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Ruling

Subject: Capital gains tax- marriage breakdown, disposal of property.

Question 1

Did the first element of the cost base of the interest you acquired in the dwelling from your ex spouse sometime after 20 September 1985, consist of the cost base of your ex spouse at the time it was transferred?

Answer

Yes.

Question 2

Were you the legal owner of your spouse's share of your dwelling from the time it was transferred to you sometime after 20 September 1985?

Answer

Yes.

Question 3

Are you entitled to a main residence exemption on the disposal of the dwelling?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commences on:

1st July 2008

Relevant facts and circumstances

You and your spouse purchased a dwelling (Dwelling A) sometime after 20 September 1985.

Dwelling A was one of three investment properties you owned. You also owned a marital home.

You and your spouse separated. At the time of separation, there was a verbal agreement that you could use the income from Dwelling A to pay your rental expenses for the dwelling you were living in.

Your spouse remained in the marital home.

Sometime after the separation your spouse requested that the rental income from Dwelling A be held in a trust account, rather than be paid directly for you to use to cover your rent.

Soon after, you filed for spousal maintenance. As a result a Family Court Consent Order was handed down with Dwelling A to be transferred to your name.

You received a letter from your solicitor, confirming that Dwelling A had been transferred to you.

You then filed for Full Property Settlement in the Federal Magistrate's Court. Your spouse did not consent to a hearing in this Court because of their contention that there should be an unequal split of the Asset Pool in their favour. A valuation of the dwelling was provided for Court purposes.

You then purchased another dwelling (Dwelling B) to allow you to be closer to, and care for, your aging parents. You obtained finance to enable you to purchase Dwelling B.

Sometime after, the Court Order was handed down. It ordered that your spouse would keep the marital home, you would keep Dwelling A, and the other two investment properties would be sold with the proceeds being distributed between you

After you parents died, you sold Dwelling A. The proceeds from the sale of Dwelling A was used to pay off the home loan, including interest that had accumulated over the three years it took to for the case to be finalised in the Family Law Courts.

For three years neither you nor your spouse could dispose of any of your properties as they were part of the Asset Pool, until a Court Order on the Property Settlement was handed down.

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 109-5,

Income Tax Assessment Act 1997 section 112-20,

Income Tax Assessment Act 1997 section 115-10,

Income Tax Assessment Act 1997 section 115-15,

Income Tax Assessment Act 1997 section 115-25,

Income Tax Assessment Act 1997 section 118-110 and

Income Tax Assessment Act 1997 section 126-5.

Reasons for decision

Question 1

Detailed reasoning

Where an individual who owns a property jointly with another individual, acquires the interest of the other owner of the property, they now have two separate interests in the property, their original interest and the interest acquired from the other joint owner.

If you acquire an asset, including a share of a jointly owned asset, that was transferred to you as a result of a marriage breakdown, and the dwelling was acquired by the transferor (your spouse) after 20 September 1985, you are taken to have acquired the asset, or share of the asset, at the time it was transferred from your spouse.

The first element of the cost base and reduced cost base will be the same as the cost base and reduced cost base of your spouse at the time of transfer.

In your case, you acquired your original interest in Dwelling A when you purchased the dwelling, for your share of the purchase price. You acquired the remaining interest Dwelling A as part of the divorce settlement from your spouse, for the cost base of your spouse's share at the time the transfer occurred. You now hold two separate interests in the dwelling.

Question 2

Detailed reasoning

You make a capital gain or capital loss if a capital gains tax (CGT) event happens. The most common event occurs if you dispose of a CGT asset, such as your home. This is called CGT event A1.

If you acquire a CGT asset as a result of a CGT event occurring, there are certain rules which determine the date that you are taken to have acquired the asset. When an entity disposes of a CGT asset to you, you acquire the asset when the disposal contract is entered into, or if there isn't a contract, when the other entity stops being the owner.

In your situation, you acquired your original interest in the Dwelling A, when you entered into the contract to purchase the dwelling. You received a letter from your solicitor, confirming that the remaining interest in Dwelling A had been transferred to you pursuant to the Family Court Consent Order. Therefore, you are taken to have acquired the remaining interest on the date the title was issued.

Question 3

Detailed reasoning

Generally, a capital gain or loss that was made on the disposal of your home can be disregarded if you are an individual, the dwelling was your main residence for the entire time you owned the property and you did not use it to produce assessable income.

There are several factors that may be relevant in establishing whether a dwelling is your main residence including:

A dwelling is considered to be your main residence from the time you acquired your ownership interest in it, if you moved into the dwelling as soon as practicable after that time. A mere intention to occupy a dwelling as your main residence, without actually doing so is not sufficient to get the exemption.

In your case, as you did not occupy Dwelling A as your main residence you are not entitled to a main residence exemption.

Note: Your capital gain is the difference between your capital proceeds and the cost base of your CGT asset.

Capital proceeds are an amount of money you receive or are entitled to receive for a CGT event happening, such as disposing of a CGT asset. You received an amount of money when you disposed of dwelling A. This amount of money is your capital proceeds and will need to be apportioned to each ownership interest you have in the dwelling.

Your cost base for each ownership interest was discussed above. You can also include in your cost base the costs of selling the dwelling and any non-deductible costs of ownership apportioned between the two interests.

As you are an individual, you sold your dwelling after 21 September 1999 and you held the dwelling for at least 12 months prior to disposal, any capital gain made on the disposal is a discount capital gain. You are entitled to reduce the capital gain made on the disposal of the dwelling by 50% when working out your net capital gain.

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