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Edited version of private ruling
Authorisation Number: 1011653217747
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Ruling
Subject: Capital gains tax - marriage breakdown - disposal of rental property
Question 1
Do the capital gains tax provisions apply to the disposal of a jointly held investment property to a relative as the result of a family law ruling when there is no consideration involved?
Answer
Yes
Question 2
Are you deemed to have received the market value of the property at the time of disposal?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2010
The scheme commences on:
1 July 2009
Relevant facts and circumstances
Three taxpayers (X, Y and Z) from the one family owned an investment property.
The property was rented to a relative.
X and Y divorced.
During the divorce process the relative paid all the outgoings and mortgage commitments for the property.
As part of the divorce settlement the court ordered that the property be transferred to the relative.
The relative assumed ownership of the property mortgage.
No consideration was paid for the disposal of the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 115-25
Income Tax Assessment Act 1997 subsection 116-20(1)
Income Tax Assessment Act 1997 subsection 116-30(1)
Income Tax Assessment Act 1997 section 126-5(1)
Reasons for decision
Question 1
Summary
The transfer of the property by X Y and Z to your relative would be considered an A1 disposal of a CGT asset.
Detailed reasoning
A capital gain or loss is made if a capital gains tax (CGT) event happens. Under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity.
When considering the disposal of a CGT asset, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the asset. Property is considered to be owned by person(s) registered on the title. In this case the property was owned by your spouse, child and yourself.
The property was transferred to your relative because of a consent order under the Family Law Act 1975.
Therefore, the transfer of the property by your spouse, child and yourself to your relative would be considered an A1 disposal of a CGT asset.
Question 2
Summary
As no consideration was received for the property, you are taken to have received the market value of the property on the date the property was transferred to your relatives.
Detailed reasoning
A capital gain is realised if the capital proceeds are greater than the cost base and a capital loss is realised if the reduced cost base is greater than the capital proceeds.
Capital proceeds is defined in subsection 116-20(1) of the ITAA 1997 as the total of the money you have received, or are entitled to receive, in respect of the event happening and the market value of any other property you have received, or are entitled to receive, in respect of the event happening, worked out as at the time of the event.
Under subsection 116-30(1) of the ITAA 1997, if you received no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset that is the subject of the event. The market value is worked out as at the time of the event.
The time of the event is when you enter into the contract for the disposal, or if there is no contract, when the change of ownership occurs.
In your case the property was transferred to your relative for no consideration as provided in the court order.
Therefore, you are taken to have received the market value of the property on the date the property was transferred to your relative.
Further issues for you to consider
As your share of the property was transferred to your relative by way of the court order and not to your spouse, the rollover provisions for marriage breakdown under subsection 126-5(1) of the ITAA 1997 will not apply in this instance.
If you have held the rental property for longer than 12 months you may be eligible to reduce your share of any assessable capital gain by 50% as per section 115-25 of the ITAA 1997.