Edited version of your private ruling

Authorisation Number: 1012504902436

Ruling

Subject: Capital gains tax - marriage breakdown roll-over

Question 1

Are you liable for any capital gain made on the property being transferred into your name on the date of transfer?

Answer:

No

Question 2

Will the liability for any capital gain be deferred until the transferred property is later sold?

Answer:

Yes

Question 3

Will you be able to claim the main residence exemption, on a pro-rata basis, for the period from when it was transferred to you from the trust, to be your principal place of residence, until the later disposal of the property?

Answer:

Yes

This ruling applies for the following period

Year ending 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· your application for private ruling

· copy of the Family Court consent order

You are associated with a family trust that owned two investment properties.

A marriage breakdown occurred.

As part of the divorce settlement, one property was sold and the other will be transferred into your name, to be your principal place of residence.

The transfer will happen because of a consent order under the Family Law Act 1975.

The settlement provides that all capital gains tax (CGT) liabilities are to be distributed to you.

You stated that the trust is liable for the CGT on the sold property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 126-A

Income Tax Assessment Act 1997 Section 126-5

Income Tax Assessment Act 1997 Section 126-15

Income Tax Assessment Act 1997 Section 118-180

Income Tax Assessment Act 1997 Section 118-185

Reasons for decision

Detailed reasoning

Marriage or relationship breakdown roll-over

A same asset roll-over involves the transferral of an asset from one taxpayer to another. It allows a taxpayer to defer the making of a capital gain from such a CGT event until such time as a later event occurs in respect of the asset.

Subdivision 126-A of the ITAA 1997 considers same asset roll-overs in the context of marriage breakdown. Section 126-5 of the ITAA 1997 states there is a roll-over if a CGT event (the trigger event) happens involving an individual (the transferor) and his or her spouse (the transferee), or a former spouse (also the transferee) because of:

(a) a court order under the Family Law Act 1975 or under a State law, Territory law or foreign law relating to breakdowns of relationships between spouses; or

(b) a maintenance agreement approved by a court under section 87 of the Family Law Act 1975 or a corresponding agreement approved by a court under a corresponding foreign law; or

(c) (Repealed by No 144 of 2008)

(d) something done under:

i. a financial agreement made under Part VIIIA of the Family Law Act 1975 that is binding because of section 90G of that Act; or

ii. a corresponding written agreement that is binding because of a corresponding foreign law; or

(da) something done under:

i. a Part VIIIAB financial agreement (within the meaning of the Family Law Act 1975) that is binding because of section 90UJ of that Act; or

ii. a corresponding written agreement that is binding because of a corresponding foreign law; or

(e) something done under:

i. an award made in an arbitration referred to in section 13H of the Family Law Act 1975; or

ii. a corresponding award made in an arbitration under a corresponding State law, Territory law or foreign law; or

(f) something done under a written agreement:

i. that is binding because of a State law, Territory law or foreign law relating to breakdowns of relationships between spouses; and

ii. that, because of such a law, prevents a court making an order about matters to which the agreement applies, or that is inconsistent with the terms of the agreement in relation to those matters, unless the agreement is varied or set aside.

Subsection 126-5(4) of the ITAA 1997 states that a capital gain or a capital loss the transferor makes from the CGT event is disregarded.

Subsection 126-15(1) of the ITAA 1997 provides that 'there are the roll-over consequences in section 126-5 if the trigger event involves a company (the transferor) or a trustee (also the transferor) and a spouse or former spouse (the transferee) of another individual because of…'. The subsection then proceeds to list those same qualifying court orders and agreements as detailed in section 126-5 of the ITAA 1997.

In your case, the trigger event is the CGT event pertaining to the disposal of the property. Based on the information provided, the transfer of the property will happen because of a consent order under the Family Law Act 1975.

Accordingly, the roll-over provisions in Subdivision 126-A of the ITAA 1997 will be available to the trust and will apply to the transfer of the property. Therefore, any capital gain made by the trust (the transferor) will be disregarded under subsection 126-5(4) of the ITAA 1997.

Position of transferee (you)

Subsection 126-5(5) explains that, for a disposal case where the transferor acquired the asset on or after 20 September 1985, the first element of the asset's cost base (in the hands of the transferee) is the asset's cost base (in the hands of the transferor) at the time the transferee acquired it.

Main residence exemption

Subsection 118-180(1) of the ITAA 1997 provides that the main residence exemption applies as if a taxpayer owned an ownership interest in land or a dwelling during a period when it was actually owned by a company or trustee if:

· the taxpayer acquired the interest from the company or trustee;

· it was acquired by the company or trustee on or after 20 September 1985; and

· marriage breakdown rollover was available to the company or trustee under Subdivision 126A of the ITAA 1997.

In this event, a dwelling cannot be treated as the taxpayer's main residence during the period, despite other provisions of the main residence exemption that would allow the taxpayer to treat it as his or her main residence during the period (subsection 118-180(2) of the ITAA 1997).

This provision has two effects:

1) the taxpayer is treated as having owned the asset transferred at all times during the period it was owned by the company or trustee; and

2) a dwelling to which the asset relates is not to be treated as the main residence of the taxpayer during any part of the period that the asset was in fact owned by the company or trustee.

The effect of deeming the taxpayer to have owned the asset during the period it was owned by the company or trustee is that the ownership period in relation to the taxpayer commences at the time the asset was acquired by the company or trustee. Thus, where a dwelling is transferred by a company or trustee to the taxpayer and the dwelling was acquired by the company or trustee after 19 September 1985, the taxpayer will obtain at best a partial main residence exemption. That is, the person is not entitled to a main residence exemption for the period that the dwelling was owned by the company or trust.

As a result, the dwelling can only be treated as the taxpayer's main residence for the period from when the taxpayer actually owned the property. This means that, on a subsequent disposal by the taxpayer, the dwelling will only qualify for a partial exemption in accordance with section 118-185 of the ITAA 1997, as the dwelling is not taken to be the taxpayer's main residence throughout the taxpayer's ownership period.

Subsection 118-185(1) of the ITAA 1997 explains that you get only a partial exemption for a CGT event that happens in relation to a dwelling or your ownership interest in it if:

a) you are an individual; and

b) the dwelling was your main residence for part only of your ownership period; and

c) the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

Subsection 118-185(2) provides that you calculate your capital gain or loss using the formula:

where:

· CG or CL amount is the capital gain or capital loss you would have made from the CGT event apart from this Subdivision.

· Non-main residence days is the number of days in your ownership period when the dwelling was not your main residence.

Accordingly, you will only be entitled to a partial main residence exemption for the period from when it was transferred to you from the trust (to be your principal place of residence) until the later disposal of the property.