Contributed by Andrew Henshaw, Director, Velocity Legal
The breakdown of a marriage can have a high emotional and financial cost. Often, a spouse will have to transfer some of their assets to the other spouse, whether by agreement or by court order. In some circumstances, matrimonial assets will be held by related entities (eg a family trust), and that entity will have to transfer assets to a spouse.
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CGT roll-over on marriage breakdown
Transferring an asset from one spouse to another usually triggers a CGT event, and the person transferring the asset may make a capital gain. However, there is a CGT roll-over for certain transfers between spouses because of a marriage breakdown in Subdiv 126-A of ITAA 1997. This roll-over also applies to de facto relationship breakdown.
Where certain criteria are met, the CGT marriage breakdown roll-over grants roll-over relief for the following types of transfers:
- (1) transfers “involving” an individual and his/her spouse (ie Spouse 1 to Spouse 2) (s 126-5), and
- (2) transfers “involving” a company or a trustee and a spouse (ie Spouse 1’s Company/Trust to Spouse 2) (s 126-15).
Until very recently, it was widely understood that the CGT marriage breakdown roll-over could only apply if Spouse 2 actually received the property (ie in their personal name, not in a company or trust).
Sandini’s case: CGT roll-over despite a trust receiving the matrimonial property
In that case, Mr Ellison and Ms Ellison were separating. The Family Court gave an order directing that Sandini Pty Ltd as trustee for the Karratha Rigging Unit Trust (Sandini, controlled by Mr Ellison) transfer shares in Mineral Resources Limited to Ms Ellison.
After the Family Court order (but before the transfer), Ms Ellison asked Mr Ellison to arrange instead for Sandini to transfer the Mineral Resources Limited shares to Ms Ellison’s family trust (the Family Trust), and not to Ms Ellison personally. Mr Ellison agreed to do so.
The ATO later audited Sandini (and Mr Ellison). The ATO determined that the CGT marriage breakdown roll-over did not apply. This was because Sandini transferred the shares to Ms Ellison’s trust (and not to Ms Ellison personally). As a result, the ATO’s view was that Sandini had made a significant capital gain.
Sandini sought declaratory relief that the CGT marriage breakdown roll-over applied (the ATO had not yet issued an assessment, so Pt IVC of the Taxation Administration Act 1953 could not be engaged). The Federal Court held that the CGT roll-over applied.
The case is complex, and the Federal Court spent significant time considering whether CGT Event A1 could occur on the transfer of beneficial title. However, leaving that issue aside, one reason that the CGT marriage breakdown roll-over applied was because Ms Ellison was sufficiently “involved” in a transfer of the Mineral Resources Limited shares. This was despite the fact that Sandini transferred title to the Mineral Resources Limited shares to the Family Trust, and not to Ms Ellison.
Have the rules changed? No, not really!
Some commentators have suggested that Sandini has broadened the scope of the CGT marriage breakdown roll-over.
The author disagrees, for the following reasons:
- where a Family Court order states that a CGT asset is to be transferred to a trust, the CGT marriage breakdown roll-over is unlikely to apply. This is because it is likely that CGT Event E2 will apply (as opposed to CGT Event A1), and a capital gain as a result of CGT Event E2 is not eligible for the CGT marriage breakdown roll-over (see s 126-5(2))
- assuming that Sandini was correctly decided, the CGT marriage breakdown roll-over may technically be available in more circumstances (eg where a Family Court order states that the CGT asset is to be transferred to an individual, and the individual then nominates for the CGT asset to go to a trust). However, practically implementing this strategy is likely to have disastrous tax consequences for Spouse 2 (in this case, Ms Ellison). This is discussed below.
Why? CGT consequences for Ms Ellison
The Sandini case does not address the CGT consequences for Ms Ellison. The case originated from an ATO audit of Sandini, and solely concerned whether Sandini could get the CGT marriage breakdown roll-over.
Ms Ellison became the “beneficial owner” of the shares when the Family Court gave their order (see para 139 of the judgment). When Ms Ellison directed that the Mineral Resources Limited shares be transferred to her Family Trust (instead of her), Ms Ellison effectively transferred her interest in the shares to her Family Trust. It is highly likely that Ms Ellison triggered a separate CGT event at point in time (either CGT Event A1, E1 or E2).
While the CGT marriage breakdown roll-over may apply to the transfer from Sandini (good news for Sandini and Mr Ellison), there is no CGT roll-over that could apply to the transfer of beneficial title from Ms Ellison to her Family Trust (bad news for Ms Ellison, and likely to result in a significant gain for Ms Ellison).
For this reason, the Sandini case is a red herring. It only addresses one side of the coin. In my view, a divorcing spouse cannot get matrimonial property into their family trust without someone triggering CGT.
The CGT marriage breakdown roll-over is complex, and the consequences of getting it wrong can be dire. Specialist tax and duty advice should be obtained well before entering into any family law settlement.