Edited version of your written advice

Authorisation Number: 1012737165363

Ruling

Subject: Capital gains tax - marriage breakdown

Question 1

Will capital gains tax (CGT) event A1 occur as a result of the disposal of the property?

Answer

Yes

Question 2

Will CGT event C2 occur as a result of the satisfaction of the court order?

Answer

Yes, however any capital gain or loss will be disregarded.

Question 3

Will section 102-25 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to treat CGT event C2 as the most relevant CGT event?

Answer

No, CGT event C2 occurs in addition to CGT event A1.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

You and your spouse held an interest in a rental property (the property).

Your marriage had broken down irretrievably.

The separation resulted in several years of litigation.

Court orders issued that ordered that the property be sold and the proceeds be placed in a controlled money account.

The property was sold at auction. On completion of the sale, the net proceeds were held in a controlled money account as per the court orders.

Subsequent orders were made. Pursuant to those orders a percentage of the monies held in the controlled money account were to be distributed to you.

You received the payment at which time the order in relation the property was satisfied

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-25

Income Tax Assessment Act 1997 Section 103-10

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 118-75

Reasons for decision

CGT event A1

CGT event A1 occurs when you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity (subsection 104-10(2) of the ITAA 1997).

In this case you held an ownership interest in Darlington. As a result of the sale of Darlington CGT event A1 occurred in relation to your interest.

Capital proceeds

Generally capital proceeds from a CGT event are the total of:

• The money you have received, or are entitled to receive, in respect of the event happening; and

• The market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).

Section 103-10 of the ITAA 1997 provides that you will be taken to have received an amount as capital proceeds if it has been applied for your benefit (including by discharging all or part of a debt you owe) or as you direct, or if you are entitled to have it so applied.

In this case, an amount of capital proceeds were received in relation to your interest in the property. As required under the court order the net proceeds were transferred into a controlled money account.

We consider that your share of the capital proceeds were applied for your benefit to discharge your obligations under the court order and other costs relating to the disposal. Accordingly, your capital proceeds from CGT event A1 will be the proportion of the proceeds from the sale that represented your interest in the property.

Further issues for you to consider: The market value substitution rule for capital proceeds is contained in section 116-30 of the ITAA 1997. It provides that where you have received no capital proceeds from a CGT event you are taken to have received the market value of the CGT asset that is the subject of the event (worked out as at the time of the event).

CGT event C2

CGT event C2 occurs if your ownership of an intangible asset ends by the asset being cancelled, satisfied or abandoned (section 104-25 of the ITAA 1997).

However, any capital gain you make from CGT event C2 is disregarded if it is relation to a right that directly relates to the breakdown of a relationship between spouses and at the time of the event you and your spouse are separated and there is no likelihood of cohabitation being resumed (section 118-75 of the ITAA 1997).

In this case, you acquired an intangible asset, being the right to receive an amount, as a result of the court order. When the payment was made to you, this right was satisfied and CGT event C2 occurred.

However, as the right related directly to your marriage breakdown, any capital gain or loss you make from CGT event C2 will be disregarded in accordance with section 118-75 of the ITAA 1997.

Most relevant event

If more than one CGT event occurs in respect of a transaction, the most specific CGT event should be applied (subsection 102-25(1) of the ITAA 1997).

Subsection 102-25(1) of the ITAA 1997 will only apply when more than one event could apply to one transaction. For example where an asset is disposed of to an existing trust, CGT event A1 and CGT event E2 both occur in relation to the same transaction.

In this case you had two separately identifiable CGT assets; your interest in the property and the rights under the order. We consider the disposal of these two assets occurred as a result of two separate transactions. The first being the disposal of the property and secondly, at a later date the satisfaction of the rights you acquired under the order.

In this case, the two CGT events, A1 and C2, relate to different transactions. Accordingly section 102-25 of the ITAA 1997 will have no application and both CGT events will occur, however as discussed, any gain you make from CGT event C2 will be disregarded.