Thinking | 21 April 2017
Talking Tax – Issue 74
Application of the CGT rollover for marriage breakdowns broadened by Federal Court
The Federal Court in the recent case of Sandini Pty Ltd v Commissioner of Taxation  FCA 287 made a declaration that the Taxpayer was entitled to relief under the marriage and relationship breakdown CGT rollover under subdivision 126A of the Income Tax Assessment Act 1997 (ITAA 1997). This was despite the fact that the assets in question were transferred directly to the family trust of the Taxpayer’s spouse - a transfer that would not ordinarily come within the scope of the rollover.
Significantly, the Court took a much wider interpretation of the scope of CGT event A1 in order to reach this outcome and while the decision is important in the context of the application of the rollover, it may have further reaching consequences. The ATO is appealing the decision. In the course of divorce proceedings between the Taxpayer and his spouse, the Family Court ordered that Sandini Pty Ltd as trustee for the Karratha Rigging Unit Trust (Sandini), transfer a portion of its shareholdings directly to the spouse. Sandini was wholly controlled by the Taxpayer so the effect of the order was to transfer assets from the Taxpayer to his spouse. The spouse requested that the shares instead be transferred to her family trust and the Taxpayer obliged.
Subdivision 126A of the Income Tax Assessment Act 1997 (ITAA 1997) allows for tax relief where a CGT event occurs involving an individual and their spouse or former spouse due to a court order relating to the breakdown of a marriage or other relationship. The rollover expressly covers circumstances where the transferor is a company or trust but does not include situations where the transferee is such an entity.
Where all requirements are met, the rollover allows the Taxpayer to disregard any capital gain or loss due to the CGT event and the first element of the transferee’s cost base will be the transferor’s cost base at the date of the transfer.
Relief under Subdivision 126A ITAA 1997 is ordinarily not available where the CGT asset is transferred to a trust, as CGT event E2 does not come within the scope of the rollover. However, in this instance, the Taxpayer successfully argued that the rollover was available as CGT event A1 had occurred. The Court also held that even where CGT event A1 had not occurred, the circumstances of the case were such that the transfer of shares to the spouse’s family trust could be deemed a transfer to the spouse in her personal capacity.
The court made the following significant findings:
The Family Court orders had the effect of vesting beneficial ownership of the CGT assets in the spouse
The Court cited authorities for the proposition that the effect of orders such as these under section 79 of the Family Law Act 1975 (Cth) is that full beneficial ownership of the CGT asset is vested in the transferee. The Court held that this vesting event is sufficient to demonstrate a change in beneficial ownership at the date the orders were made.
A change in equitable ownership is sufficient for CGT event A1 to occur
Section 104-10 ITAA 1997 which sets out the requirements for CGT event A1, states that an A1 event will occur where there is a ‘change of ownership’ from the transferor to the transferee. The section states that the A1 event will not occur where you transfer legal title, but retain beneficial title to the CGT asset. The Court held that the focus of the provision is on a change in beneficial ownership of a CGT asset and that where beneficial title passes from the transferor to the transferee, this will be sufficient to demonstrate a change in ownership and will trigger CGT event A1.
Where the spouse requests that the asset be transferred to their trust, it may be treated as if it were transferred to them directly
The Court held that section 103-10 ITAA 1997 operated to apply the provisions of Subdivision 126A as if the property had been transferred directly to the Taxpayer’s spouse, as the CGT asset had been applied at the direction or for the benefit of the spouse.
In the circumstances, the spouse was a beneficiary and effective controller of the trust and had expressly requested that the shares be transferred to the trust. The Court held that it was clear the shares had been applied at the direction of the spouse and for her benefit.
As consent orders are deemed to come with the scope of subdivision 126A, this decision should be kept at the front of mind when considering the tax consequences of a family law settlement.
It is not clear whether the ATO considered whether the transfer to the spouse’s trust was a separate CGT event from the spouse’s perspective, that is, whether she ceased being the beneficial owners.
The proposed changes to penalties for small business and individuals
On 8 March 2017, the ATO released a Final Community Findings Report, following a period of community consultation about proposed changes to the imposition of penalties for individuals and small business entities (being entities with a turnover of less than $10 million). The ATO sought feedback about amending its administrative framework to give these taxpayers ‘one chance’ before imposing certain penalties.
The ATO initially released a consultation paper seeking feedback about its proposal to redesign its approach on penalising small business and individuals for:
- false or misleading statements for failure to take reasonable care for errors made in income tax returns and activity statements and
- late lodgement of income tax returns and activity statements.
Under the proposal, individuals and small business entities will be afforded ‘one chance’ before the ATO applies the above penalties. This means that in the first instance of either false or misleading statements or late lodgement by an entity, where penalties would otherwise be imposed, the Commissioner will forego their imposition. This would represent a considerable shift in current administrative practice. Ordinarily, the ATO will first apply the appropriate penalties and then require the taxpayer to apply for a remission of them.
Unsurprisingly, the consultation paper makes it clear that the proposal will not extend to taxpayers who have demonstrated reckless or dishonest behaviour, or those who cease engagement with the ATO during an audit or review.
The consultation paper suggests that a three to four year review period will be put in place. At the end of each review period, the ‘one chance’ opportunity would be re-set and all eligible taxpayers will again have access to the ‘one chance’ allowance. However, community feedback suggested a two year period would be preferred.
While community feedback was generally positive, some alternative approaches and concerns were raised. The ATO is currently in the process of considering these responses further and has promised to ‘share more information in the future’.
Our comments on the implication of Draft Taxation Ruling TR 2017/D2
The ATO recently released Draft Taxation Ruling TR 2017/D2 which sets out the Commissioner’s view on the application of the central management and control (CM&C) test for companies. The topic has previously been discussed in Talking Tax - Issue 69.
In our view, TR 2017/D2 is consistent with the decision handed down in Bywater Investments Limited & Ors. v Commissioner of Taxation; Hua Wang Bank Berhad  HCA 45 last year and taxpayers should ensure that they are mindful of the following matters:
- There is no presumption that the directors of a company exercise CM&C. This is a ‘useful’ starting point, but not a rebuttable presumption
- Whether the directors of a company have the required knowledge of the business and whether they actively consider all information before making decisions in the best interests of that company
- Executives travelling to Australia on business, especially those with global or regional roles, as well as executives on assignment to Australia need to be mindful of whether they are exercising CM&C in Australia – individuals who are not directors can exercise CM&C
- Whether the decision making is undertaken in Australia and whether the transaction is ‘relevant’ to determining the company’s CM&C
- Whether the minutes of meetings are factually correct as to who was present and what was discussed, including the rigour of the discussion, keeping in mind that the ATO can access immigration information and
- The interaction between the above matters and the company’s tax governance framework is also an important consideration that can often be overlooked.
Legislation and government policy
NSW revenue amendment Bill now law
On 11 April 2017, the State Revenue Legislation Amendment Bill 2017 (NSW) received assent as Act No 11 of 2017. This Act makes a range of substantive amendments to the Duties Act 1997 (NSW), Land Tax Management Act 1956 (NSW) and Payroll Tax Act 2007 (NSW).
- Nominal duty (rather than ad valorem duty) will be charged on certain transfers of property, where duty has been paid in respect of the sale or transfer and the purchaser is the trustee of a self-managed superannuation fund
- The matters of which the Chief Commissioner must be satisfied for nominal duty (rather than ad valorem duty) to be charged on transfers of trust property that are a consequence of the retirement or appointment of a trustee have been clarified
- An exemption from duty has been provided for the vesting of land occurring as a consequence of the merger of credit unions or of authorised deposit-taking institutions with mutual structures
- Existing exemptions from duty on transfers following the break-up of marriages and de facto relationships have been extended to cover such transfers to trustees under the Bankruptcy Act 1966 (Cth)
- Further provision has been made in relation to the aggregation of interests acquired by a person in a landholder for the purposes of liability for landholder duty
- The liabilities of a landholder are to be disregarded in determining whether a person has an interest in a landholder that makes the person liable for landholder duty and
- The application of that Act to instruments that are in a digital form has been clarified.
- Government entities that lease land to taxpayers will be required to make the taxpayer aware that they can be liable for land tax on the land.
- Certain wages paid by employment agents who on-hire their common law employees to clients of the agents will be exempt from payroll tax if the wages paid by the clients to their own employees are “exempt wages”, and
- Wages paid under the Supporting Leave for Living Organ Donors Programme will be exempt from payroll tax,
Various NSW Acts were also amended to permit disclosures to the Australian Charities and Not-for-profits Commission.
Income tax relief for transfers within a fund to a MySuper product
On 11 April 2017, the Treasury released an exposure draft of the Treasury Laws Amendment (2017 Measures No. 2) Bill along with draft explanatory material, for public consultation regarding income tax relief for transfers within a fund to a MySuper product. This draft legislation will amend the Income Tax Assessment Act 1997 (ITAA 1997) to give effect to tax reforms announced on 29 June 2015 that expand the tax relief available to superannuation funds when mandatorily transferring assets as part of the transition to the MySuper rules.
As part of this transition, superannuation funds are required to transfer the existing balances of members who are in default products, to MySuper products by 1 July 2017. Capital Gains Tax relief is currently provided for these transfers into a different superannuation fund, but not for transfers within the same fund structures. This Bill seeks to expand this CGT relief so that it applies to mandatory transfers within the same fund structure. The relief will be provided in the form of an asset roll-over which will apply to transfers made between 29 June 2015 and 1 July 2017.
The purpose of the consultation is to seek industry views on the proposed expanded tax relief. Interested parties are invited to make a submission regarding this draft legislation by 27 April 2017.
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