Getting it right the first time
In Sandini Pty Ltd & Ors [2018] HCA Trans 190, the High Court of Australia was asked to consider the availability of marriage breakdown roll-over relief under the Income Tax Assessment Act 1997 (“ITAA”) where an asset owned by the trustee of a trust controlled by one former spouse, was transferred to the trustee of another trust controlled by the other former spouse.
Special leave was refused by the High Court.
Brief summary of facts
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 Pty Ltd (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 Mineral Resources Limited (MIN) shares.
Sandini was not the trustee of the Ellison Family Trust. Sandini was the trustee of the Karratha Rigging Unit Trust (KRUT) and, in that capacity, owned over 35 million MIN shares.
On 29 September 2010, the wife 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.
Issue
The issue in this case was who would be responsible to ultimately pay tax on the sale/transfer of the shares. The options were:
- Sandini Pty Ltd (Sandini) as trustee of the Ellison Family Trust (noting Sandini was not the trustee of this trust);
- Sandini as trustee of the Karratha Rigging Unit Trust (KRUT) (this trust owned the shares);
- Mrs Ellison personally; or
- Wavefront Asset Pty Ltd (Wavefront) as trustee of the Felstead Family Trust.
Mr Ellison’s objective was to pass on any tax liability to Mrs Ellison. Her objective, not surprisingly, was to ensure that Mr Ellison paid the tax.
As the primary judge explained at [123] of his reasons:
With the making of a court order such as the Family Court Order, there are two roll-over consequences. The first is that if the roll-over has taken place, no tax is paid by the transferor and the transferee inherits or acquires the cost base of the assets as they were historically when held by the transferor. In this way, tax is deferred until the next disposition of the family asset. The underlying policy is apparently that the transfers of assets arising on a marital breakdown, as on a transfer of assets in other circumstances such as death, are not the occasion for exigibility. In both those instances, there is not the sale for purpose of making a gain, but rather in this instance, necessary compliance with a court order.
If the Family Court orders had been drafted correctly (by referring to Sandini as trustee of the Karratha Rigging Unit Trust (KRUT)) and if the share were transferred to Mrs Ellison personally, then she would need to pay tax on the shares when she eventually sold them.
However, the orders were not drafted correctly. It was open for Mr Ellison to seek for the Family Court to rectify the orders and he elected not to do this (he withdrew his application). It was not open for Mr Ellison to seek that the Federal Court or even the High Court on appeal from the Federal Court, to interpret the orders in any way other than as they were drafted.
As a result, the transfer did not occur because of the Family Court orders and Sandini as trustee of the Karratha Rigging Unit Trust (KRUT) was held liable for the tax on the transfer of the shares.
The secondary issue was that the shares were not transferred to Mrs Ellison personally, but to Wavefront Asset Pty Ltd (Wavefront) as trustee of the Felstead Family Trust. This would also have resulted in Sandini as trustee of the Karratha Rigging Unit Trust (KRUT) being held liable for the tax, even if the orders were drafted correctly.
The lessons to be learnt from this case are:
- Ensure you receive competent legal and accounting advice;
- Ensure you follow that advice carefully; and
- Review orders carefully to ensure they are drafted correctly.