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Subject: capital gains tax - marriage breakdown - disposal - cost base - capital gain

Question: Will you be entitled to reduce the amount of capital proceeds received for the disposal of your dwelling by the amount paid to your former spouse as part of a family agreement?

Answer: No.

This ruling applies for the following period

Income year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You purchased a dwelling located in an overseas country after 20 September 1985, which was registered in your name.

You stayed in the dwelling when you went to the country on holidays.

Your marriage broke down and a family agreement was made at the time of the divorce whereby you would pay your former spouse an agreed percentage of the capital proceeds when the dwelling was disposed of.

The family agreement did not arise because of a court order.

You disposed of the dwelling, and in compliance with the family agreement, have paid your former spouse the agreed percentage of the capital proceeds you received from the disposal of the dwelling.

You made a capital gain on the disposal of the dwelling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 126-5(1)

Income Tax Assessment Act 1997 Subsection 126-5(2)

Reasons for decision

You may make a capital gain when a capital gains tax (CGT) event occurs to a CGT asset. The most common CGT event is CGT event A1 which occurs when your ownership interest in a dwelling is transferred to another entity.

Where you transfer an asset to your spouse as a result of a marriage breakdown, there is automatic roll-over in certain cases when the necessary conditions have been met. The roll-over allows the transferor spouse to disregard a capital gain or capital loss that would otherwise arise.

The following conditions must be met for the roll-over to apply:

· the transfer must happen because of an order or court order made by consent under the Family Law Act 1975 (FLA 1975) or a similar law of a foreign country;

· a maintenance agreement approved by a court under section 87 of that Act or a similar agreement under a foreign law; or

· a court order under a State, Territory or foreign law relating to de facto marriage breakdowns.

Application to your case

In your case, you purchased a dwelling located in an overseas country after 20 September 1985, where you stayed when on holidays in country. The dwelling was registered in your name only.

Your marriage broke down and you made a family agreement under which you would pay your former spouse an agreed percentage of the capital proceeds when you disposed of the dwelling.

You disposed of the dwelling and CGT event A1 occurred. You paid your former spouse the agreed percentage of the capital proceeds you had received from the disposal of the dwelling.

You did not transfer your ownership interest in the dwelling to your former spouse, but disposed of the dwelling. Therefore, as none of the conditions listed above for a roll-over to apply have occurred, you will not be eligible for marriage breakdown roll-over.

You are not eligible for any other exemptions in relation to the disposal of your ownership interest in the dwelling. As none of the CGT exceptions apply, you are responsible for any CGT liability in relation to the disposal of the dwelling. It does not matter that you did not keep all of the sale proceeds from the disposal of the dwelling as it is ownership of the asset when it was sold that counts.

It is viewed that you received all of the capital proceeds from the disposal of the dwelling. The fact that you have paid part of the capital proceeds to your former spouse does not alter the ownership of the dwelling when it was disposed of, and the payment is viewed as a personal agreement which does not affect your taxation liability. How you dealt with the capital proceeds once you received them was entirely at your discretion.

While we appreciate and acknowledge your circumstances, there is no legislation under the CGT provisions to enable you to reduce your capital proceeds by the amount you paid to your former spouse. Therefore, the capital gain you have made on the disposal of your overseas dwelling will be the difference between the full amount of capital proceeds you received from the disposal of the dwelling and the cost base of your dwelling.