CGT rollover relief
Usually, capital gains tax (CGT) applies to any change of ownership of an asset. However, if you transfer an asset to your spouse/de facto partner because of the breakdown of your marriage or relationship, there can be an automatic rollover of the asset.
Following breakdown of a married or de facto relationship, if you transfer an asset from one party of the relationship to the other pursuant to a court order or financial agreement, you can obtain rollover relief, meaning that CGT is not payable on transfer of the asset to your former partner: section 126 Income Tax Assessment Act 1997 (Cth).
‘Rollover’ means the transferor spouse disregards the capital gain or loss that would otherwise arise. In effect, the person who receives the asset (the transferee spouse) will make the capital gain or loss (and if it is a capital gain, they will be responsible for payment of CGT) when they subsequently dispose of the asset. The cost base of the asset is also transferred to the transferee spouse.
CGT rollover applies only if:
- the asset or share of an asset is transferred between you and your spouse or from a company or trust to one of you;
- The transfer of ownership is because of a court order, formal agreement or award.
You can’t choose whether or not the rollover applies.
Widening and narrowing of the lense of CGT rollover for marriage breakdowns
The original decision of Sandini Pty Ltd & Ors v Federal Commissioner of Taxation & Ors  FCA 287 handed down in 2017 caused significant controversy and uncertainty for tax advisers in the previous widely understood notion that CGT relief was only available to transfers between spouses and from entities to spouses.
In the original decision, the Trial Judge allowed for the CGT rollover relief to apply a transfer of assets from one entity to another.
The recent Full Court decision of Ellison v Sandini Pty Ltd  FCAFC 44 has restored faith in the prior wisdom of tax advisers, that CGT rollover relief on relationship breakdown is only available for transfers to a party to the relationship and not to a trust or other related entity which the party has effective control of.
Read on to find out the facts of the Sandini case and discover how they may apply to you in the case of CGT rollovers as a consequence of marriage breakdown.
The facts: Ellison & Sandini Pty Ltd
The Family Court Order dated 21 September 2010 required Mr Ellison to transfer to Ms Ellison shares in a listed company, Mineral Resources Limited, valued at $2.5 million from an entity owned and controlled by Mr Ellison (Sandini Pty Ltd). Ms Ellison instead requested that the shares be transferred to a trust controlled by her (Wavefront Pty Ltd).
No capital gain was included in Sandini’s tax return in respect of the 2011 tax year, apparently on the basis that rollover relief was available, even though the transfer did not go to the Wife, it went to Wavefront (being a company owned and controlled by Ms Ellison) as trustee for the Felstead Family Trust.
The Original Decision – Widening the lense of CGT Rollover Relief for Marriage Breakdown
The Trial Judge held that:
- Beneficial ownership of the shares arose for Ms Ellison ‘because of’ the Family Court Order, which was sufficient to trigger a CGT event (A1) at the time of the order coming into effect;
- CGT event A1 does not require both beneficial and legal ownership to be transferred, only beneficial ownership;
- Even if CGT event A1 was not triggered when the order came into effect, Ms Ellison obtained the beneficial ownership in the shares via a deemed receipt of those shares, when the title was transferred to a trust at her direction;
- Ms Ellison was sufficiently ‘involved’ in the transaction given her direction to transfer the shares to Felstead Family Trust and this was sufficient “involvement” for Felstead Family Trust to be an eligible transferee and for the marriage breakdown rollover provisions to apply.
- The shares had been applied at the direction of Ms Ellison and for her benefit through the trust (she was special beneficiary and controller of the trust);
- Ms Ellison and Sandini were entitled to rollover relief and to disregard any capital gain on the transfer.
This decision of the Trial Judge ostensibly extended CGT rollover relief to transfers to associated companies or trusts of the transferee where the transferee spouse is ‘involved’ in the transaction.
The Full Court decision – Narrowing the lense of CGT Rollover Relief for Marriage Breakdown
The ATO appealed the decision to the Full Court of the Federal Court.
The Full Court decision in Ellison & Sandini Pty Ltd  FCAFC 44 held that the Marriage breakdown CGT rollover is only applied if the assets are transferred from a company, trust or spouse to a spouse or former spouse. Ms Ellison’s direction to transfer the shares into her trust was an insufficient connection to the transfer for the relief to apply. Therefore, no rollover relief was available to Sandini Pty Ltd and therefore it was required to pay CGT on the transfer.
What have we learnt regarding CGT Rollover Relief?
The Full Court decision in Sandini restores faith in the widely held understanding that CGT rollover relief on relationship breakdown is only available for transfers to a party to the relationship and not to a trust or other related entity which the party has effective control of.
Divorces often involve complicated taxation issues and consequences where there are companies and trusts.
Barton Family Lawyers has extensive experience dealing with complicated financial settlements involving companies and trusts.
Barton Family Lawyers cannot however give financial, tax or accounting advice. This is the forte of an accountant or financial planner.
We strongly recommend that you obtain financial advice before entering into any financial settlement with a former spouse in relation to the division of your assets.
If you require assistance with respect to a division of your assets following a relationship breakdown, get in contact with us today to book a reduced rate initial consultation with one of our family law experts to have a confidential discussion about your individual circumstances.