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  • 7 Marriage breakdown

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Read this chapter if your legal or de facto marriage ended on or after 20 September 1985 and:

    • you transfer an asset to your spouse or
    • a company or trustee of a trust transfers an asset to your spouse.

    As a general rule, you have to pay tax on a capital gain you make if a CGT event happens to an asset you acquired on or after 20 September 1985. However, if you transfer an asset to your spouse as a result of a marriage breakdown, there is automatic roll-over if certain CGT events happen and other prescribed conditions are met. It allows a capital gain or loss that would otherwise arise to be disregarded until a later CGT event happens to the asset. It also transfers certain attributes of the asset to the person receiving it (transferee spouse).

    Roll-over as a result of marriage breakdown applies automatically. You cannot choose whether or not it applies.

    In this chapter of the guide, the following terms apply:

    • Your spouse’ includes your de facto spouse.
    • ‘Transferee spouse’ is the spouse to whom an asset is transferred.
    • ‘Transfer of an asset’ can refer to a disposal of an asset and can include creating an asset in another – see Creation cases.
    • ‘Transferor’ is the one who transfers an asset to another. It can refer to a spouse, company or trustee of a trust.

    Conditions for marriage breakdown roll-over

    There is roll-over if one of the CGT events listed below happens involving you and your spouse, a company or trustee of a trust. The event must happen because of:
    Note: Maintenance agreements registered under section 8 of the Family Law Act 1975 are excluded.

    Relevant CGT events

    There is roll-over only if one of the following CGT events happens.

    Disposal cases

    You, a company or a trustee of a trust:

    • dispose of an asset to your spouse (CGT event A1) – this is likely to be the most commonly occurring CGT event
    • enter into an agreement with your spouse under which:
      • the right to the use and enjoyment of a CGT asset you own passes to them and
      • title in the asset will or may pass to them at the end of the agreement (CGT event B1). There is no roll-over if title in the CGT asset does not pass to them when the agreement ends.
    Creation cases

    You, a company or a trustee of a trust:

    • create a contractual or other right in favour of your spouse (CGT event D1)
    • grant an option to your spouse or renew or extend an option granted to them (CGT event D2)
    • own a prospecting or mining entitlement, or an interest in one, and grant your spouse a right to receive income from operations carried on by the entitlement (CGT event D3)
    • are a lessor and grant, renew or extend a lease to your spouse (CGT event F1).

    There is no roll-over if the CGT asset involved is trading stock of the transferor spouse, company or trust.

    Consequences of roll-over

    You transfer the asset (transferor)

    If you acquired the asset before 20 September 1985, any capital gain or loss you make from a CGT event that is a disposal to your spouse is disregarded.

    For all other assets you acquire on or after 20 September 1985, if there is marriage breakdown roll-over, any capital gain or loss you make from the CGT event that involves you and your spouse is disregarded.

    The asset is transferred to you (transferee)

    Disposal cases
    Asset acquired before 20 September 1985

    If a CGT asset - including a share of a jointly owned asset - was transferred to you because of the breakdown of your marriage and it was acquired before 20 September 1985 by:

    • your spouse
    • a company or
    • a trustee of a trust

    you are taken to have acquired the asset before that date and any capital gain or loss is disregarded.

    However, if you make a major capital improvement to that asset after 20 September 1985, part of any capital gain you make when a CGT event happens to the asset could be subject to capital gains tax. See the section on Capital improvements to assets acquired before 20 September 1985.

    Asset acquired on or after 20 September 1985

    If you receive the CGT asset - or a share of a jointly owned asset - and there is a marriage breakdown roll-over, you are taken to have acquired the asset at the time your spouse, the company or the trustee disposed of the asset to you. To calculate a capital gain or loss when a later CGT event happens, your cost base or reduced cost base for the asset is taken to be an amount equal to the cost base or reduced cost base of your spouse, the company or trustee at the time of the transfer.

    Costs of transfer incurred by the transferor - such as conveyancing fees and stamp duty - are included in the cost base.

    In calculating your capital gain, if the sum of your period of ownership of the asset and the period of ownership of your spouse, the company or the trustee is at least 12 months, the cost base may be indexed for inflation provided you acquired the asset before 11.45 am on 21 September 1999. If you acquired the asset after that time, its cost base is not indexed for inflation but you may qualify or the CGT discount on your capital gain. If the transfer of the asset occurred before 1 July 1998, only your period of ownership determines whether indexation applies.

    If you receive your spouse's share of property that you jointly owned, you are taken to have acquired that share of the property at the time it was transferred.

    Collectables or personal use assets remain collectables or personal use assets when they are transferred between the parties in a marriage breakdown roll-over. For information regarding collectables and personal use assets, see What are CGT assets?

    Creation cases

    If the CGT event involved is the creation of an asset in you by your spouse, a company or a trustee, the first element of the cost base or reduced cost base of the asset is as follows:

    CGT event

    Cost base or reduced cost base

    Creating contractual or other rights (D1)

    incidental costs incurred by the transferor that relate to the event

    Granting an option (D2)

    expenditure incurred by the transferor to grant the option

    Granting a right to income from mining (D3)

    expenditure incurred by the transferor to grant the right

    Granting a lease (F1)

    expenditure incurred by the transferor on the grant, renewal or extension of the lease

    You acquire the asset at the time specified by the CGT event. For example, for CGT event D1, you acquire the asset at the time you enter into the contract or, if there is no contract, the time the right is created. For more information, see the list of CGT events in appendix B.

    Example: Transfer of assets from a legal or a de facto marriage

    Danny and Claudia jointly owned the following assets immediately before their marriage breakdown:

    Asset

    Date purchased

    Cost

    The family home

    January 1985

    $75,000

    Furniture

    Between January and June 1985

    $15,000

    Holiday home

    December 1998

    $65,000

    Shares in a company

    March 1999

    $35,000

    On their divorce in October 2000, the Family Court approved the couple's voluntary asset agreement and made an appropriate court order by consent.

    Claudia received the family home and the furniture. Because these assets were acquired by the couple before 20 September 1985, she is taken to have acquired her share of the home and furniture before that date. She is also taken to have acquired Danny's share in those assets before that date. Claudia would not have to pay tax on capital gains on those assets.

    Danny is not subject to tax on the capital gain on the transfer to Claudia of his share in these assets.

    Danny received the holiday home - which did not become his home - and the shares.

    Although the couple acquired these assets after 20 September 1985, as a result of the court order Claudia does not have to pay any tax on the capital gain on the transfer of her share of these assets to Danny.

    Danny is taken to have acquired Claudia's share of these assets, at the time of transfer, or her relevant cost base. However, if he were to sell the holiday home or the shares, he could calculate his capital gain or capital loss by working out the cost base of the whole of the holiday home, or the whole of the shares, at the time he and Claudia jointly acquired them. He would then deduct this amount, after indexation if he makes a capital gain, from the proceeds he receives.

    End of example

    CGT assets transferred by a company or trust

    If a CGT asset is transferred by a company or a trustee of a trust to your spouse, adjustments are required to the cost base (or reduced cost base) of any interests. These can be shares or indirect interests in shares in the company, units in a unit trust and other interests in the trust. They are reduced in value by an amount that reasonably reflects the fall in their market value as a result of the transfer of the CGT asset. For more information please contact the Australian Taxation Office.

    Special rules apply to marriage breakdown roll-overs involving a controlled foreign corporation or certain non-resident trusts.

    Main residence

    If the CGT asset transferred in a marriage breakdown roll-over is your home, you may be entitled to an exemption from capital gains tax for the period the home was your main residence. For further information, see chapter 4.

    Where there is no court approval

    The above rules do not apply if you and your spouse divide your property by some means other than because of a court order or an agreement approved by the court. Normal capital gains tax rules apply. You must include any capital gain or loss you make on the transfer of a CGT asset in your assessable income on your tax return for that income year. The transferee spouse acquires the asset at the time of transfer.

    Special rules may apply if the amount paid by one spouse for property owned by the other is greater or less than the market value of the property and they are not dealing at arm's length. In these circumstances, in calculating any capital gain or loss, the spouse who disposes of the property is treated as having received the market value of the property. The purchaser of the property is taken to have paid an amount or it equal to its market value.

    Record keeping

    The transferor must keep records of all acts, transactions, events or circumstances relevant to the acquisition, holding and transfer of the CGT assets to which the marriage breakdown roll-over provisions apply.

    The transferee must keep records of all acts, transactions, events or circumstances relevant to the CGT assets received in order to calculate any capital gain or loss if any later CGT event happens to those assets.

    Last modified: 18 Sep 2009QC 18323