You may recall the decision in Sandini Pty Ltd v Commissioner of Taxation 2017 FCA 287 (Sandini) reported last year, where it was held that CGT roll-over relief was available on a relationship breakdown involving the transfer of a parcel of listed shares held by a unit trust (to be retained by the Husband) to a discretionary trust (as directed by the Wife) pursuant to Family Court orders. The decision extended the application of the relationship breakdown rollover to include situations where the spouse was “involved” in the transfer of the relevant CGT asset. Prior to this decision it was understood that the CGT roll-over relief was only available where the transferee was a spouse or former spouse involved in the relationship breakdown.
On appeal, the Full Federal Court , in a split judgment, has overturned the decision of the primary judge in Sandini. While the case was complex, the reasons for the majority of the Court has reverted the understanding of the application of the CGT rollover to the situation requiring the transferee to be a spouse or former spouse of the taxpayer. More particularly the majority of the Court concluded that:
- The CGT relationship breakdown provisions of s 126A of ITAA 1997 require that there is a CGT event “ involving” an individual, company or trust ( the transferor) and a spouse or former spouse of another individual (the transferee).
- A CGT event includes a disposal of a CGT asset (CGT event A1) ie. There must be a change in the beneficial ownership of an asset.
- The Family Court orders did not immediately effect a beneficial change in ownership of the relevant CGT assets as a result of:The shares
- transferred were part of a larger parcel of listed shares held by the transferor and not capable of being identified to alter the equitable ownership.
- The orders incorrectly specified the name of the transferor.
- Parties did not transfer the listed shares in strict accordance with the orders.
- Importantly, the transferee must be a spouse or former spouse to be “involved” in the CGT event.
From a taxation perspective, it is interesting to refer to some of the reasons given by the dissenting judge (Logan J) in his decision to dismiss the appeal, in particular the following:
- CGT event A1 was triggered by virtue of the orders and when they were made.
- Right to compel the transfer of an asset can be equated with beneficial ownership
- The Wife enjoyed all the benefits and dispositive powers of the shares from the date of the orders and the transferor retained a bare legal ownership of those shares.
- The contention that the shares were not capable of being sufficiently identified was Dickensian, and failed to consider the nature of share transactions in a digital age.
- The Wife was sufficiently “involved” in the transfer as a constructive recipient of the shares and direction of those shares to the trust to activate the application of the rollover provisions.
- S 126A does not require the spouse or former spouse to be the transferee, what is required is the involvement of the spouse or former spouse.
- The purpose of s 126A is to relieve taxpayers from taxation burdens which would otherwise arise by deferring the crystallization of a CGT liability and should be given a liberal construction.
It remains to be seen whether Sandini will seek special leave to appeal the decision to the High Court, based on the reasoning of Logan J. In the meantime, it is worthwhile to make the following observations.
- For the CGT relationship breakdown roll-over provisions to apply, the CGT asset must be transferred to the spouse or former spouse.
- Specialist taxation advice should be obtained and considered in property settlements, especially where there are complex CGT issues.
- Failure to follow consent orders strictly, could result in unintended taxation implications.
 Ellison v Sandini  FCAFC 44
Should you have any questions or need assistance in regards to the potential taxation implications involving a matrimonial property settlement, please feel free to contact John or David on (07) 3221 4465.