The High Court has refused Sandini’s application for special leave to appeal from the decision of the Full Federal Court in Ellison v Sandini Pty Ltd  FCAFC 44.
The Full Federal Court had held that that Sandini was not entitled to s 126-5 (marriage breakdown roll-over relief), by operation of s 126-15, because:
- the 21 September 2010 orders of the Family Court “did not constitute CGT Event A1, and
- the subsequent transfer of shares by Sandini to Wavefront, which did constitute CGT Event A1, did not engage s 126-15(1)(a) of the ITAA 1997 as Ms Ellison was not involved in the transfer as transferee and the transfer did not occur because of the Family Court orders.”
Full Federal Court – Catchwords
INCOME TAX – capital gains tax – roll over relief – whether Family Court order resulted in a change of ownership within the meaning of s 104-10 of the Income Tax Assessment Act 1997 (Cth) (the ITAA) – whether Family Court order constituted CGT event A1 as defined in 104-5 of the ITAA – whether the effect of Family Court order was such that the roll over relief provisions contained in Subdivision 126-A of the ITAA were engaged – whether primary judge erred in holding that a change of ownership had occurred as a result of the deeming provision contained in s 103-10 of the ITAA
EQUITY – unnumbered and uncertificated shares in public company – creation of trust over part of shareholding by Family Court order – beneficial ownership – requirement for certainty of subject of trust – shares as a fungible asset
Ellison v Sandini Pty Ltd  FCAFC 44
In Ellison v Sandini Pty Ltd  FCAFC 44, the Full Federal Court allowed an appeal from a decision of the Federal Court. In the Federal Court, the Taxpayer was allowed to benefit from CGT marriage breakdown rollover relief and was assessed in respect of the gains made on the transfer of shares in a company to an entity controlled by his former spouse, which occurred pursuant to an order of the Family Court.
In this case, the Family Court made an order that a trust controlled by the Taxpayer was to transfer its shares in a publicly listed company to the former spouse of the Taxpayer. The Taxpayer’s former spouse then requested that the shares be transferred to a trust controlled by her. The transfer of shares was made to this trust.
Under section 126-5 of the ITAA 1997, CGT relief is provided if a CGT event occurs involving an individual and their spouse or former spouse, and the CGT event occurs pursuant to (among other things) an order of the Family Court. A key consideration was the fact that the transferee was not the Taxpayer’s former spouse, but rather an entity controlled by her.
At trial, Justice McKerracher of the Federal Court held that the Taxpayer was entitled to apply the CGT rollover in respect of the transfer. He determined that the transfer had occurred pursuant to an order of the Family Court and that equitable ownership of the shares had been transferred, thereby triggering CGT event A1. Importantly, his Honour found that the effect of the order of the Family Court was such that, as at the date of the order being made, beneficial ownership of the shares was vested in the Taxpayer’s former spouse while legal title remained with the trust controlled by the Taxpayer.
In the alternative, his Honour held that because the Taxpayer’s former spouse directed of the shares be transferred to the trust and they were applied for her benefit, section 103-10 ITAA 1997 had the effect of deeming the shares to be received personally by the Taxpayer’s former spouse, for the purposes of the CGT provisions in the ITAA 1997.
The Full Federal Court in a majority decision overturned the decision of the Federal Court, deciding that the Taxpayer was not entitled to apply the marriage breakdown CGT rollover relief (Logan J dissenting).
The Court held that the change in ownership of the shares occurred either upon the execution of the share transfer form or the registration of the share transfer in favour of the trust controlled by the Taxpayer’s former spouse. The Court noted that orders of a Family Court do not have the power to effect a change of ownership in assets and therefore CGT event A1 cannot arise as a result of Family Court orders directing that a transfer of shares be made.
As a result of this finding, the relevant transfer of beneficial ownership of the shares occurred between the trusts controlled by the Taxpayer and his former spouse. The Court held that section 126-15(1) of the ITAA 1997 is quite clear in its wording and, on a literal construction where only a spouse or former spouse is transferee, the section does not contemplate the transferee being an entity controlled by a spouse or former spouse. Consequently, the Taxpayer was not entitled to apply for the marriage breakdown CGT rollover relief.