Edited version of private ruling

Authorisation Number: 1011679449203

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Ruling

Subject: Cost base of capital gains tax (CGT) asset transferred by court order

1. Where the CGT asset is transferred to you because of a court order under the Family Law Act 1975 (FLA 1975), is the date of acquisition of the asset worked out in accordance with Division 109 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

2. Is the cost base of the asset calculated using the market value of the asset at the date you acquired it?

No. The cost based is calculated in accordance with section 126-5(5) of the ITAA 1997.

This ruling applies for the following period:

1 July 2008 - 30 June 2009

The scheme commences on:

1 July 2008

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.

Under consent orders, pursuant to Part 10.4 of the FLA 1975, your former spouse agreed to transfer all their right title and interest in the property to you. The transfer was contingent upon you paying to the mortgagee the funds required to discharge the existing mortgage in relation to this property.

There were no other contracts entered into to transfer title of this property.

Title of the property was transferred to you by your former spouse.

Your name was not on the deed documents for the property at any time until title was transferred.

The property was acquired by your former spouse after 20 September 1985.

Relevant legislative provisions

Family Law Act 1975

Income Tax Assessment Act 1997 Division 109

Income Tax Assessment Act 1997 Section 126-5(5)

Income Tax Assessment Act 1997 Subsection 109-5(2)

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Paragraph 104-10(3)(b)

Income Tax Assessment Act 1997 Section 126-5

Income Tax Assessment Act 1997 Subsection 126-5(5)

Income Tax Assessment Act 1997 Subsection 126-5(3) and

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

Division 109 of the ITAA 1997 sets out the ways in which you can acquire a CGT asset and the time of the acquisition. Generally, you acquire a CGT asset when you become its owner. You can also acquire a CGT asset as a result of a CGT event happening. The table at subsection 109-5(2) of the ITAA 1997 sets out the specific rules for the circumstances in which, and the time at which, you acquire a CGT asset as a result of a CGT event happening.

CGT event A1 occurs when an entity disposes of a CGT asset to you. You acquire the asset when the disposal contract is entered into or, if none, when the entity stops being the asset's owner.

Taxation Determination TD 1999/56 addresses the issue of when an asset is acquired by the transferee if a CGT asset is transferred by one spouse to another because of a court order under the FLA 1975. If a CGT asset acquired on or after 20 September 1985 is transferred, the time of acquisition of that asset by the transferee depends on the provisions of Part 3-1 and Part 3-3 of the ITAA 1999.

Paragraph 4 of TD 1999/56 explains:

A court order might be silent on when an asset is to be acquired by the transferee. It might merely specify that one spouse transfer an asset to the other spouse on or by a certain date or within a certain period of time. Regardless of the wording of the order, it is the action taken because of the court order that must be considered to determine the time of acquisition of the asset by the transferee for capital gains purposes.

Example 1 of TD 1999/56 provides a similar scenario to your circumstances. Here, as there is no contract entered into before the transfer of property, the taxpayers is taken to have acquired the property from his former spouse on the day title is transferred to him, as per paragraph 104-10(3)(b) of the ITAA 1997.

Your former spouse acquired the property after 20 September 1985, therefore, CGT principles apply.

Your former spouse transferred all their right title and interest in the property as a result of the court order under the FLA 1975. In accordance with TD 1999/56, the court order you provided is silent on when the asset was to be acquired by you. Therefore, you acquired this asset when ownership of the asset is transferred to you.

There were no other contracts entered into to transfer title of this property.

Therefore, in accordance with Division 109 of the ITAA 1997, you acquired the property on the day title was transferred.

Question 2

Under section 126-5 of the ITAA 1997 there is a roll-over if a CGT event happens involving an individual (the transferor) and his or her spouse (the transferee); or a former spouse (also the transferee), because of a court order under the FLA 1975 or under a State, Territory or foreign law relating to breakdowns of relationships between spouses.

Taxation Determination TD 1999/60 sets out that the marriage breakdown roll-over provided by section 126-5 of the ITAA 1997 is automatic if the requirements are satisfied. The provision is clearly expressed in this respect and contains no scope for any election to be made. Parties to a marriage breakdown cannot agree not to apply the provisions if the requirements have been satisfied.

The roll-over will allow the transferor to disregard a capital gain or capital loss that would otherwise arise as a result of the disposal of their interest in the asset. In effect, the transferee will make the capital gain or capital loss when they subsequently dispose of the asset.

Under subsection 126-5(5) of the ITAA 1997, if the asset was acquired by the transferor on or after 20 September 1985 and was transferred between spouses because of a court order under the FLA 1975, the first element of the asset's cost base in the hands of the transferee is the asset's cost base in the hands of the transferor at the time the transferee acquired it.

Your cost base for the property is the same as your former spouse's cost base at the time the property was transferred to you. That is, the cost base of the asset for you is the same as what your former spouse would have used to calculate the capital gain or loss if the property had been sold instead of being transferred.

You satisfy the requirements provided by section 126-5 of the ITAA 1997, as a result, the marriage breakdown roll-over is automatically applied.

Therefore, in accordance with section 126-5(5) of the ITAA 1997, you retain your former spouse's cost base for the property when you acquire it (refer to Question 1).