Private ruling: CGT - roll-over relief - transfer of property
Date of advice: 20 September 2024
Published: 28 October 2024
Ruling period: Income year ending 30 June 20XX | Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the transfer of the Property from the Company to Person 2 attract capital gains tax (CGT) roll-over relief under subdivision 126-A of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: On the basis that the transfer of the Property from the Company to Person 2 is a payment under section 109C of the Income Tax Assessment Act 1936 (ITAA 1936), would section 109RC of the ITAA 1936 apply to treat any deemed dividend as frankable? | A2: Yes | Q3: On the basis that any transfer of cash from the Company to Person 2 is a payment under section 109C of the ITAA 1936, would section 109RC of the ITAA 1936 apply to treat any deemed dividend as frankable? | A3: Yes | Q4: Will the transfer of Property 2 from the Trust to Person 2 attract CGT roll-over relief under subdivision 126-A of the ITAA 1997? | A4: Yes

Relevant facts and circumstances: The marriage between Person 1 and Person 2 has broken down and they are seeking to agree to consent orders pursuant to section 79 of the Family Law Act 1975 in relation to the division of assets of the marriage. The settlement may involve the following potential transactions being undertaken pursuant to a Family Court order: • the Company transfer the Property to Person 2, and • the Company transfer a cash amount to Person 2, or • the Trust being required to transfer Property 2 or an ownership interest in Property 2 to Person 2. Person 2 is an associate of a shareholder of the Company for the purposes of section 109C of the ITAA 1936. The transfer of the Property from the Company to Person 2 is a payment under section 109C of the ITAA 1936 equal to the market value of the property. The transfer of cash from the Company to Person 2 is a payment under section 109C of the ITAA 1936.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 109C | Income Tax Assessment Act 1936 section 109RC | Income Tax Assessment Act 1997 section 126 | Income Tax Assessment Act 1997 section 126-15

Reasons for decision: Detailed Reasoning - Detailed reasoning: Relevantly, subsection 126-15(1) of the ITAA 1997 states that 'there are the roll-over consequences in section 126-5 if the trigger 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 1975 or under a State law, Territory law or foreign law relating to breakdowns of relationship between spouses...' Subsection 126-5(1) of the ITAA 1997 provides a rollover if a CGT event happens involving an individual and their spouse or former spouse because of, among other things, a court order under the Family Law Act 1975. Subsection 126-5(2) of the ITAA 1997 provides that CGT event A1 is a relevant CGT event for sections 126-5 of the ITAA 1997 and 126-15 of the ITAA1997. Subsection 126-5(4) of the ITAA 1997 states that 'a capital gain or a capital loss the transferor makes from the CGT event is disregarded'. Taxation Determination TD 1999/47 Income tax: capital gains: is there a roll-over under section 126-5 or 126015 of the Income Tax Assessment Act 1997 if a CGT event happens because of a court order under the Family Law Act 1975 made by consent? provides that 'an order made by consent is a 'court order' in terms of paragraphs 126-5(1)(a) and 126-15(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997). If a CGT event happens because of a consent order under the Family Law Act 1975 , there is a roll-over under section 126-5 or 126-15 of the ITAA 1997'. CGT event A1 will happen in respect of the Property when ownership of the Property changes from the Company to Person 2 in accordance with the proposed consent orders. As consent orders under the Family Law Act 1975 are a court order, section 126-15 of the ITAA 1997 will apply and there will be a roll-over for the Company. Any capital gain or capital loss can be disregarded by the Company. | Detailed Reasoning - Question 2: Subsection 109C(1) of the ITAA 1936 states that 'a private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either: (a) the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder, or (b) a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time'. Subsection 109C(2) of the ITAA 1936 provides that 'payment' includes a payment to the entity and a transfer of property to the entity. Section 109RC of the ITAA 1936 states: (1) This section applies if a dividend is taken to be paid under this Division because of a family law obligation. (2) Subparagraph 202-45(g)(i) of the Income Tax Assessment Act 1997 does not make the amount of the dividend unfrankable. (3) The dividend can be franked in accordance with Part 3-6 of the Income Tax Assessment Act 1997 only if: (a) the dividend is franked at the private company's benchmark franking percentage for the franking period in which the dividend is taken to be paid, or (b) if the private company does not have a benchmark franking percentage for the period - the dividend is franked at a franking percentage of 100%. On the basis that a deemed dividend arises to Person 2 because of the transfer of the Property, the deemed dividend can be franked in accordance with subsection 109RC(3) of the ITAA 1936. | Detailed Reasoning - Question 3: Subsection 109C(1) of the ITAA 1936 states that 'a private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either: (a) the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder, or (b) a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time'. Subsection 109C(2) of the ITAA 1936 provides that 'payment' includes a payment to the entity and a transfer of property to the entity. Section 109RC of the ITAA 1936 states: (1) This section applies if a dividend is taken to be paid under this Division because of a family law obligation. (2) Subparagraph 202-45(g)(i) of the Income Tax Assessment Act 1997 does not make the amount of the dividend unfrankable. (3) The dividend can be franked in accordance with Part 3-6 of the Income Tax Assessment Act 1997 only if: (a) the dividend is franked at the private company's benchmark franking percentage for the franking period in which the dividend is taken to be paid; or (b) if the private company does not have a benchmark franking percentage for the period - the dividend is franked at a franking percentage of 100%. On the basis that a deemed dividend arises to Person 2 because of the payment, the deemed dividend can be franked in accordance with subsection 109RC(3) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Relevantly, subsection 126-15(1) of the ITAA 1997 states that 'there are the roll-over consequences in section 126-5 if the trigger 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 1975 or under a State law, Territory law or foreign law relating to breakdowns of relationship between spouses...' Subsection 126-5(1) of the ITAA 1997 provides a rollover if a CGT event happens involving an individual and their spouse or former spouse because of, among other things, a court order under the Family Law Act 1975 . Subsection 126-5(2) of the ITAA 1997 provides that CGT event A1 is a relevant CGT event for sections 126-5 of the ITAA 1997 and 126-15 of the ITAA 1997. Subsection 126-5(4) of the ITAA 1997 states that 'a capital gain or a capital loss the transferor makes from the CGT event is disregarded'. Taxation Determination TD 1999/47 Income tax: capital gains: is there a roll-over under section 126-5 or 126015 of the Income Tax Assessment Act 1997 if a CGT event happens because of a court order under the Family Law Act 1975 made by consent? provides that 'an order made by consent is a 'court order' in terms of paragraphs 126-5(1)(a) and 126-15(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997). If a CGT event happens because of a consent order under the Family Law Act 1975 , there is a roll-over under section 126-5 or 126-15 of the ITAA 1997'. CGT event A1 will happen in respect of Property 2 when ownership of Property 2, or an ownership interest in Property 2, changes from the Trust to Person 2 in accordance with the proposed consent orders. As consent orders under the Family Law Act 1975 are a court order, section 126-15 of the ITAA 1997 will apply and there will be a roll-over for the Trust. Any capital gain or capital loss can be disregarded by the Trust.