Edited version of private advice

Authorisation Number: 1051598302869

Date of advice: 23 October 2019

Ruling

Subject: CGT - Marriage or relationship breakdown roll-over

Question

Will you be liable for capital gains tax (CGT) from the sale a jointly owned property?

Answer

Yes.

This ruling applies for the following period:

Financial Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You and your former spouse purchased a vacant block of land on which a holiday house was constructed for private use.

The certificate of title listed you and your former spouse as the registered owners as joint tenants.

By mutual agreement you and your former spouse dissolved your marriage and settled your property and financial matters under a private arrangement. There is no written record of this arrangement.

Under the arrangement it was intended that your former spouse would receive your 50% share of the property.

The arrangement was never formalised and the legal title of the property was never transferred solely into your former spouse's name.

Your income tax return has no CGT event recorded in the year of separation.

Your former spouse took over all cost involved with the property and conducted renovation to the dwelling.

The property was contracted for sale and sold.

You did not receive any proceeds from the sale of the property.

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 108-7

Income Tax Assessment Act 1997 section 118-130

Income Tax Assessment Act 1997 section 126-5

Reasons for decision

Capital Gains Tax

If you dispose of a capital asset, such as real estate or shares you will usually make either, a capital gain or a capital loss. You dispose of an asset when a change of ownership occurs from you to another person or entity. CGT applies to all changes of ownership of CGT assets occurring on or after 20 September 1985, unless an exemption or roll-over applies.

Marriage or relationship breakdown roll-over

Where an asset is transferred between spouses as a result of a marriage or relationship breakdown, there is generally an automatic CGT roll-over of the asset.

In order for the relationship breakdown roll-over to apply, the CGT event must have happened due to:

·        ownership of an asset or share in a jointly-owned asset is transferred between individual's (i.e. spouse 1 to spouse 2) or from a company or trust to an individual (i.e. spouse 1's company/trust to spouse 2) and

·        the transfer of ownership is because of a court order, formal agreement such as a binding financial agreement or an award as listed under section 126-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

The roll-over allows the transferor spouse to disregard any capital gain or capital loss that arises as a result of the transfer if certain requirements are met. The spouse that receives the asset will make a capital gain or loss when they subsequently dispose of the asset.

If the transfer is agreed as part of an informal private agreement or the asset is disposed of to an unrelated third party, the roll-over provisions do not apply, instead, the normal CGT rules will apply.

In your case, the settlement of your marital assets was conducted under an informal private arrangement. Accordingly, the marriage breakdown relief provisions do not apply to your situation.

We consider that no CGT event occurred at the time you came to your arrangement, as the arrangement was never formalised and the legal title of the property was never transferred solely into your former spouse's name.

Ownership for the purposes of Capital gains tax

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.

A person's legal interest in a property is determined by the legal title to that property under the land law legislation in the State or Territory the property is situated. The legal owner of the property is recorded on the title deed for the property issued under that legislation.

For CGT purposes individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common.

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. Where individuals are related, for example spouses, we generally consider that the equitable right is exactly the same as the legal title. (Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners).

In absence of the contrary, property is considered to be owned by person(s) registered on the title deed.

Conclusion

We consider that a CGT event A1 occurred when the property was contracted for sale and ultimately sold to the third party in the 2017 financial year.

There are no other provisions within the tax law that would allow you to disregard the CGT event in the circumstances you describe.

It is the ownership of the asset when it is disposed of that determines the CGT liabilities, not who will ultimately retain the proceeds of the sale. Therefore, you will be responsible for any capital gains tax liability on the portion of the property that you owned at the time it was disposed of.

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