If a company or a trustee of a trust transferred a CGT asset to a spouse, adjustments are required to the relevant cost base and reduced cost base of interests in the company or trust. These may have been 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.
If the transferor was a controlled foreign corporation or a foreign trust, there are special rules for working out the capital gain or capital loss for a subsequent CGT event.
Generally, the transfer of an asset from a private company to a spouse who is a shareholder or an associate of a shareholder is treated as a payment for the purposes of Division 7A of the Income Tax Assessment Act 1936, which the company may be taken to have paid a dividend because of that payment.
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Example 99: Transfer of assets from a marriage or relationship
Danny and Claudia jointly owned the following assets immediately before their marriage breakdown:
Asset |
When purchased |
Cost |
|---|---|---|
The family home |
January 1985 |
75,000 |
Holiday house |
December 1988 |
65,000 |
Shares in a company |
March 1999 |
35,000 |
After their permanent separation in October 2020, the Family Court approved the couple’s agreement and made an appropriate court order by consent.
Danny transferred his interest in the family home to Claudia in March 2021 under the court order. Because it was acquired by the couple before 20 September 1985 and the CGT rollover applied, she is taken to have acquired Danny’s interest in the home before that date. Therefore, Claudia will not have to pay tax on any capital gains when she sells the home, that is, either on her original interest in the home, or the interest Danny transferred to her.
Danny has no CGT obligation on the transfer to Claudia of his interest in the family home.
Claudia’s interests in the shares and the holiday house were transferred to Danny in March 2021 under the court order. The holiday house did not become his home.
Although the couple acquired these assets on or after 20 September 1985, Claudia’s capital gains from the transfer of her interests in these assets to Danny are disregarded under the marriage breakdown rollover.
Danny is taken to have acquired Claudia’s interests in these assets at the time of transfer for her relevant cost bases. If he were to sell the holiday home or the shares, he would separately calculate his capital gain or capital loss in respect of his original interest and the interest he acquired from Claudia.
When he sells the assets, Danny can choose to apply the indexation method or the discount method to work out the amount of any capital gain from his original interests because they were acquired before 21 September 1999.
Because he acquired Claudia’s interests after that date, he can only choose the discount method to work out any capital gain on them. However, in applying the 12-month ownership test for the purposes of the CGT discount, he can take into account the period that Claudia owned the interest.
Danny will have to ensure that the cost bases of the interests he acquired from Claudia do not include any amount of indexation.
End of exampleIf these rules apply to you, seek help from us or a recognised tax adviser.