Edited version of private ruling

Authorisation Number: 1011468366788

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Ruling

Subject: Capital gains tax - joint ownership - marriage breakdown - disposal of property

Question

Will you be entitled to include all of the capital gains made on the disposal of the property?

Answer: No.

This ruling applies for the following period/s:

Year ended 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You and your spouse jointly purchased a property consisting of land and buildings.

The building was used for the business enterprise of you and your spouse as business partners.

You and your spouse divorced.

You and your ex-spouse made a verbal private property settlement agreement under which you and your ex-spouse each received 50% of the family assets and liabilities. Under the agreement, the land and buildings were to become your property, with your ex-spouse not entitled to receive any of the capital growth from the land and buildings. You were required to pay your ex-spouse for the 50% ownership interest in the land and buildings, with payments to be made on a monthly basis until sufficient funds became available to payout your ex-spouse balance of the property settlement.

You paid the monthly payments to your ex-spouse.

The land and buildings remained in joint names as a security for your ex-spouse to ensure that you met your obligations under the agreement.

You paid for the maintenance of the land and buildings and utilised them as you wanted without any intervention from your ex-spouse.

You disposed on the land and buildings.

Upon settlement, your ex-spouse was paid the balance of monies owing under the property settlement agreement.

You made a capital gain on the disposal of the land and buildings.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Section 126-5.

Reasons for decision

Capital gains tax

Capital gains tax (CGT) is the tax that you pay on certain gains you make. You may make a capital gain as a result of a CGT event, happening to an asset in which you have an ownership interest. The most common CGT event, CGT event A1, occurs when you dispose of your ownership interest in a CGT asset to another entity.

The time of the CGT event is when you enter into the contract for the disposal, or if there is no contract, when the change of ownership occurs.

There are exceptions to the general rule about the application of the capital gains provisions. For example, under the marriage breakdown exception, any capital gain or capital loss you make is disregarded where the transfer of an asset is brought about as a result of a Court order issued under the Family Law Act 1975 and the asset is transferred to one of the spouses in compliance with the court order.

In your case, you and your ex-spouse made a verbal private property settlement agreement under which you both received half of the family assets and liabilities. In compliance with the settlement agreement you kept the land and buildings. You disposed of the land and buildings and paid your ex-spouse the balance of monies owed under the settlement agreement when settlement occurred. As neither you nor your ex-spouse transferred your respective interests in the land and building to the other, the marriage breakdown exception does not apply.

When considering the disposal of your interest in a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the property. In absence to the contrary, property is considered to be owned by person(s) registered on the title.

We consider that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. In the absence of evidence to the contrary, property is considered to be owned by the person(s) registered on the title and that any capital gains made in relation to a property should be shared in the same proportion as a taxpayer's ownership interest in the property.

In your case, the land and buildings were never transferred into your name only, and when you disposed of the land and buildings, they were still in joint names. You paid your ex-spouse the balance of monies owed under the settlement agreement when settlement occurred.

We have examined the possible existence of a trust. From the facts presented, it has been determined that the private property settlement agreement was a verbal agreement, and not evidenced in writing. As you have not provided any evidence to support the existence of a trust, it is viewed that both you and your ex-spouse each held an equitable and legal interest in a share of the land and buildings.

As none of the exceptions to the general rule apply, you are responsible for any capital gains tax liability on the portion of the land and buildings that you owned at the time you disposed of them. It does not matter that you and your ex-spouse had made a private property settlement agreement under which you both received half of the family assets and liabilities; it is the ownership of the asset when it is disposed of that counts. As you and your ex-spouse's names were on the title of the land and buildings when you disposed of them, you are both viewed as having had a 50% ownership interest in the land and buildings when they were sold. Therefore, you must include any capital gain made on the disposal of your 50% ownership interest in the land and buildings in your 200X-0Y income tax return.

While we appreciate and acknowledge your circumstances, the Commissioner does not have any discretion to allow you to include any capital gain made on the disposal of your ex-spouse's 50% ownership interest in the land and buildings in your 200X-0Y income tax return.

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