House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 4 - Capital gains tax marriage breakdown roll-over for small superannuation funds

Outline of chapter

4.1 Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to extend the capital gains tax (CGT) marriage breakdown roll-over to in specie transfers of personal superannuation interests from a small superannuation fund to another complying superannuation fund under specific conditions.

Context of amendments

4.2 Subdivision 126-D of the ITAA 1997 currently provides a CGT roll-over on legal marriage breakdown for transfers of CGT assets between small superannuation funds where there has been a 'payment split' pursuant to a court order or agreement under Part VIIIB of the Family Law Act 1975 .

4.3 The existing CGT marriage breakdown roll-over is only available where a CGT asset reflecting the interest subject to a payment splitting order or agreement is transferred between small superannuation funds.

4.4 Consequently the CGT roll-over is unavailable if:

•

any asset reflecting the personal superannuation interest of the spouse whose interest has been split is transferred to another superannuation fund;

•

any asset reflecting the existing personal interest of the other spouse is transferred to another superannuation fund;

•

any asset reflecting the personal superannuation interest of one of the spouses is transferred to another superannuation fund where there has been no payment split; or

•

any asset is transferred to a complying superannuation fund that is not a small superannuation fund.

4.5 For de facto spouses, the current CGT marriage breakdown roll-over is only available for transfers of non-superannuation assets because of a court order under a state, territory or foreign law relating to de facto marriage breakdowns or an agreement which is binding under a state, territory or foreign law relating to de facto marriage breakdowns.

4.6 These amendments will ensure that CGT need not be an impediment to separating spouses achieving a 'clean break' from each other in terms of their superannuation arrangements.

Summary of new law

4.7 Subdivision 126-D of the ITAA 1997 is amended to provide a CGT roll-over on marriage breakdown for a transfer of any CGT asset reflecting the personal interest of either spouse (but not both) in a small superannuation fund to another complying superannuation fund if that transfer satisfies specific conditions.

4.8 Related amendments are made to:

•

the existing CGT marriage breakdown roll-over between small superannuation funds to extend it to transfers from a small superannuation fund to another complying superannuation fund; and

•

the CGT marriage breakdown roll-over for transfers of non-superannuation assets to ensure that it applies to transfers pursuant to written agreements made under Western Australian, Tasmanian, Queensland or Northern Territory laws relating to de facto marriage breakdown.

Comparison of key features of new law and current law

Detailed explanation of new law

CGT marriage breakdown roll-over

4.9 These amendments provide a CGT roll-over on marriage breakdown to defer the making of a capital gain or capital loss from a transfer of any asset reflecting the personal interest of one of the spouses from a small superannuation fund to another complying superannuation fund for the benefit of the transferor spouse [Schedule 4, item 6, paragraph 126-140(2A)(c)] . The accrued capital gain or capital loss is deferred until a subsequent CGT event happens to an asset which has been transferred.

4.10 Under section 995-1 of the ITAA 1997, spouse includes a person who, although not legally married to the person, lives with the person on a genuine domestic basis as the person's husband or wife.

4.11 A small superannuation fund is defined under section 995-1 of the ITAA 1997 as a complying superannuation fund with four or fewer members. A complying superannuation fund is defined under the same section as a complying superannuation fund within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993 and includes most mainstream superannuation funds.

4.12 The CGT marriage breakdown roll-over will be available to the trustee of the small superannuation fund who made the transfer of the superannuation interest.

Awards, orders and agreements

4.13 To be eligible for the CGT roll-over, the transfer must be in accordance with:

•

an award made in the arbitration of property settlement proceedings under the Family Law Act 1975 between an individual and their spouse or former spouse or of a matter in respect of which such proceedings might be taken, or a corresponding award made under a corresponding state, territory or foreign law [Schedule 4, item 6, paragraphs 126-140(2A)(d) and (2B)(a)];

•

a court order made under the Family Law Act 1975 altering property interests of an individual or their spouse or former spouse, or a court order in proceedings under that Act binding some other person (eg, the corporate trustee of a small superannuation fund) to effect a division of property between an individual and their spouse or former spouse [Schedule 4, item 6, paragraphs 126-140(2A)(d) and (2B)(b)];

•

a court order made under a state, territory or foreign law relating to de facto marriage breakdowns that corresponds to an abovementioned court order made under the Family Law Act 1975 [Schedule 4, item 6, paragraphs 126-140(2A)(d) and (2B)(c)];

•

a binding financial agreement under the Family Law Act 1975 or a corresponding written agreement that is binding because of a corresponding foreign law [Schedule 4, item 6, paragraphs 126-140(2A)(d) and (2B)(d)]; or

•

a written agreement that is binding under a state, territory or foreign law relating to de facto marriage breakdowns that, because of such a law, prevents a court making an order about matters to which the agreement applies or that is inconsistent with the terms of the agreement in relation to those matters, unless the agreement, or one or more of its terms, is varied or set aside [Schedule 4, item 6, paragraphs 126-140(2A)(d) and (2B)(e)].

Genuine marriage breakdown

4.14 The CGT roll-over will only apply where a marriage or de facto marriage has genuinely broken down (see paragraph 4.16).

4.15 There may be instances where a transfer occurs because of reasons not directly connected with the breakdown of a relationship. For example, this may be the case where the spouses had an agreement before the breakdown of the marriage or de facto marriage that the particular property was to be transferred between them for reasons not directly related to the marriage breakdown. The CGT roll-over will not be available in these circumstances.

4.16 These amendments will require that for transfers arising from an agreement:

•

the spouses involved are separated with no reasonable likelihood of cohabitation being resumed; and

•

the transfers happened because of reasons directly connected with the breakdown of the marriage or de facto marriage.

[Schedule 4, item 6, paragraph 126-140(2A)(h) and subsection 126-140(2C)]

4.17 The question of whether the spouses have separated is to be determined in the same way as it is for the purposes of section 48 of the Family Law Act 1975 , as affected by sections 49 and 50 of that Act. [Schedule 4, item 6, subsection 126-140(2D)]

4.18 The mere fact that two separated people live in the same home (ie, they are genuinely separated but living under one roof) does not amount to 'cohabitation' for this purpose.

4.19 These requirements will not apply to transfers arising out of a court order or arbitral award because it would be reasonable to assume that such transfers would directly relate to a marriage or de facto marriage breakdown.

'Clean break'

4.20 These new provisions provide spouses in a small superannuation fund with an opportunity to completely separate their superannuation arrangements on marriage breakdown so as to achieve a 'clean break'. To be eligible for the CGT roll-over, the trustee must transfer all of the assets reflecting the personal superannuation interest of the transferor spouse [Schedule 4, item 6, paragraphs 126-140(2A)(e) and (f)] . If a number of assets are to be transferred in accordance with an abovementioned award, order or agreement, the transfers may take place separately [Schedule 4, item 6, paragraph 126-140(2A)(e)] .

Either spouse (but not both)

4.21 These new provisions enable a trustee of a small superannuation fund to access the CGT roll-over on behalf of either spouse on marriage breakdown. However, once the trustee has obtained a CGT roll-over for the benefit of either spouse, the roll-over is no longer available for a transfer of any asset reflecting the personal superannuation interest of the other spouse (which arises out of the same marriage breakdown). Only one spouse needs to move their personal superannuation interest for a 'clean break' to be achieved.

4.22 A future entitlement to benefits from the fund as a result of a payment splitting order or agreement does not constitute an 'interest' for this purpose.

Roll-over where each spouse has a personal interest in a small superannuation fund and there has been no payment split

4.23 Where each spouse has a separate personal interest in a small superannuation fund and there has been no payment split of one spouse's interest in favour of the other spouse, the CGT roll-over will apply to a transfer of any asset reflecting the personal interest of either spouse. The award, order or agreement in accordance with which the transfer or transfers are made will determine which spouse moves their interest and hence benefits from the CGT roll-over. Once any such transfer has been made, the trustee can no longer obtain a CGT roll-over for any transfer for the benefit of the other spouse. [Schedule 4, item 6, paragraphs 126-140(2A)(a), (b) and (g)]

Example 4.1

Amy and David each have a personal interest in a small superannuation fund and there has not been any payment split. They reach a binding financial agreement on marriage breakdown which provides that the trustee transfer all of the assets reflecting David's personal interest to another complying superannuation fund. The assets reflecting David's personal interest consist of a parcel of shares and a rental property. The transfer of the parcel of shares is completed first.

A CGT roll-over will apply to the transfer. Consequently no roll-over will then be available to the trustee for any transfer made for the benefit of Amy. When the trustee subsequently transfers the rental property, a CGT roll-over will also apply to that transfer.

Roll-over where each spouse has a personal interest in a small superannuation fund and there has been a payment split

4.24 If a payment split of one spouse's interest in a small superannuation fund in favour of the other spouse has been discharged by the creation of a new interest in the same fund for that other spouse, then effectively each spouse now has a separate personal interest in that fund. Therefore the rule in paragraph 4.23 applies. The same rule also applies where a payment split has not been discharged at all (ie, where the spouse benefiting from a payment split still has an entitlement to future benefits from the small superannuation fund as a result of the payment split).

Example 4.2

In addition to the facts in Example 4.1, Amy acquired either a part or all of her personal interest as a result of a previous payment splitting order in her favour.

A CGT roll-over will still apply to the transfer made for the benefit of David under the binding financial agreement. No roll-over will be available to the trustee for any transfer made for the benefit of Amy.

Example 4.3

Andrew and Tracy each have a personal interest in a small superannuation fund. Tracy's interest is subject to a payment splitting agreement which entitles Andrew to future benefits from the fund. The agreement also stipulates that the trustee transfer all of the assets reflecting Andrew's personal interest to another complying superannuation fund.

A CGT roll-over will apply to the transfer. No roll-over will then be available to the trustee for any transfer made for the benefit of Tracy.

If the trustee subsequently transfers any asset reflecting Andrew's entitlement under the payment splitting agreement to his new superannuation fund, the existing marriage breakdown roll-over will apply to that transfer.

4.25 If a payment split has resulted in a transfer of an asset to another complying superannuation fund to which the existing CGT marriage breakdown roll-over applies, then only the spouse benefiting from the payment split can move their personal superannuation interest with CGT roll-over under these new provisions [Schedule 4, item 6, paragraphs 126-140(2A)(a), (b) and (g)] . The reason for this restriction is that by transferring an asset reflecting their entitlement under the payment splitting order or agreement, that spouse has initiated the process of separating the couple's superannuation arrangements and should be allowed to complete that process.

Example 4.4

Matt and Karen each have a personal interest in a small superannuation fund. The trustee has previously obtained a CGT roll-over (under the existing marriage breakdown roll-over provisions) for the transfer of 5,000 shares from the fund to another small superannuation fund because of a payment splitting order in Karen's favour.

As Karen has already started removing her superannuation from the fund, the trustee can no longer obtain a CGT roll-over for any transfer made for the benefit of Matt.

If the trustee subsequently transfers all of the assets reflecting Karen's personal interest in accordance with any award, order or agreement specified in these new provisions, a CGT roll-over will apply to that transfer.

Related amendments

Roll-over of assets as a result of a payment split

4.26 This Schedule also amends the existing CGT marriage breakdown roll-over - which currently applies to transfers of assets between small superannuation funds - by extending it to transfers from a small superannuation fund to another complying superannuation fund. [Schedule 4, items 4 and 5, paragraphs 126-140(1)(c) and (2)(b)]

Roll-over of non-superannuation assets

4.27 In December 2006, Schedule 1 to the Tax Laws Amendment (2006 Measures No. 4) Act 2006 amended Subdivision 126-A of the ITAA 1997 to extend the CGT marriage breakdown roll-over to the transfer of an asset to a spouse or former spouse pursuant to:

•

a binding financial agreement under the Family Law Act 1975; and

•

a written agreement under a state, territory or foreign law relating to de facto marriage breakdowns.

4.28 The extension to transfers pursuant to a written agreement under a law relating to de facto marriage breakdowns was intended to extend the CGT roll-over to transfers pursuant to any written agreement equivalent to a binding financial agreement under the Family Law Act 1975 .

4.29 In relation to assets transferred under Australian law, all states and territories (except Victoria) have laws under which parties to a de facto marriage can make a written agreement equivalent to a binding financial agreement under the Family Law Act 1975 . The amendments made to Subdivision 126-A of the ITAA 1997 in December 2006 were intended to extend the CGT roll-over to the transfer of an asset to a former de facto spouse pursuant to such an agreement made under any of those laws.

4.30 However, subparagraphs 126-5(1)(f)(ii) and 126-15(1)(f)(ii) of the ITAA 1997 may be construed to exclude transfers pursuant to written agreements made under Western Australian, Tasmanian, Queensland or Northern Territory laws which are equivalent to binding financial agreements under the Family Law Act 1975 .

4.31 Currently, a financial agreement made under the Family Court Act 1997 (Western Australia) prevents courts in that State from making an order about matters to which the agreement applies, unless the agreement is set aside. In the other Australian states and territories, a written agreement that is equivalent to a binding financial agreement under the Family Law Act 1975 prevents courts from making an order that is inconsistent with the terms of the agreement, unless the agreement, or one or more of its terms, is varied or set aside.

4.32 Proposed subparagraphs 126-5(1)(f)(ii) and 126-15(1)(f)(ii) will provide for the identification of the state, territory or foreign laws under which parties to a de facto marriage can make a written agreement equivalent to a binding financial agreement under the Family Law Act 1975 in those terms. [Schedule 4, items 2 and 3, subparagraphs 126-5(1)(f)(ii) and 126-15(1)(f)(ii)]

Application and transitional provisions

4.33 These amendments will apply to CGT events that happen on or after 1 July 2007, regardless of when the award, order or agreement is made.

Consequential amendment

4.34 A consequential amendment is made to item 7 in the table in section 112-150 of the ITAA 1997 to reflect the availability of the CGT roll-over where a CGT asset is transferred from a small superannuation fund to another complying superannuation fund because of a marriage breakdown. [Schedule 4, item 1]