Edited version of private advice

Authorisation Number: 1052326549611

Date of advice: 5 November 2024

Ruling

Subject: CGT - marriage breakdown roll-over

Question 1

If the interest you currently hold in Property Y is transferred by you to your spouse in accordance with the proposed Binding Financial Agreement (BFA), will this attract the marriage breakdown roll-over under section 126-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and be exempt from capital gains tax for you?

Answer

Yes.

Question 2

If the interest in Property X is transferred to you by your spouse in accordance with the proposed BFA, will you be exempt from capital gains tax under the main residence exemption in subsection 118-110(1) of the ITAA 1997 with respect to that interest from the date of transfer until Property X is sold (assuming it is used by you as your main residence for all of that period)?

Answer

Yes.

Question 3

Will the interest you have held in Property X since March 20XX also be exempt from capital gains tax under the main residence exemption in subsection 118-110(1) of the ITAA 1997 (if Property X is later sold by you)?

Answer

Yes.

Question 4

Will the interest in Property X you acquire from your spouse in accordance with the proposed BFA be exempt from capital gains tax under Part 3-1 of the ITAA 1997 for the period from XX March 20XX until the date it is transferred to you (if Property X is later sold by you)?

Answer

No.

Question 5

In calculating the capital gain arising from what is contemplated in Question 4, will the first element of cost base under subsection 110-25(2) of the ITAA 1997, be XX% of the purchase price of Property X paid on XX March 20XX?

Answer

Yes.

Question 6

In calculating the capital gain arising from what is contemplated in Question 4, will you be able to include in the 3^rd element of cost base under subsection 110-25(4) of the ITAA 1997, any holding costs paid by your spouse during this period?

Answer

Yes.

Question 7

In calculating the capital gain arising from what is contemplated in Question 4, will you be able to include in the cost base under Division 110 of the ITAA 1997, any amount of Division 43 of the ITAA 1997, building write off?

Answer

No.

Question 8

In calculating the capital gain arising from what is contemplated in Question 4, does the character of that interest as a non-income earning passive investment during the period it was held by your spouse impact the calculation of the capital gain under Part 3-1 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Income tax year ending 30 June 2025

Income tax year ending 30 June 2026

The scheme commenced on:

1 July 2024

Relevant facts and circumstances

1. You and your spouse amicably separated in 20XX.
2. You and your spouse were living together in a jointly owned home up until time of separation. You both then rented separately.
3. Prior to XX March 20XX, you and your spouse made a written separation agreement to divide all income and property as equally as possible.
4. On XX March 20XX, you and your spouse settled on two properties, Property X and Property Y.
5. The separation agreement stated that you and your spouse would live separately.
6. Property X has never been rented out or used as a source of income.
7. You and your spouse are considering entering into a Binding Financial Agreement (BFA) under Part VIIIA of the Family Law Act 1975 (FLA 1975).
8. You and your spouse are still legally married.

Relevant legislative provisions

Section 102-20 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Section 110-25 of the Income Tax Assessment Act 1997

Subdivision 126-A of the Income Tax Assessment Act 1997

Subsection 126-5(3A) of the Income Tax Assessment Act 1997

Section 126-25 of the Income Tax Assessment Act 1997

Section 118-110 of the Income Tax Assessment Act 1997

Section 118-115 of the Income Tax Assessment Act 1997

Section 118-125 of the Income Tax Assessment Act 1997

Section 118-130 of the Income Tax Assessment Act 1997

Section 118-178 of the Income Tax Assessment Act 1997

Part 3-1 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Summary

The marriage breakdown roll-over occurs and the interest you currently hold in Property Y, which is transferred to your spouse in accordance with the proposed BFA is exempt from capital gains tax under section 126-5 of the ITAA 1997.

Detailed reasoning

Section 102-20 states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset.

Under section 104-10, CGT event A1 happens if you dispose of a CGT asset. Disposal of a CGT asset happens when a change of ownership occurs from one entity to another.

CGT generally applies to all changes of ownership of assets acquired on or after 20 September 1985. Subdivision 126-A outlines the circumstances where a capital gain may be disregarded or rolled over following a marriage breakdown.

Under section 126-5, where you transfer an asset to your spouse or ex-spouse as a result of a marriage breakdown, there is an automatic roll-over in certain cases. The roll-over allows the transferor spouse to disregard any capital gain or capital loss that would be realised.

For the roll-over to apply, the CGT event must have happened because of:

• an order of a court, a court order or a financial agreement made by consent under the Family Law Act 1975 (FLA 1975), or a similar law of a foreign country, or
• a court order under a state, territory or foreign law relating to breakdown of relationship between spouses.

Under subsection 126-5(3A), there is no roll-over because of a financial binding agreement made under the Family Law Act 1975, unless the following conditions set out in section 126-25 are met:

a)    at the time of the trigger event:

                      i.        the spouses, or former spouses, involved are separated; and

                     ii.        there is no reasonable likelihood of cohabitation being resumed; and

b)    the trigger event happened because of reasons directly connected with the breakdown of the relationship between the spouses or former spouses.

Application to your circumstances

In your case, the CGT event is the time of the transfer of the interest in Property Y in accordance with the proposed Binding Financial Agreement (BFA) made under Part VIIIA of the Family Law Act 1975.

The conditions under section 126-25 are met in that you and your spouse are separated and there is no reasonable likelihood of cohabitation being resumed.

Therefore, the interest you currently hold in Property Y that is transferred to your spouse in accordance with the proposed BFA will attract the marriage breakdown roll-over and is exempt from capital gains tax for you under section 126-5 of the ITAA 1997.

Question 2

Summary

The interest in Property X that is transferred to you by your spouse in accordance with the proposed BFA is exempt from capital gains tax under the main residence exemption in subsection 118-110(1) from the date of transfer until Property X is sold (assuming it is used by you as your main residence for all of that period).

Detailed reasoning

Generally, the capital gains provisions apply when you dispose of an asset unless there is an exemption.

Section 118-110 provides an exemption for the sale of an interest in your main residence if the exemption conditions are satisfied.

One of those exemption conditions is that the sale is of (or includes) a dwelling. This is about the physical characteristics of a building that is part of the sale and applies independently to the way you used it. (Use of the building as your main residence is a different condition that must also be satisfied.)

Subsection 118-115(1) provides that a dwelling is a unit of accommodation that is a building or is contained in a building and consists wholly or mainly of residential accommodation, and the land immediately under the unit of accommodation.

'Ownership period' is defined in section 118-125 as the period on or after 20 September 1985 when you had an ownership interest in the dwelling (or land on which the dwelling is later built).

Under subsection 118-130(1) the definition of ownership interest in a dwelling includes having, relevantly, a legal or equitable interest in the dwelling.

Application to your circumstances

The interest in Property X you acquire under the BFA comes within the definition of 'dwelling' and will be used as your main residence. You are therefore eligible for the main residence exemption under subsection 118-110(1) at the time of sale provided you continue to use Property X as your main residence until that time.

Question 3

Summary

The interest you have held in Property X since XX March 20XX is exempt from capital gains tax under subsection 118-110(1) if Property X is later sold by you (assuming it is used by you as your main residence for all of that period).

Detailed reasoning

The same tax provisions apply as have been explained for question 2.

Application to your circumstances

The interest you have held in Property X since XX March 20XX comes within the definition of a dwelling and is used as your main residence. You are therefore eligible for the main residence exemption under subsection 118-110(1) at the time of sale provided you continue to use Property X as your main residence until that time.

Question 4

Summary

As Property X was not your spouse's main residence, the interest in Property X you acquire from your spouse under the BFA is subject to capital gains under Part 3-1 for the period from XX March 20XX until the date it is transferred to you (if Property X is later sold by you).

Detailed reasoning

Section 118-178 has the effect that where an ownership interest in a dwelling is acquired from a spouse that attracts the marriage or relationship roll-over, you are taken to have acquired that interest when your spouse acquired it, and you are subject to capital gains tax on that interest until the time of transfer unless your spouse was eligible for the main residence exemption during that period.

Application to your circumstances

The interest in Property X that you acquire under the BFA will attract the marriage or relationship roll-over under section 126-5 for your spouse.

Although that interest comes with the meaning of 'dwelling', it was not used by your spouse as their main residence during their period of ownership.

This means section 118-178 will apply and you will be subject to capital gains tax on that interest for that period should you later sell Property X.

Question 5

Summary

The first element of cost base will be XX% of the purchase price of Property X (being your spouse's share as you were joint purchasers) under subsection 110-25(2).

Detailed reasoning

To calculate your capital gain or loss, you will need to determine the cost base of the property.

Subsection 126-5(5) provides that the first element of the asset's cost base for a person who acquires a property that is subject to the marriage breakdown roll-over is the cost base of the transferor.

That is, the transferee spouse will "inherit" the transferor's cost base such that the cost base is the same as what the transferor spouse would have used to calculate the capital gain or loss if the asset had been sold by them instead of transferred to you under the BFA.

Section 110-25 sets out the elements that form part of the cost base. The cost base is made up of five elements:

The first element of the cost base under section 110-25 is made up of money paid or required to be paid to acquire the CGT asset.

Application to your circumstances

In your case, you will "inherit" the cost base from your spouse such that the cost base is the same as what your spouse would have used to calculate the capital gain or loss had their interest in Property X been sold by them rather than transferred to you under the BFA. Therefore, the first element of cost base for that interest under subsection 110-25(2) will be XX% of the purchase price of Property X (being your spouse's share as a joint purchaser).

Question 6

Summary

As you will "inherit" your spouse's cost base for their interest in Property X that is transferred to you under the BFA, you are able to claim any holding costs paid by your spouse from XX March 20XX until the date their interest in Property X is transferred to you. This is because these costs would have formed part of your spouse's cost base under subsection 110-25(4).

Detailed reasoning

Similar reasoning applies to what was explained for question 5. That is, the transferee spouse has a cost base that is the same as what the transferor spouse would have used to calculate the capital gain or loss if the asset had been sold by them instead of transferred under the BFA.

The third element of cost base under subsection 110-25(4) consists of non-capital costs incurred in connection with your ownership of a CGT asset. Examples are interest, rates, repairs and insurance premiums.

Application to your circumstances

Your cost base under subsection 126-5(5) is the same as what your spouse would have used to calculate the capital gain or loss if their interest had been sold instead of transferred to you under the BFA.

Therefore any holding costs paid by your spouse in the period they owned their interest in Property X, and which are of a kind described in subsection 110-25(4), will form part of your cost base for that interest in Property X.

Question 7

Summary

Division 43 write off amounts are not included in any of the five elements of cost base and therefore cannot be included in the calculation of the capital gain under Division 110 of the ITAA 1997.

Detailed reasoning

The five elements of cost base under section 110-25 are:

1. money paid or required to be paid to acquire the CGT asset.
2. incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller or buyer, fees paid to an accountant.
3. non-capital costs incurred in connection with your ownership of a CGT asset. Examples are interest, rates, repairs and insurance premiums.
4. capital expenditure you incur to increase the value of the CGT asset if the expenditure is reflected in the state or nature of the asset at the time of the CGT event.
5. the capital expenditure you incur to preserve or defend your title or rights to the asset.

Application to your circumstances

In your case, building depreciation is not included in any of the five elements of cost base under section 110-25, so cannot be included in calculating the capital gain.

Question 8

Summary

The fact that the interest in Property X that is to be transferred to you under the BFA was held by your spouse as a non-income producing passive investment is not something that forms part of how the capital gain under Part 3-1 is calculated (other than what was explained in question 4).

Detailed reasoning

There is nothing in how a capital gain is calculated under Part 3-1 where the marriage or relationship roll-over applies that takes account of the transferred property being a non-income producing passive investment in the hands of the transferor spouse.

This is other than what was explained under question 4 in that it matters whether the interest that is transferred under the BFA was the main residence of the transferor spouse during their period of ownership.

Application to your circumstances

Should you ever sell Property X, the capital gain that is calculated with respect to the interest transferred to you by your spouse under the BFA (and relating to their period of ownership) does not involve the character of their interest being a non-income producing passive investment other than it not being their main residence during that period (refer question 4).

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