Divorcing husband transfers assets to wife’s Family Trust – any CGT?

Moving assets into Family Trust & SMSF on divorce - for no CGT divorce family trust

CGT divorce family trust

Divorcing couples working together can move assets in their Family Trust & Self-Managed Super Fund - for no CGT

When you divorce often the biggest assets are in the Family Trust. No matter how much we all love our Family Trust it is still a separate entity from the marriage. Thankfully, CGT relief still applies where assets are transferred out of the Family Trust to the divorcing mum and dad.

But what about where mum wants assets transferred from the marriage into her Family Trust? This is the opposite. So off we go to the Federal Court. Let's see what it decides.

Excitingly, the Court states that the CGT marriage breakdown roll-over relief applies for assets going into a Family Trust.

This provides opportunities for the Family Court to transfer assets directly into the Family Trust, Unit Trust and Self-Managed Super Fund.  CGT divorce family trust

The case is a lovely example of where the ex-wife and husband work together. As a tax lawyer, I shun Family Law because the parties don't work together. A tax lawyer provides little value when the taxpayers are bickering amongst themselves. This is a wonderful exception.

The question on every tax practitioner's lips: is there a change in ownership of an asset under CGT event A1. Does CGT apply? The Federal Court gave a win to the taxpayer in Sandini Pty Ltd v FCT [2017] FCA 287 (Federal Court, McKerracher J, 22 March 2017).

Build Online:

Family Trust Deed - over 18,000 sold

Family Trust Updates - change Appointor, Trustee and Trust Name

Family Trust annual Distribution Statements

Family Trust Vesting Deed

Sandini Pty Ltd v Federal Commissioner of Tax, Federal Court

The former wife, Mrs Ellison successfully obtained an order from the Family Court transferring mining shares to the value of $2.5m from Sandini Pty Ltd to her. Not a problem. There is CGT marriage breakdown roll-over relief: section 126-A ITAA 1997. However, after the family court order, Ms Ellison emails Mr Ellison requesting him to transfer the shares, instead, to her family trust.

The 5 Tax Questions

1. Is roll-over relief available where the 'ultimate' entity is not the former wife? Instead, it is an entity she controls.

2. Does the change in ownership of the shares occur under the Family Court order? Obviously, the roll-over only applies if CGT event A1 occurs. This is 'because of' the making of the Family Court order. This is the trigger event required for the CGT rollover relief.

3. Is a change in the 'beneficial ownership' of an asset enough to trigger CGT Event A1?  Remember, beneficial ownership and legal ownership are different. This is the basis of every trust relationship. The Family Court order merely changes beneficial ownership of the shares. Legal ownership follows later when the transfer is signed and the shares are transferred. The change in the legal ownership of the shares occurs on signing the share transfer. Therefore, the change in the legal ownership of the shares did not occur 'because of' the family court order.

4. Section 103-10 ITAA 97 deals with the 'entitlement to receive money or property'. Does section 103-10 apply where the taxpayer 'directs' the shares into her family trust? After all, she is entitled to them under the Family Court order.  All she is doing is asking the husband to apply her benefit under section 103-10. The ATO foolishly claimed that section 103-10 is more limited. It incorrectly argued that 103-10 only applies to 'capital proceeds' owed to a taxpayer that was directed to the taxpayer's benefit.

5. What about section 126-15 roll-over relief? This applies where the transfer of the assets in question 'involves' a company or trust and a former spouse.  Mr Ellison argued that the wording of the section is wide enough to merely require that the wife is 'involved' in the transfer. It was not necessary for the wife to be the recipient of the transferred assets.

Decision

Thankfully, the Court found that a change in the ownership of an asset for the purposes of CGT event A1 only requires a change in the beneficial ownership of the asset. No CGT was payable on the transfer of the shares to the ex-wife's Family Trust. CGT marriage breakdown roll-over applies to the transfer of assets. The Court noted:

  • an entity can be an owner of property (which is a CGT asset) with beneficiary interest only (legal ownership is not required)
  • CGT event A1 clearly states that the event is not triggered if a taxpayer continues as beneficial owner of an asset
  • when you read CGT event A1 and section 106-50 (absolutely entitled beneficiaries) together the beneficial ownership is clearly what is required
  • CGT events look at beneficial ownership - not legal ownership

The Court decided that the Family Court order gave beneficial ownership of the shares to the wife. This satisfies the change of ownership required under CGT event A1. Therefore, for the successful roll-over, CGT event A1 happened 'because of' the Family Court Order.

Build Online:

Family Trust Deed - over 18,000 sold

Family Trust Updates - change Appointor, Trustee and Trust Name

Family Trust annual Distribution Statements

Family Trust Vesting Deed

Section 103-10 applies

For section 103-10 (entitlement to receive money or property), the Court held that there was nothing in the words of the section which limits its operating to receipt capital proceeds. Rather, it held that a 'constructive receipt' comes about under the section where money or property is applied for the benefit of the taxpayer. Mrs Ellison has dispositive powers to transfer the shares to her Family Trust. The free CGT rollover section 103-10 therefore applies.

Section 126-15 applies

As to section 126-15 (transfer of assets involving a company or trust and a spouse or former spouse) the Court said the ATO was wrong. The ATO fallacious arguments were:

(a) the former spouse had to be involved in the transfer as transferee (and as a natural person), and

(b) that this construction was consistent with the older provisions found in the ITAA 1936.

Both were held to be wrong.

Rather, the Court held that the words of the section don't require her to be the transferee. Further, the term 'transferee' in s 126-15 merely identifies 'a person, not to prescribe a necessary capacity of that person'. In any event, the Court held that Mrs Ellison was actually 'involved' in the transfer. It was Mrs Ellisson that had 'directed' her ex-husband to transfer the shares to the Family Trust. Ms Ellison was sufficiently 'involved' in the transfer for section 126-15.

Build Online:

Family Trust Deed - over 18,000 sold

Family Trust Updates - change Appointor, Trustee and Trust Name

Family Trust annual Distribution Statements

Family Trust Vesting Deed

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD

Legal Consolidated Barristers and Solicitors CGT divorce family trust
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