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  • Chapter 8 - 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 or a share of an asset to your spouse
    • you receive an asset or a share of an asset from your spouse, or
    • a company or trustee of a trust transfers an asset to you or your spouse.

    New terms

    We may use some terms that are new to you. These words are explained in Definitions. Generally they are also explained in more detail in the section where they first appear.

    When we talk about 'your spouse', this includes your de facto spouse. 'Transfer' of an asset includes disposing of an asset to the transferee spouse or 'creating' an asset in their favour (such as a right to use property). Where we talk about 'an asset', this includes a share of an asset.

    The term 'transferee spouse' refers to the spouse to whom an asset is transferred, while the 'transferor' is the person (or a company or the trustee of a trust) who transfers an asset to the transferee spouse.

    As a general rule, capital gains tax (CGT) applies to all changes of ownership of assets 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 rollover in certain cases (you cannot choose whether or not it applies).

    This rollover ensures the transferor spouse disregards a capital gain or capital loss that would otherwise arise. In effect, the one who receives the asset (the transferee spouse) will make the capital gain or capital loss when they dispose of the asset. If you are the transferee spouse, the cost base and other attributes of the asset are transferred to you.

    You must keep all relevant records, as explained in chapter 3.

    Conditions for marriage breakdown rollover

    For the rollover conditions to be met, a CGT event must have happened because of:

    • an order of a court or court order made by consent under the Family Law Act 1975 or a similar law of a foreign country
    • a maintenance agreement approved by a court under section 87 of that Act or a similar agreement under a foreign law, or
    • a court order under a state, territory or foreign law relating to de facto marriage breakdowns.

    Note that from 27 December 2000 maintenance agreements are no longer approved under section 87 of the Family Law Act 1975. Therefore, rollover does not apply to maintenance agreements entered into after this date unless a court order (including a consent order) has been obtained. CGT events happening because of maintenance agreements registered under section 86 of the Family Law Act 1975 have never qualified for rollover.

    On 10 May 2005, as part of the Budget, the Government announced proposed changes that will extend the scope of the marriage breakdown CGT rollover to assets transferred to a spouse or former spouse under a binding financial agreement or arbitral award under the Family Law Act 1975 or a similar agreement or award under a corresponding foreign law. The rollover will also apply to assets transferred under a written agreement under a state, territory or foreign law relating to de facto marriage breakdowns where the agreement is similar to a binding financial agreement. (Amendments will also be made to ensure that the main residence exemption interacts more appropriately with the marriage breakdown rollover relief and ensure that marriage breakdown cash settlements do not give rise to CGT liabilities.) The Government's intention is that the changes will apply to CGT events that happen after the date of Royal Assent of the amending legislation.

    If you transfer assets under a private arrangement that does not meet any of these conditions, rollover is not available. (See If there is no court approval)

    Relevant CGT events

    For rollover to apply, one of the following events must happen. The transferor:

    • disposes of an asset to the transferee spouse (CGT event A1)
    • enters into an agreement with the transferee spouse under which:
      • the right to use and enjoy a CGT asset passes to them
      • title in the asset will or may pass to them at the end of the agreement (CGT event B1). There is no rollover if title in the CGT asset does not pass to them when the agreement ends
       
    • creates a contractual or other right in favour of the transferee spouse (CGT event D1)
    • grants an option to the transferee spouse or renews or extends an option granted to them (CGT event D2)
    • owns a prospecting or mining entitlement, or an interest in one, and grants the transferee spouse a right to receive income from operations carried on by the entitlement (CGT event D3), or
    • is a lessor and grants, renews or extends a lease to the transferee spouse (CGT event F1).

    There is no rollover for the transfer of trading stock.

    Consequences of rollover

    You transfer the asset

    If you transfer the asset, the consequences of rollover are:

    • you disregard for assets acquired before 20 September 1985: any capital gain or capital loss, and
    • for assets acquired on or after 20 September 1985: marriage breakdown rollover ensures you disregard any capital gain or capital loss you make from the CGT event that involves you and the transferee spouse.
    The asset is transferred to you
    Assets 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 by the transferor before 20 September 1985, you are also taken to have acquired the asset before that date. You disregard any capital gain or capital loss you make when you later dispose of the asset.

    However, if you make a major capital improvement to that asset after 20 September 1985, you may be subject to CGT when a CGT event happens to that asset (see Other capital improvements to pre-CGT assets).

    Assets acquired on or after 20 September 1985

    The rules are different if the asset was acquired by the transferor on or after 20 September 1985. In this case, if you receive the CGT asset (or a share of a jointly owned asset) and there is a marriage breakdown rollover, you are taken to have acquired the asset (or share of the asset) at the time it was transferred from your spouse (or the company or trustee).

    To calculate your capital gain or capital loss when a later CGT event happens, the first element of your cost base and reduced cost base will be the same as the cost base and reduced cost base of your spouse (or the company or trustee) at the time of the transfer.

    If the transferor's cost base includes an amount of indexation, you may later have to recalculate the first element of your cost base to exclude that amount if you want to apply the CGT discount to your capital gain.

    You include transfer costs incurred by your spouse (or the company or trustee) - for example, conveyancing fees and stamp duty - in the cost base.

    If you acquired the asset from your spouse (or the company or trustee) before 11.45am (by legal time in the ACT) on 21 September 1999, you may be able to use the indexation method when calculating your capital gain. This can only apply if the total ownership period of you and your spouse (or the company or trustee) is 12 months or more.

    If you acquired the asset after 11.45am (by legal time in the ACT) on 21 September 1999, you cannot use the indexation method when calculating your capital gain but you may be able to use the discount method. You can use the discount method to calculate your capital gain if the combined period of ownership of the asset for you and your spouse is 12 months or more. If the period is less than 12 months, you use the 'other' method.

    Collectables or personal use assets remain collectables or personal use assets when they are transferred from your spouse (or the company or trustee) in the case of a marriage breakdown rollover.

    For information about collectables and personal use assets, see What is a CGT asset?

    As explained earlier, there are several instances where your spouse (or a company or trustee) may create an asset in your favour. The table below explains how to calculate the first element of your cost base and reduced cost base of that asset in each case.

    CGT event

    First element of cost base and 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 are taken to have acquired 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 appendix 1.

    CGT assets transferred by a company or trust

    If a company or a trustee of a trust transfers 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 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.

    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

    When purchased

    Cost

    The family home

    January 1985

    $75,000

    Holiday house

    December 1988

    $65,000

    Shares in a company

    March 1999

    $35,000

    On their divorce in October 2004, the Family Court approved the couple's voluntary asset agreement and made an appropriate court order by consent.

    Claudia received the family home. Because it was acquired by the couple before 20 September 1985, she is taken to have acquired both her original interest in the home and Danny's share before that date. Claudia will not have to pay tax on capital gains when she sells the home.

    Danny has no CGT obligation on the transfer to Claudia of his share in the family home.

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

    Although the couple acquired these assets after 20 September 1985, Claudia's capital gain from the transfer of her share of these assets to Danny is disregarded under the marriage breakdown rollover.

    Danny is taken to have acquired Claudia's share of these assets at the time of transfer for her relevant cost base. If he were to sell the holiday home or the shares, he would 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 base of the interest that he acquired from Claudia does not include any amount of indexation.

    End of example

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

    If these rules apply to you please seek help from the Tax Office or a recognised tax advisor.

    Superannuation interests

    From 28 December 2002 CGT rollover may apply when a CGT asset of a small superannuation fund is transferred to another small superannuation fund on the breakdown of a legal (but not a de facto) marriage.

    A small superannuation fund is one that is a complying fund and has fewer than five members.

    The consequences of rollover are the same as for transfers between spouses.

    Main residence

    If the CGT asset transferred in a marriage breakdown rollover is your home, you may be entitled to an exemption from CGT for the period the home was your main residence. Special rules apply if the dwelling is transferred to you from a company or trust (see chapter 6 for more information).

    If there is no court approval

    If you and your spouse divide your property by some means other than by a court order or an agreement approved by the court, normal CGT rules apply - not the rules explained in this chapter. You must include on your tax return for that year any capital gain or capital loss you make on the transfer of a CGT asset.

    The spouse to whom the asset is transferred is taken to have acquired 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 - see market value substitution rule for capital proceeds and market value substitution rule for cost base and reduced cost base in Definitions. In these cases, for CGT purposes, they are taken to have paid or received the market value of the property.

    Last modified: 09 Apr 2020QC 27596