Sandini Pty Ltd atf the Karratha Rigging Unit Trust & Ors v. Ellison & Ors v. Commissioner of Taxation of the Commonwealth of Australia & Ors
This case concerns the availability of marriage breakdown roll-over under Subdivision 126-A of the Income Tax Assessment Act 1997 (ITAA 1997) where an asset owned by the trustee of a trust controlled by one former spouse was transferred to the trustee of a trust controlled by the other former spouse.
Brief summary of relevant events
- Sandini Pty Ltd (Sandini) was the trustee of the Karratha Rigging Unit Trust (Rigging Trust) and, in that capacity, owned over 35 million Mineral Resources Limited (MIN) shares.
- On 21 September 2010, the Family Court made orders, by consent, under section 79 of the Family Law Act 1975, that within seven days, Sandini, as trustee of the Ellison Family Trust, do all acts and things and sign all documents necessary to transfer to the wife 2,115,000 (MIN) shares.
- Sandini, however, was not the trustee of the Ellison Family Trust. The consent orders had made a mistake, in the trust capacity, assigned to the company that did own the relevant MIN shares (the transfer of which was object of the order). Despite this, no court was prepared to rectify the order under the ‘slip rule’ (which is used to correct mistakes in orders).
- On 29 September 2010, Ms Ellison asked that the MIN shares be transferred to Wavefront Asset Pty Ltd (Wavefront) as trustee of the Felstead Family Trust rather than to her. The share transfer was completed on 30 September 2010 and registered on 4 October 2010.
- On 30 September 2010 Mr Ellison for Sandini and Ms Ellison for Wavefront signed a share transfer form for the transfer of 2,115,000 shares in MIN from Sandini to Wavefront. This transfer was registered on 4 October 2010.
- To deal with the error in Sandini’s capacity (in the Consent Orders), Sandini sought a declaration by the Court that it was the Rigging Trust, that disposed of the MIN shares, that this was done as a consequence of the Consent Orders (despite the mistake in Santini’s capacity), and that the transfer was to Mrs Ellison (per the Consent Orders) despite the transfer actually being to the trustee of the trust that she nominated for the transfer (in other words, ‘applied … as [she] direct[ed]’ within the meaning of s103-10(1) of the ITAA 1997 – the CGT equivalent of the deemed derivation of income provision in s6-5(4) of the same Act). This was designed to ensure that the Rigging Trust got the intended CGT rollover relief, and he sought a declaration that this relief was available.
- The Federal Court at first instance (McKerracher J, on 22.3.17) did make orders, broadly as requested, by Santini (see related Tax Technical article).
- About a year later (on 27 March 2018) the Full Federal Court allowed overturned the first instance decision, in terms are the subject of this ‘Decision Impact Statement’.
- The parties sought leave to appeal this decision to the High Court, but on 14 September 2018, the High Court refused leave to appeal (see related Tax Technical article).
The relevant rollover provision, was in the following terms:
126-15(1) There are the roll-over consequences in section 126-5 if the trigger event [viz: a ‘CGT event’] involves a company (the transferor) or a trustee (also the transferor) and a *spouse or former spouse (the transferee) of another individual because of:
(a) a court order under the Family Law Act 1975or under a *State law, *Territory law or *foreign law relating to breakdowns of relationships between spouses; or …
From the facts, it appears clear that the parties intended this transfer of shares to come within the relevant Family Law CGT rollover provisions.
The simple mistake, in the consent orders (ascribing the wrong trust capacity, to the company that did own the shares to be transferred), however, potentially ‘threw a spanner in the works’ (and this was the final result).
The effect of the rollover was not only, to relieve the transferor, of what would otherwise be, its capital gains tax liability. It was also, to pass its historic cost base on to the transferee (along with the latent capital gain).
The divorce was, apparently, very acrimonious and when Mrs Ellison came to understand that she might escape CGT, on the latent capital gain, she became uncompromising (and eventually won).
What follows is the relevant analysis, by the Commissioner, of the Full Federal Court decision, which now stands.
Issues decided by the court
A. Did the Family Court order result in a change of ownership of the MIN shares for the purposes of CGT event A1?
The majority of the Full Court held that the Family Court order did not result in a change of ownership of the MIN shares. Rather, CGT event A1 in section 104-10 of the ITAA 1997 happened either on the execution of the share transfer form or, at the latest, the registration of that transfer. [The relevant ‘trigger event’ had to be an A1 event (and not an E1 event on the creation of a trust) just because of the constraints of the rollover – see s126-5(2).]
In reaching this decision the majority observed that the orders were ineffective because Sandini was not the trustee of the Ellison Family Trust, and could not be ordered to do anything.
Although it was not necessary to decide, the majority did consider whether an order applying to Sandini as trustee of the Rigging Trust might have resulted in an immediate change of ownership of the MIN shares. [This involved a very long analysis of the effect of family law orders, to effect immediate equitable interests (for which there was favourable authority) and the capacity to create trusts over a specified number of assets, that are part of a larger fungible pool (such as these listed shares, which had no identifying share numbers). There is favourable authority for this, too, if the trust is over the entire pool, as to the specified number, for the beneficiary, and as to the balance, for the owner beneficially (in essence, requiring the owner to keep at least that many shares). Despite this favourable start, the majority just couldn’t get themselves to these particular orders, entered by consent, as they were, having the requisite trust effect, over the whole pool.]
B. Were the roll-over requirements in section 126-15 of the ITAA 1997 satisfied when CGT event A1 happened to the MIN shares?
(i) The ‘involvement’ issue
The Court determined that rollover under section 126-15 applies only if the transferee is one of the parties to the marriage (a spouse or former spouse). [This accords with the conventional understanding of how the Family Law Rollover requirements operate.]
As the shares were not transferred to Ms Ellison, this requirement was not satisfied.
(ii) The ‘because of’ issue
The Court considered that a CGT event will occur because of a Family Court order if the order requires the event to occur and it does occur.
In this case, the Family Court order was ‘inefficacious in all relevant respects’. It required Sandini, in a non-existent capacity, to do things. The fact that Mr and Ms Ellison may have agreed that Sandini do things in another capacity does not mean that the orders had any effect.
As the shares were not transferred because of the order, this requirement was not satisfied.
C. Did section 103-10 of the ITAA 1997 apply so that subsection 104-10(2) of the ITAA 1997 and/or paragraph 126-15(1)(a) of the ITAA 1997 are deemed to apply to Ms Ellison because she directed the transfer of the MIN shares to Wavefront?
The Court accepted the Commissioner’s submission that section 103-10 of the ITAA 1997 does not operate at large to apply the whole of Parts 3-1 or 3-3 of the ITAA 1997 to a person if money or other property has been applied for that person’s benefit or as that person directs. Rather it operates so that provisions which are engaged by the receipt of money or property (such as section 124-95 of the ITAA 1997) apply if money has been applied for the benefit of a person or as they direct.
[Intuitively (to a tax practitioner, at least) this seems ‘wrong-headed’ and ‘contrary’. Ultimately, however, the argument rested purely on the words of s103-10 no ‘gelling’ with the requirements for a ‘change of ownership’ (which the Commissioner protested, did not amount to him taking an unnecessarily narrow view).
- s103-10(1) says that you will be treated ‘as if you had received money or property’ if the one or the other had been ‘applied … as you direct’. There was no argument that Mrs Ellison had directed that her shares be paid to her family trust (and not to her).
- And there are some provisions that are activated by having ‘received money or property’.
- But, what constitutes a ‘change of ownership’ is not something that depends on that – the Commissioner submitted (and the Court agreed). Deeming her to have received the shares, eventually transferred to her trust, did not mean that ownership had gone to her, for the purposes of the relevant A1 event (s104-10(2)).
- This raises an interesting question as to whether an otherwise effective Family Law rollover could be sabotaged by the recipient asking for his/her property to be transferred to another person, and the payer, unwittingly doing as requested (just because they were not acutely aware of this minute CGT point).
- Also, this must have been galling for Santini, as the wife’s request, to have the shares transferred to her trust, could have been taken as evidence that the orders had created an ownership interest, in her, sufficient to be assigned.]
ATO View of Decision
a. Change of ownership
CGT event A1 in section 104-10 of the ITAA 1997 is triggered by a change of ownership of a CGT asset. The type of change that is relevant will depend on the type of ownership the holder of the CGT asset has and what the purported acquirer obtains and whether, for example, their ownership is recognised at law or in equity. Most transactions give rise to clear changes in ownership without needing to address considerations that arise because ownership has been divided.
It is clear that CGT event A1 in section 104-10 of the ITAA 1997 does not happen if:
- there is a mere change in the trustee of a trust (as subsection 960-100(2) of the ITAA 1997 provides that the trustee of a trust is taken to be an entity consisting of the person who is the trustee at any given time).
- a person transfers legal ownership but continues to be the beneficial owner (an exception in CGT event A1 itself).
Consistent with the decision of the majority of the Full Court, we consider that triggering CGT event A1 in section 104-10 of the ITAA 1997 does not require a change in legal as well as beneficial ownership.
Further, we consider that a change in beneficial ownership does not occur unless the purported acquirer of the CGT asset has full dominion over it that a court of equity would enforce. This is akin to the rights to specific performance a purchaser of land obtains upon paying the settlement sum. It is not sufficient for a change in beneficial ownership that the purported acquirer of the CGT asset has some form of proprietary interest, or equitable or beneficial interest in the asset falling short of beneficial ownership, and the purported seller has retained rights to deal with the asset, including powers of disposition over it.
b. Effect of Family Court order
CGT event A1 in section 104-10 of the ITAA 1997, rather than CGT event E1 in section 104-55 of the ITAA 1997, happens if an order creates a trust over an asset because the change of ownership happens by operation of law. CGT event E1 does not happen as there is no relevant ‘you’ as contemplated by that event.
We note the Court’s conclusions that:
- roll-over is only available under section 126-15 of the ITAA 1997 if the transferee is a spouse or former spouse
- a CGT event occurs because of a Family Court order if the order requires the event to occur and it does occur, and
- section 103-10 of the ITAA 1997 does not operate, at large, to apply the whole of Parts 3-1 or 3-3 of the ITAA 1997 to a person if money or other property has been applied for that person’s benefit or as that person directs.
Implications for impacted advice or guidance
We are reviewing our public advice and guidance products to determine what effect (if any) the decision may have on them. To date we have identified that the following public rulings might be affected:
- Taxation Determination TD 1999/48 Income tax: capital gains: if a court makes an order under the Family Law Act 1975 declaring or altering a spouse’s interest in property, do CGT events happen to CGT assets of the spouse for the purpose of section 126-5 or 126-15 of the Income Tax Assessment Act 1997. We will consider updating TD 1999/48 to address:
- comments of the Court about the effect of an order under section 79 of the Family Law Act 1975 (for example, in some instances, a CGT event might happen when an order is made)
- the ‘because of’ issue considered by the Court..
- Taxation Ruling TR 2014/5 Income tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate). We will consider updating the Ruling to address comments of the Court about the effect of an order under section 79 of the Family Law Act 1975 (for example, in some instances, a CGT event might happen when an order is made).
- The Guide to capital gains tax 2018.
If you’ve read this far, congratulations.
CPD questions (answers available)
- Was this case about the availability of of a Family Law CGT rollover of about 2m listed shares (under s126-15(1) of the ITAA 1997)?
- Do these rollover provisions allow a transferor to be a trust, so long as the transferee is a party to the marriage?
- In these facts, was it necessary that the ‘trigger event’ be a CGT-event A1 (that is to say a ‘change of ownership’)?
- Is it also necessary that the ‘trigger (A1) event’ happen ‘because‘ of the Family Court order?
- Did it appear that the parties had expected their orders would have given them this rollover relief?
- Was there a fatal flaw in the drafting of the consent orders?
- What was it?
- Did this render the order ineffectual?
- Could the eventual transfer of the shares, then, be ‘because’ of this order?
- Were these listed shares ‘fungible’ in the sense that they had no identifying numbers and they were all the same?
- Is it impossible to have a ‘change of ownership’ in part of a pool of fungible assets?
- Was there the necessary change of ownership, in this case, in favour of the wife?
- Did the wife direct Santini to transfer her shares to her family trust?
- Did Santini do this?
- Were these shares ‘applied … as [the wife] direct[ed] for the purposes of the ‘deemed receipt’ CGT rules in s103-10(1)?
- Did that satisfy the requirement for there to have been a change of ownership to her?