Edited version of your private ruling

Authorisation Number: 1012080696104

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Subject: CGT - marriage breakdown rollover - disposal of vacant block of land - worthless shares - capital loss

Question 1: Will you be assessable for all of the capital gain made on the disposal of the block of land?

Answer: Yes.

Question 2: Did you make a capital loss on your Company A shares when the company was deregistered?

Answer: Yes.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts and circumstances

Block of land

You and your former spouse jointly acquired a vacant block of land after 20 September 1985.

You and your former spouse incurred costs when acquiring the block of land.

The funding to acquire the block was sourced from proceeds from a settlement amount your former spouse had received from the Commonwealth Government as a result of receiving injuries during their employment.

No improvements were made to the block of land during either you or your former spouse's ownership periods.

You and your spouse separated after a number of years and you and your former wife entered into a Deed of Settlement in the Federal Magistrates Court.

The Court Order provided that your former spouse would transfer her share in the vacant block of land to you and that you would put the block of land on the market within a specified period and that you both would receive specified amounts from the capital proceeds from the disposal of the block of land.

The Court Order also provided that your former spouse would transfer their ownership interest in their Company A shares to you and that the loss from those shares would be offset against the capital gain made on the disposal of the block of land. Under the Court Order, your former spouse would pay by cheque to the Australian Taxation Office half of the capital gains tax to be paid by you in relation to the disposal of the block of land, after the adjustment for the capital losses made in relation to the Company A shares.

Your former spouse transferred their ownership interest in the block of land into your name in compliance with the Court Order.

You and your former spouse incurred numerous expenses in relation to the dwelling during both of your ownership periods.

The block of land was disposed of a number of years later, with a number of expenses incurred in relation to the disposal of the block of land.

The capital proceeds from the disposal of the block of land were distributed in compliance with the Court Order.

You made a capital gain on the disposal of the block of land.

Company A shares

You and your former spouse acquired a number of ordinary shares in Company A after 20 September 1985.

After a short period of time, you and your former spouse acquired additional shares in Company A.

A number of years later, your Company A shares were re-issued due to an accounting error, under which you received two parcels of a smaller number of ordinary shares, with each parcel valued at the same amount as your original shares.

Company A went into liquidation a number of years later, and the company was deregistered.

You marriage settlement court order made in the Federal Magistrates Court provides that your former spouse transfer their interest in the jointly owned Company A shares to you.

Your former spouse did not transfer their Company A shares into your name in compliance with the court order.

You have provided copies of a number of documents, which form part of, and should be read in conjunction with this private ruling.

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 104-25

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-15

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-30

Income Tax Assessment Act 1997 Section 115-100

Income Tax Assessment Act 1997 Section 126-5

Reasons for decision

Vacant block of land

You make a capital gain or capital loss when a capital gains tax (CGT) event happens to a CGT asset.

For CGT purposes, you are considered to own two separate assets in relation to the block of land. The first CGT asset will be the interest in the property that you acquired when the property was originally purchased by you and your former spouse. Your second interest was acquired when your former spouse transferred their share in the vacant block of land to you in compliance with the court order.

Original 50% ownership interest

In your case, you and your former spouse jointly acquired the vacant block of land. The cost base of your original 50% ownership interest will include the following amounts:

· First element - money given for asset

The first element of the cost base of your original interest will be 50% of the acquisition price.

· Second element - Costs incurred when acquiring and disposing of the property

The second element of your cost base will include the following amounts:

Half of the expenses incurred in relation to the acquisition of the property, such as real estate agent's fees, stamp duty, costs of advertising, and search fees; and

Any expenses you incurred when disposing of the property.

· Third element - Costs of owning the asset

The third element of your cost base will include half of the expenses incurred during your ownership of the property such as council rates, water rates, emergency levy and land tax.

50% ownership interest acquired from your former spouse as a result of a marriage breakdown

Where you transfer an asset to your spouse as a result of a marriage breakdown, there is automatic roll-over where the transfer occurs because of a court order. The roll-over allows the transferor spouse to disregard a capital gain or capital loss that would otherwise arise. In effect, the one who receives the asset will make the capital gain or capital loss when they dispose of it. 

Where the asset is transferred because of a court order, the person receiving the asset is taken to have acquired it at the time of transfer for the cost base of their former spouse.

In your situation, you will be taken to have acquired your former spouse's ownership interest in the block of land on the date it was transferred to you, for your former spouse's cost base.

Your former spouse's cost base will include the following amounts:

· First element - money given for asset

The first element of your former spouse's cost base will be 50% of the acquisition price.

· Second element - Costs incurred when acquiring and disposing of the property

The second element of your former wife's cost base will include the following amounts:

Half of the expenses incurred in relation to the acquisition of the property, such as real estate agent's fees, stamp duty, costs of advertising, and search fees; and

Any expenses your former spouse incurred when transferring the property into your name.

· Third element - Costs of owning the asset

The third element of your former spouse's cost base will include half of the expenses incurred during their ownership of the property such as council rates, water rates, emergency levy and land tax

Disposal of the block of land

You make a capital gain on the disposal of a CGT asset if the capital proceeds you receive from the disposal are more than the cost base of the asset. You make a capital loss it the capital proceeds received from the disposal are less than the reduced cost base of the asset.

When considering the disposal of your interest in a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property. In absence to the contrary, property is considered to be owned by person(s) registered on the title, but it is possible for legal ownership to differ from beneficial ownership.

You disposed of the block of land, and as your name was the sole name on the title when the property was disposed of, you are viewed as being the sole owner of the property when it was disposed of. Therefore, you are liable for the capital gain made on the disposal of the property and it must be included in your 2010-11 income tax return.

The capital gain will be calculated as the difference between the capital proceeds you received for the disposal of the property and the combined cost bases of the property, being your original 50% ownership interest cost base and the cost base of the your former spouse's 50% ownership interest.

While we acknowledge that the court order outlined that your spouse must pay half of any capital gain made on the disposal of the property, this was a personal arrangement which is not enforceable by the Australian Taxation Office. Therefore, for CGT purposes you are liable for all of the capital gain made on the disposal of the block of land as you owned 100% of the property when it was disposed of and the capital gain must be included in your assessable income in the 2010-11 income year.

Normally, you would have to own the property for at least 12 months before you qualified for the 50% CGT discount if you made a capital gain from its sale.

The effect of marriage breakdown roll-over is to count the period that your former spouse owned the property when determining whether you have owned it for at least 12 months. (That means you qualify for the 50% CGT discount if the combined periods of ownership of you and your former spouse are at least 12 months.)

In your case, you will be able to apply the 50% discount to the capital gain made on the disposal of both your original 50% ownership interest in the block of land and the 50% ownership interest transferred to you from your former spouse.

 Company A shares

Company converts shares into a larger or smaller number of shares

If a company coverts its shares into a larger or smaller number of shares, no CGT event happens to the shareholder's original shares for CGT purposes. The converted shares have the same date of acquisition as the original shares to which they relate.

Where the original shares were acquired on or after 20 September 1985, the cost base of the original shares is apportioned to the new shares cost base.

Cancelling original share certificates and replacing them with new certificates as part of any conversion process does not change the result above, unless there is also a cancellation or redemption of the original shares.

In your case, you and your former spouse jointly purchased a number of Company A shares. The company later re-issued a smaller number of shares to you and your former spouse which had the same value as your original shares.

As the shares were re-issued, and not cancelled, the new shares retain the same date of acquisition, and the cost base of your original shares will be apportioned to the new shares.

Deregistration of company

You can make a capital loss when a company is deregistered in accordance with Corporations Law as your ownership of that company's shares ends at that time due to them being cancelled. You may make your capital loss before the company is deregistered in the case of shares in a company in liquidation that are declared worthless by the liquidator if you choose to claim the capital loss at the time of the declaration.

Generally, you make a capital loss if your reduced cost base is greater than your capital proceeds. A capital loss is applied to any capital gain made in the same income year, and any unapplied capital losses are carried forward to the following income years to offset any future capital gains.

In your case, you did not receive a written declaration from the liquidator of Company A declaring that your shares in the company were worthless. Therefore, you made a loss on your Company A shares when the company was deregistered.

Your capital loss will be calculated as your interest of the shares purchase price, plus any incidental costs you incurred when you acquired your interest in the Company A shares.

While the court order outlined that your former spouse's share of the Company A shares would be transferred to you, and that you could offset any capital loss made in relation to those shares against the capital gain made on the disposal of the block of land, your former spouse did not transfer their interest in the Company A shares to you. Therefore, your former spouse, as the owner of those shares has made the capital loss. As a result, you can only offset the capital loss made on your Company A shares against the capital gain made on the disposal of the block of land.