In Ellison v Sandini Pty Ltd  FCAFC 44, the Full Federal Court overturned decision which allowed Mr Sandini (the Taxpayer) to benefit from Capital Gains Tax (CGT) marriage breakdown rollover for the transfer of shares to an entity controlled by his former spouse, pursuant to a Family Court Order (FCO).
At first instance, the Federal Court held the Taxpayer was entitled to the rollover under section 126-5 of the Income Tax Assessment Act (ITAA97), even though the transferee was an entity rather than an individual. In summary, the Federal Court found that Ms Ellison, the Taxpayer’s former spouse, authorised the transaction which was made in accordance with evidence of her request and direction. The Court in first instance held the Taxpayer was entitled to the rollover relief because:
- the FCO caused CGT event A1 to happen, as there was a disposition of shares by operation of law. The requirement of section 104-10, that a CGT event must happen ‘because of’ a FCO was satisfied as the transfer would not have occurred were it not for the FCO;
- a share transfer passing equitable ownership to the transferee is enough to trigger CGT. If it was necessary for both legal and beneficial ownership to pass for a CGT event A1 to happen, then whenever there was a disposition of equitable ownership without legal ownership, no CGT would ever be assessable; and
- in the alternative of the above, section 103-10 applies. Under this section, if money or property is applied for the benefit of a taxpayer or as directed by the taxpayer, the taxpayer is taken to have received that money or property for the purposes of the CGT provisions. Because the transfer of the shares to Ms Ellison’s entity was for Ms Ellison’s benefit, section 103-10 is satisfied.
The Full Federal Court, by majority, allowed the Commissioner’s appeal, finding that CGT roll-over relief under s 126-5 was NOT available. The reasons for the decision included:
- the wording of section 126-15(1) of ITAA 1997 only refers to a spouse or former spouse (and not a corporate trustee) as a transferee;
- FCOs do not have the power to effect a change of ownership in the shares. Therefore, CGT event A1 does not arise as a result of the making of the orders, but instead, it will occur either upon the execution of the share transfer form or the registration of the share transfer in favour of the wife’s entity; and
- the fact that that Ms Ellison had agreed with the transfer of shares to an entity controlled by her and the apparent joint belief of the parties that they were giving effect to the FCO were irrelevant.
Interestingly, in the dissenting judgment Logan J applied existing authority to conclude that a liberal construction of section 126-15 should be accepted as correct, as the Taxpayer’s former spouse was sufficiently involved in the transfer of shares such that the beneficial ends of deferring the CGT liability should apply.
The Full Court’s decision is consistent with the general industry position, prior to the first instance decision, that strict compliance with the wording of the legislative provision is required in order to obtain marriage breakdown rollover relief. Section 126-15(1) of ITAA97 refers to a spouse or former spouse (rather than an entity controlled by a spouse or former spouse) as transferee.
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