Edited version of your private ruling

Authorisation Number: 1012015525385

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Subject: capital gains tax - main residence - marriage breakdown - dependant child - ownership interest

Question 1: Did a CGT event occur when the dwelling was disposed of?

Answer: Yes.

Question 2: Will you be liable for any capital gain made on the disposal of your share of the dwelling?

Answer: Yes.

Question 3: Will you be eligible to disregard any capital gain made on the disposal of the dwelling under the marriage breakdown rollover?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

Your former-spouse received a posting to an overseas country.

You and your former spouse moved overseas, and retained your ownership of your dwelling in Australia for about a year after moving overseas before it was decided that the Australian dwelling would be disposed of.

During your period overseas, you stayed in rented accommodation.

A number of year later, while still residing overseas, you and your former spouse purchased a dwelling (Dwelling A) with the intention of returning to Australia.

Your adult child was studying at a University at the time Dwelling A was purchased. Your child was financially dependent upon you and your former spouse, and moved into the dwelling.

You stayed in Dwelling A when you visited Australia.

You and your former spouse separated a number of months after Dwelling A was acquired. You were still living overseas when the separation occurred.

You returned to Australia a number of months later and moved into Dwelling A as you required accommodation.

You kept your personal belongings with you at Dwelling A, with your other belongings not having arrived from overseas.

Your mail was sent to Dwelling A.

The utilities for Dwelling A were in joint names, being you and your former spouse.

Court orders were handed down by the Australian Family Court in relation to the property settlement a number of months later where it was stated that Dwelling A would be disposed of after your child had completed their University studies, with you receiving the total equity in the dwelling from the disposal.

You moved out Dwelling A after living there for around one month and moved into a rented unit.

You enrolled on the Australian Electoral Roll after moving into your rented unit.

You commenced a relationship after a period of time, with your partner living in their own residence.

Your child completed their University studies and it was mutually agreed between you and your former spouse that your child could remain in Dwelling A for a further period of time.

You and your former spouse were formally divorced.

The lease on your rented unit expired, and your and your new partner commenced living together..

A number of months later, you purchased a property jointly with your new partner, which became your main residence.

Your former spouse agreed to commence paying you for your court ordered entitlement in the equity of Dwelling A so that your child could continue living there, and you would receive sufficient monies to pay for the mortgage finance on your new property. An amount of your equity in Dwelling A was agreed upon and your former spouse advanced an agreed amount to you each month until the agreed amount was paid, after which you had no further claim on the equity in Dwelling A.

Your child moved out of Dwelling A after a period of time, and the dwelling was disposed of.

The title of Dwelling A was still in joint names at the time of disposal, with you and your former spouse signing the contract of sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-175

Income Tax Assessment Act 1997 Section 126-5

Reasons for decision

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

The CGT provisions will generally apply whenever you sell or transfer an interest you own in a dwelling to someone else.  

There are exceptions to the general rule about the application of the capital gains provisions. For example, under section 126-5 of the Income Tax Assessment Act 1997 (ITAA 1997), any capital gain or capital loss you make is disregarded when the relevant conditions are met on the transfer or disposal of a CGT asset as a result of a marriage breakdown. The conditions would be met if the sale or transfer is brought about as a result of a Court order issued under the Family Law Act 1975, and the asset is transferred to your former spouse.

In your case, you and your former spouse received a court order which outlined that your child could continue living in Dwelling A until they had finished their University studies. The dwelling would then be disposed of and you would receive the proceeds.

You and your former spouse made an arrangement under which your former spouse would pay you monthly amounts for your court ordered entitlement in the equity of the dwelling.

We view that the payment arrangement was a private agreement that you and your former spouse made between yourselves. It did not result in you disposing or transferring your ownership in the dwelling to any other entity, such as your former spouse. Therefore, as your ownership interest in Dwelling A was not transferred or disposed of, and you do not meet the relevant conditions, the marriage breakdown exception does not apply to your ownership interest in Dwelling A.

Another exception to the general rule is the main residence exemption available under section 118 -110 of the ITAA 1997. Any capital gain or capital loss you make is disregarded if the dwelling was your main residence for the whole of your period of ownership.

You must have resided in the dwelling to be able to get the main residence exemption, whether a full exemption or a partial exemption. A mere intention to occupy a dwelling as your main residence, but without actually doing so, is insufficient to obtain the exemption.

In your case, you and your former spouse acquired Dwelling A with the intention of returning to Australia. Your child moved into the dwelling and you stayed there when visiting Australia. Upon your return to Australia, you required accommodation and moved into Dwelling A. You lived there for around one month before moving into a rented unit.

Based on the facts of your situation, it is viewed that you used Dwelling A as a transitional place to stay for the period from when you returned to Australia until you found a more permanent residence, being the rented unit. Therefore, the main residence exemption will not apply as it is not viewed that Dwelling A was your main residence for the period you lived there.

Section 118-175 of the ITAA 1997 outlines that if you and a dependant child under 18 years old have different dwellings for a period, you must choose one of the dwellings as the main residence for both of you for the period.

As your dependant child was over 18 years old when they moved into the Dwelling A, you cannot choose Dwelling A as your main residence under this provision.

As outlined above, CGT event A1 occurs when you dispose of your ownership interest in a CGT asset. When considering the disposal of your interest in a dwelling, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner/s of the dwelling. Unless there is evidence to the contrary, a dwelling is considered to be owned by person/s registered on the title.

Dwelling A was disposed after your child moved out, with the title still in joint names. CGT event A1 occurred when the dwelling was disposed of. While you received payments from your former spouse in relation to your equity in Dwelling A, as outlined above, your ownership interest in Dwelling A was neither transferred nor disposed of and your name remained on the title of the dwelling.

Therefore, as none of the exceptions to the general rule apply, you, as joint owner are responsible for any capital gains liability on the portion of the dwelling that you owned at the time the dwelling was disposed of. You must include any capital gain made on the disposal of your share in Dwelling A in your 2010-11 income tax return.