Edited version of private ruling

Authorisation Number: 1011678016273

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Ruling

Subject: Capital gains tax

Questions and answers

1. Are you required to pay capital gains tax on the capital gain made on the disposal of your share in an investment property?

Yes.

2. Are you entitled to a capital loss because you agreed to transfer your share of the proceeds of the sale of the investment property to your ex-spouse under a financial agreement entered into through the Family Court?

No.

This ruling applies for the following period:

Year ended 30 June 2010.

The scheme commenced on:

1 July 2009.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You and your spouse have separated.

You and your spouse owned an investment property in equal shares.

You and your spouse entered into a settlement agree under the Family Court.

The agreement dealt with the proceeds of the sale of the investment property as well as the treatment of other amounts.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-22

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-7

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 subsection 118-75(1)

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

The CGT provisions are contained in Part 3-1 and 3-3 of the ITAA 1997. CGT is the tax you pay on certain capital gains you make. You make a capital gain or a capital loss when a 'CGT event' happens (section 102-20 of the ITAA 1997). The most common CGT event A1 happens when you dispose of the asset to another party (for example disposal of a dwelling) (section 104-10 of the ITAA 1997).

Section 108-7 of the ITAA 1997 provides that individuals who hold a CGT asset as joint tenants are treated as if they were tenants in common who each owned a separate CGT asset comprising an equal interest in the asset.

Any capital gain or capital loss made upon the disposal of the asset will be based upon legal ownership. As you and your spouse had a half share ownership interest in your property, your capital gain will be based upon your ownership interest, which is 50 percent.

This is in accordance with Taxation Ruling TR 93/32, where it is stated that income from property must be shared according to legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.

Division 126 of the ITAA 1997 only provides roll-over relief when the CGT event occurs because of a transfer of the asset between spouses. If you had of transferred your interest in the investment property to your spouse that transfer may have qualified for roll-over relief.

You are assessable on your share of the capital gain made on the sale of the investment property.

In your application you refer to a C2 event occurring.

CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied; or

(c) expiring; or

(d) being abandoned, surrendered or forfeited; or

(e) if the asset is an option - being exercised; or

(f) if the asset is a convertible interest - being converted.

You reached a settlement with your spouse as part of a separation in which you both were entitled to certain amounts and you had the option to acquire your spouse's share of the family home.

You exercised the option to acquire your spouse's interest in the family home.

This meant that your spouse gave up their right to an amount equal to the amount you would have received if you had not taken up the option.

If a CGT event C2 occurred then it would seem that the capital proceeds are equal to the cost base and there would be no gain or loss.

In any event section 118-75(1) of the ITAA 1997 provides that a capital gain or capital loss you make as a result of CGT event C2 happening is disregarded if:

(a) you make the gain or loss in relation to a right that directly relates to the breakdown of a marriage or de facto marriage, and

(b) at the time of the CGT event:

(i) you and your spouse or former spouse are separated, and

(ii) there is no reasonable likelihood of cohabitation being resumed.