 in section 104-10 of the ITAA 1997, rather than CGT event E1 in section 104-55 of the ITAA 1997, happens if an order creates a trust over an asset because the change of ownership happens by operation of law. CGT event E1 does not happen as there is no relevant 'you' as contemplated by that event.

Although the statements above have been made in respect of CGT event E1, these principles can be equally applied in this situation in respect of CGT event D1 as both CGT events require 'you' to create something. Party B's right to receive the three settlement amounts under the Final Orders will be created when they are made by the Court and not by any action of Party A. Party A will not create a contractual right or other legal or equitable right in the Wife at that time, which is a requirement under subsection 104-35(1) of the ITAA 1997 for CGT event D1 to occur.

Consequently CGT event D1 pursuant to section 104-35 of the ITAA 1997 will not happen for Party A when the Final Orders are made by the Court.

Question 2

Summary

CGT event E1 will not happen for Party A pursuant to section 104-55 of the ITAA 1997 at the time the Final Orders are made by the Court

Detailed reasoning

CGT event E1 happens pursuant to section 104-55 of the ITAA 1997 if you create a trust over a CGT asset by declaration or settlement. The CGT event happens at the point in time the trust is created.

The phrase 'you create a trust over a CGT asset' is to be understood by reference to the general law of trusts. This directs attention to the fundamental nature of a 'trust' over an asset and what is involved in 'creating' such a trust.

Taxation Determination TD 2019/14 Income tax: will a trust split arrangement of the type described in this Determination cause a new trust to be settled over some but not all assets of the original trust with the result that CGT event E1 in subsection 104-55(1) of the Income Tax Assessment Act 1997 happens?specifies that a trust is created by declaration or settlement in the following circumstances:

57. A trust is created by declaration within the meaning of subsection 104-55(1) when it is created by words or conduct sufficient to demonstrate an intention to create an express trust over property (Kafataris v Deputy Commissioner of Taxation [2015] FCA 874 (Kafataris) at [26] )...

58. A trust is created by settlement when property is vested in a trustee for the benefit of others (Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v Commissioner of Taxation [2015] FCAFC 4 at [5]; Kafataris at [31]) ...

As outlined in question 1, Party A will have an obligation to pay Party B the three settlement amounts in accordance the Final Orders at the time the orders are made by the Court.

The Final Orders do not provide that any property must be held on trust for the benefit of Party B or any other party, instead Party B has the right to receive the three amounts from Party A. Party A has not demonstrated any intention to create an express trust over property, nor has the property vested in a trustee for the benefit of others.

Accordingly, CGT event E1 will not happen pursuant to section 104-55 of the ITAA 1997 in relation to Final Orders when they are made by the Court as a trust has not been created over a CGT asset by declaration or settlement.

Further, as confirmed by ATO ID 2009/129 that has been discussed above, if a trust has been created by the order of a court, rather than by the actions of the owners of the property, it is impossible to cast the owners in the role of 'you' for the purpose of CGT event E1. Consequently, CGT event E1 will not happen pursuant to section 104-55 of the ITAA 1997 for Party A when the Final Orders are made by the Court.