In the recent case of Sandini v Commissioner of Taxation  FCA 287, the husband and wife were involved in property settlement proceedings in the Family Court of Western Australia. Orders made by the Court in 2010 required the husband to transfer to the wife 2,115,000 shares in a certain publicly listed company. Those shares were owned by a corporate entity as trustee for a trust controlled by the husband. In total, the trust held some 38 million of those particular shares. The shares were transferred, however not to the wife personally, but again to a corporate entity as trustee of a discretionary trust on behalf of the wife at her specific request.
In examining the transfer of shares, the Commissioner of Taxation asserted that the transfer of shares from one corporate entity to another was a disposal that did not attract roll-over relief from tax on the basis that the trigger event must involve a company or trustee as transferor and a spouse or former spouse as transferee. A spouse is defined in the Act as an “individual”.
The husband then sought a declaration in the Federal Court of Australia that the transferor was entitled to the roll-over relief in respect of the disposal of the relevant shares.
The relevant question for the Court in the original case was whether the roll-over relief could extend to transfers of assets to a corporate entity on behalf of an individual, or whether it was restricted to transfers to individuals only.
Trial Court Analysis
At first instance, Justice McKerrarcher held that the simple operation of the Family Court Orders sufficed to transfer the beneficial ownership in the shares to the wife. As soon as the Orders were made, equitable ownership of the shares had been transferred to the wife which was a disposal sufficient to attract capital gains tax rollover relief. The subsequent registration of the transfer of the shares to a corporate entity only altered the legal ownership of the shares and the identity of the eventual legal transferee was irrelevant because the disposal had already occurred as at this time.
In addition, the Court found it was clear that the shares had been transferred at the direction of the wife, and for the benefit of the wife as she was the effective controller of the trust.
As such, the Court found that the applicants were entitled to rollover relief in respect of the disposal of the relevant shares.
Full Court Analysis
The Commissioner of Taxation appealed against this finding, and on the 27th March 2018, the Full Court upheld the appeal, Justice Logan dissenting. In doing so, the majority held that whereas the Family Court orders vested some statutory rights and beneficial interest in the wife, that interest could not be characterised as beneficial ownership, or ownership of any kind sufficient to be defined as a disposal.
Significantly for the majority, the parcel of shares that were to be transferred to the wife did not comprise the entirety of the shares held by the husband’s trust. The 2,115,000 shares to be transferred to the wife were not able to be identified, were not numbered, and were part of a larger holding of shares in the particular company. As the shares were not identifiable from the larger pool of shares held, the majority concluded that the effect of the orders was not to make the wife the beneficial owner of a relevant portion of the share pool.
As a result, Capital Gains Tax (CGT) event A1 did not occur on the date the Family Court orders were made, but rather on the execution of the share transfer form, or at the latest the registration of the share transfer form in favour of the trust controlled by the wife.
The majority further disagreed that a direction or instruction from the wife to register the shares in a certain way meant that she was “involved” in the CGT. The language of the relevant sections of the ITAA was clear in that a spouse or former spouse can only be involved in the trigger event in one capacity only, that is as a transferee from a company or trustee.
The original case and the appeal case are salient reminders that significant care and expertise must be taken when drafting and implementing aspects of property settlement orders as they can have unexpected and significant taxation consequences. Had the husband in this case simply transferred the relevant shares to the wife personally, as he was required to do pursuant to the Orders, roll over relief would have attracted to the transaction without controversy.