Peter Murphy and Commissioner of Taxation

[2014] AATA 461

[2014] AATA 461 

Division	TAXATION APPEALS DIVISION
File Number	2014/0263
Re	Peter Murphy
APPLICANT
And	Commissioner of Taxation
RESPONDENT

DECISION

Tribunal	Mr F D O'Loughlin, Senior Member
Date	2 June 2014
Date of written reasons	9 July 2014
Place	Melbourne

For the reasons given orally at the conclusion of the hearing of this matter as reflected below, the Tribunal affirms the decision under review.

………………[sgd]……………….

Mr F D O'Loughlin, Senior Member

TAXATION – Income Tax – transfer of assets by husband to himself and his wife jointly – whether a CGT event happened.

Legislation

Income Tax Assessment Act 1997 (Cth) Sections 100-25(2), 102-5, 104-10(1), 104-10(2), 104-55(5) 108-5, 108-7, 116-30

REASONS FOR DECISION

Mr F D O'Loughlin, Senior Member

9 July 2014

1. Mr Murphy contests the assessability of the capital gain that he disclosed in his 2013 year tax return.  That capital gain was disclosed following a transfer of registration of Telstra[1] and CBA[2] shares which were registered in his name to joint ownership with his wife, Mrs Murphy. 

   [1]           Telstra Corporation Limited

   [2]           Commonwealth Bank of Australia

   FACTS

2. Mr Murphy agrees that the facts are as contended by the Commissioner in his statement of facts, issues, and contentions.  Those facts are as follows. 

   (a)On or about 2 August 2008 Mr Murphy inherited 200 ordinary shares in Telstra, and 1315 ordinary shares in CBA which formed part of his late father's deceased estate. 

   (b)By an off market transfer on 6 March 2013 Mr Murphy transferred the 200 Telstra shares and 1,231 CBA shares to an account to be held jointly by himself and his wife.  Mrs Murphy did not provide any consideration for that transfer. 

   (c)On 23 July 2013 McMillan Partners, Mr Murphy's tax agent, wrote to Mr and Mrs Murphy advising that the transfer of shares to joint names would produce a taxable capital gain of $19,415 for Mr Murphy. 

   (d)On 1 August 2013 McMillan Partners lodged Mr Murphy's 2013 year income tax return.  In that tax return Mr Murphy declared total current year capital gains of $38,831 and a net capital gain of $19,415. 

   (e)On 9 August 2013 the Commissioner issued a notice of assessment to Mr Murphy.  That assessment reflected the taxable income as disclosed in Mr Murphy's tax return that included the $19,415 net capital gain. 

3. In his submissions to the Tribunal, that were accepted by the Commissioner, Mr Murphy adds the following facts. 

   (a)Mr Murphy simply transferred the shares into the names of himself and Mrs Murphy to reflect his wife, who he considered at all times as a joint owner of the shares, as an owner of these shares.  Mr Murphy's grounds of objection were:

   It is my belief that the intention of the capital gains tax should not apply in this case.  The Tax Invoice No.12875 issued on 6 March 2013 from Link Market Services is for payment of an off market transfer validation.  No reference made to a sale, just a transfer of half of my shares to my wife who is in fact entitled to half anyway, in our case.  I just wanted to transfer my shares into joint names with myself and my wife who, in this case, is entitled in equity to half of them anyway.

   (b)Mr Murphy did not make any capital gain because he has not received anything. 

   (c)Had he known that he would be taxed Mr Murphy would not have transferred the shares.  He would happily transfer the shares back to his own name if these transactions could be reversed. 

   (d)Mr and Mrs Murphy are life partners and regard themselves as joint owners of everything that they collectively own. 

   (e)Mrs Murphy has made a substantial contribution to everything in which Mr and Mrs Murphy have engaged, both in business and personally.

   (f)Mrs Murphy has, in addition, been a family carer for Mr Murphy, their children, Mr Murphy's father and Mr Murphy's grandfather, attending to their personal needs. 

   CONSIDERATION

4. The issue for consideration in this case concerns whether the transfer of the shares to the joint account caused a CGT event to occur, producing a gain for Mr Murphy.  The relevant amounts of capital proceeds and cost base are not disputed if the Part 3-1 rules, ss 102-5 and 104-10 of the 1997 Assessment Act[3] in particular, apply to include the net capital gain in Mr Murphy’s assessable income. 

   [3]           Income Tax Assessment Act 1997 (Cth)

5. Section 108-5 of the 1997 Assessment Act provides, amongst other things, that a CGT asset is any kind of property.  Note No 1 to that section gives examples of CGT assets and one of those examples is shares in a company.  Section 100-25(2) of the 1997 Assessment Act also lists shares in companies as CGT assets. 

6. A taxpayer can only make a capital gain or a capital loss if a CGT event happens.  There are many CGT events provided for in Part 3-1, in this case it is CGT event A1 that is relevant.  That event occurs if a taxpayer disposes of a CGT asset.[4]  If there is a change of ownership of an asset, the person, or persons, who owned the asset before the change has, or have, disposed of the asset to the owners after the change.  That is the effect of s 104-10(2) of the 1997 Assessment Act.  A taxpayer makes a capital gain if the capital proceeds from the disposal are more than the asset's cost base. 

   [4]           S 104-10(1) of the 1997 Assessment Act

7. If there was a change of ownership of the Telstra and CBA shares in this case, the capital proceeds for Mr Murphy would be the market value of those shares because he did not receive any consideration for the transfer of shares to his and his wife's names jointly.  That is the effect of s 116-30 of the 1997 Assessment Act.

8. The issue for determination in this case concerns whether there was a change of ownership. 

9. The Commissioner submitted that Part 3-1 is concerned with legal ownership and not equitable ownership, but it does recognise the exception where there is a change in legal ownership but no change in beneficial ownership, provided for in s 104‑10(2) of the 1997 Assessment Act, but he says that is not this case.  The proposition advanced by the Commissioner is too broad.  The Note to s104-10(2), concerning changes of trustees, and the s 104-55(5) exceptions to CGT event E1 are examples of how the Part 3-1 rules at times focus on beneficial ownership of assets. 

10. Mr Murphy does not contest that he was the beneficiary of his late father’s estate that led to him becoming the owner of the CBA and Telstra shares.

11. In this case, Mr Murphy's circumstances are such that he, and he alone, is recognised by Part 3-1 as the owner of the CBA and Telstra shares until he transferred them.  This is so notwithstanding that he and Mrs Murphy regard themselves as joint owners of all that they collectively own, the contributions each has made to their lives together and their family members’ lives and that Mr Murphy has, from the outset, believed that in equity and morally the shares that were transferred were owned jointly.

12. The system of taxing capital gains in Australia treats joint owners of assets as individual owners of a 50 per cent share of the asset.  That is the effect of s 108-7 of the 1997 Assessment Act. 

13. Transferring the Telstra and CBA shares to the joint account to reflect joint ownership was a disposal of a fractional interest in each of these shares.  After the transfer Mr and Mrs Murphy are treated by the system of taxing capital gains as each owning a 50 per cent share of each of those shares, and before the transfer Mr Murphy was recognised as the sole owner of those shares.  That means that a CGT event A1 happened. 

14. It might well be, and in some cases understandably so, that partners to a marriage or a marriage-like relationship regard his or her assets as our assets.  And it might also be the case that for family law purposes that is the practical effect of ownership of assets by individual partners to those relationships.  Australian income tax law, however, does not, at least at the present time, recognise these sorts of joint asset ownership arrangements. 

15. There is a very limited form of rollover or exemption relief from the Part 3-1 rules available for the gains that would otherwise arise upon transfers of assets between parties to a marriage relationship.  The limited extent to which capital gains made are disregarded[5] and the limited roll-over relief[6] available confirm that transfers of assets between spouses other than upon a breakdown in relationship are intended to be taxable events.  That rollover relief is not available on the present facts. 

    [5]           See s 118-75 which is limited to capital gains made as a result of CGT event C2 happening

    [6]           Division 126 applicable to transfers of assets between spouses upon relationship breakdowns

16. The present state of the Australian income tax law compels the conclusion that there was a CGT event and, on the present facts, a taxable capital gain.  Unless there is reason to do otherwise, partners to a marriage or marriage-like relationship who hold the assumption that his or her assets are our assets, would be well advised to continue with that assumption, without taking the step of formalising any joint ownership arrangements, as there will be a taxing point if they do if the transferred assets have increased in value. 

    DECISION

17. For the reasons given orally at the conclusion of the hearing of this matter as reflected above, the Tribunal affirms the decision under review.

I certify that the preceding 17 (seventeen) paragraphs are a true copy of the reasons for the decision herein of Mr F D O'Loughlin, Senior Member

......................[sgd]..................................................

Associate

Dated  9 July 2014

Date of hearing	2 June 2014
Date final submissions received	2 June 2014
Applicant	In person
Advocate for the Respondent	Ms Tanya Saw – ATO Dispute Resolution