Edited version of your private ruling

Authorisation Number: 1012126528143

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Subject: Capital gains tax - cost base - deductions

Question 1

Does the payment to your former spouse form part of the cost base of your shares in Company 'A'?

Answer:

No.

Question 2

Are you entitled to claim a deduction for interest paid to your former spouse under orders made in Family Law proceedings?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts

You and your former spouse are directors of Company 'A'.

Company 'A' operates a business.

Your former spouse holds all of the issued capital in Company 'A'.

You and your former spouse have obtained consent orders pursuant to part 10.4 of the Family Law rules under the Family Law Act 1975.

You have supplied a document which forms part of, and should be read in conjunction with this private ruling:

· The consent orders

Clause 4.1 of these orders state the following:

4.1 That in consideration of your former spouse paying a Commercial Bill when it matures you shall repay your former spouse

4.1.1 a sum of money within a set period of time;

4.1.2 Interest at the rate of 8%, calculated on the daily balance of the Principal Sum on the basis of a 365 day year.

The orders also provide that;

· Your former spouse will transfer all of their shares in Company 'A' to you.

· You will make monthly payments to your former spouse of principal and interest during the term of the loan.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Subsection 110-25(2)

Income Tax Assessment Act 1997 Subsection 110-25(3)

Income Tax Assessment Act 1997 Subsection 110-25(4)

Income Tax Assessment Act 1997 Subsection 110-25(5)

Income Tax Assessment Act 1997 Subsection 110-25(6)

Income Tax Assessment Act 1997 Section 110-35

Reasons for decision

Section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the cost base of a capital gains tax (CGT) asset consists of five elements.

The first element of the cost base, being the acquisition costs, is the total of the money paid, or required to be paid, and the market value of the property given, in respect of the acquisition. 

The second element of the cost base are the incidental costs that the taxpayer incurs in acquiring the asset of which relate to a CGT event that happens in relation to the asset (subsection 110-25(3) of the ITAA 1997). 

The third element is the non-capital costs of ownership of an asset (subsection 110-25(4) of the ITAA 1997).   A non-capital cost of ownership of an asset is any expenditure in connection with the continuing ownership of the asset. These costs include interest on money borrowed to acquire an asset, costs of maintaining, repairing and insuring an asset, rates and land tax, interest on money borrowed to refinance the money borrowed to acquire an asset, and interest on any money borrowed to finance capital expenditure incurred to increase an assets value.    

The fourth element is capital expenditure incurred to increase the value of the CGT asset (subsection 110-25(5) of the ITAA 1997).  

The fifth element is capital expenditure that you incurred to establish, preserve or defend your title to the asset, or a right over the asset (subsection 110-25(6) of the ITAA 1997). 

As per clause 4.1 of your settlement deed, the amount is to be paid to your former spouse in consideration of your former spouse paying the Commercial Bill when it matures. The amount is to be paid under the terms of the court order as part of a settlement between you and your former spouse in respect of the breakdown of your marriage rather than paid to acquire the shares in Company 'A'.

As the amount was not paid to acquire the shares in Company 'A' it cannot be included in the first element of the cost base of the shares.

The amount also does not fall within the second, third or fourth element of the cost base.

Furthermore, as there was no dispute as to ownership of the shares, it cannot be said that the settlement money could be included in the fifth element as an expense that was paid to defend your title to the asset.

Accordingly, the amount paid to your former spouse as a result of the marriage breakdown does not form part of the cost base of the shares as it was a payment made to comply with a court order that you consented to rather than a payment made for the acquisition of the shares in Company 'A'.

Section 8-1 of the ITAA 1997 allows a deduction for an expense that you incur in gaining or producing assessable income, or carrying on a business for the purpose of gaining or producing assessable income. However you cannot deduct an expense that is private or domestic in nature.

In your situation, the interest payments will be made as part of the settlement between you and your former spouse and do not have a direct nexus with your gaining or producing your assessable income. Furthermore, the interest expenses are private and domestic in nature.