Edited version of your private ruling

Authorisation Number: 1012439698927

Ruling

Subject: Capital Gains Tax - disposal

Question 1

Are you able to have $X you paid your ex-spouse out of the proceeds of selling your property excluded from the calculation of your capital gains tax?

Answer

No.

This ruling applies for the following periods:

1 July 2011 - 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You purchased a property in 200X (Property A).

You initially lived in this property, until you decided to rent it to your parent.

You entered into a relationship a few years later.

You and your partner then purchased a property (Property B).

This relationship ended.

You entered into a Family Court Order which affected the sale of the property and granted rights to your ex-spouse.

The property you and your partner purchased together was not sold. You continue to reside in this property.

Your partner did not contribute any funds to property A.

You sold property A before the court order was made.

As a result of the sale, you made a capital gain, which you included as assessable income when you lodged your income tax return

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Subsection 104-10 (5)

Income Tax Assessment Act 1997 Section 115-15

Income Tax Assessment Act 1997 Section 100-10

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Reasons for decision

Capital gains - background

A capital gain is the difference between what it cost you to get an asset and what you received when you disposed of it.

You pay tax on your capital gains. It forms part of your income tax and is not considered a separate tax, although it is generally referred to as capital gains tax (CGT).

All assets you've acquired since tax on capital gains came into effect (on 20 September 1985) are subject to CGT unless specifically excluded.

Selling assets such as real estate or shares is the most common way you make a capital gain or capital loss. CGT also applies to intangible assets such as business goodwill.

Some of your main personal assets are exempt from CGT, including your home, car, and most personal use assets, such as furniture. CGT also doesn't apply to depreciating assets used solely for taxable purposes, such as business equipment or fittings in a rental property.

If you are an Australian resident, CGT applies to your assets anywhere in the world.

Liability for capital gains tax

A capital gain or capital loss may be made if a CGT event happens to a CGT asset. Subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) describes a CGT asset as any kind of property, or a legal or equitable right that is not property.

The most common event, CGT event A1, occurs if you dispose of a CGT asset to someone else. In your situation this will be the sale of your property (section 104-10 of the ITAA 1997).

A capital gain or capital loss is disregarded if you acquired the asset before 20 September 1985 (subsection 104-10 (5) of the ITAA 1997)

In your situation, you purchased the property after 20 September 1985. Therefore it is liable to capital gains tax.

You are liable for the capital gains tax because you purchased and owned the property. You received rent from your parent while they lived in the property. You disposed of your property albeit because of the pending court order. Therefore you are liable for any capital gains tax.

While the court order deals with the disposition of the proceeds once you receive them, it does not change the fact that they are your proceeds on the disposal of your property.

The right of your ex-spouse to some of the proceeds comes about because of the court order which deals with the disposition of all of the assets belonging to you and your ex-spouse.

Calculation of capital gains tax

Your capital gain is the proceeds you received from selling your property less the cost base of the property. For more information about calculating the cost base of your property please refer to Guide to capital gains tax 2012.

Briefly your cost base is split into the following elements:

· First element: money paid or property given for the CGT asset. For example, the price you paid for the property.

· Second element: incidental costs of acquiring the CGT asset or that relate to the CGT event. For example, stamp duty, search fees etc.

· Third element: costs of owning the CGT asset. For example, rates, repairs and insurance premiums. (Please note, these costs cannot form part of your cost base if you have already claimed a deduction for these expenses in your tax return).

· Fourth element: capital costs to increase or preserve the value of your asset or to install or move it.

· Fifth element: capital costs of preserving or defending your title or rights to your CGT asset.

Please note that if you acquired a CGT asset after 13 May 1997, the cost base of the asset does not include:

a) any expenditure in the first, fourth or fifth element that you have claimed a tax deduction for in any year or did not claim a deduction for but can still claim it because the period for amending the relevant income tax assessment has not ended, and

b) heritage conservation expenditure and landcare and water facilities expenditure incurred after 12 November 1998 that give rise to a tax offset.

You paid your ex-spouse $X from the proceeds of the sale of your property. This does not fit into any of these elements, and therefore cannot form part of your cost base.

CGT discount:

For assets held for 12 months or more before the relevant CGT event, the CGT discount applies to allow an individual to reduce their capital gain by 50%. Under section 115-15 of the ITAA 1977 to be a discount capital gain, the capital gain must result from a CGT event happening after 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999.

You purchased the property more than 12 months before the disposal; therefore you can apply the CGT discount. Your net capital gain is your capital gain multiplied by 50% (the discount rate).

From the proceeds that you received from selling your property you were ordered by the Family Courtto pay $X to your ex-spouse. This sum still forms part of the calculation of your capital gain, because it is included in the proceeds of the sale. Your subsequent dealings with the proceeds of the sale of your property under the Family Court order are private in nature.

Conclusion

You are liable for the capital gains tax with respect to the sale of Property A. The sum you were ordered by the Family Court to pay to your ex-spouse will not be excluded from the calculation of your capital gains tax.