Edited version of your written advice

Authorisation Number: 1012936357230

Date of advice: 13 January 2016

Ruling

Subject: CGT - marriage breakdown, cost base and disposal of property

Questions and answers

1. Does the first element of the cost base, of the property, in the hands of the transferee, include the transferors cost base of their 50% in the property, at the time the transferor transfers the asset to the transferee?

Yes.

2. Is the timing of the Capital Gains Tax event the date the contract was entered into?

Yes.

3. Are the costs incurred from the sale of the property included in the cost base for the financial year?

Yes.

4. Are improvements/renovations made to the property throughout xx financial year to xx financial year included in the cost base?

Yes.

This ruling applies for the following period

1 July 20XX to 30 June 20YY

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You and your former spouse acquired an investment property in joint names. You and your spouse each have a 50% interest in the property.

The property was a rental property.

Between the years, xx and xx the property was, improved/renovated.

You and your former spouse separated.

The market value of the property was determined by an independent valuer.

The property was transferred into your name through a Family Law Court Settlement. As per the Family Court Settlement your spouse received their part of the settlement in cash.

You began to reside in the property and remained there until xx when you again used the property to produce income.

In the financial year ended xx the property was contracted for sale and settled in the financial year ended xx.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 110-25

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

Income Tax Assessment Act 1997 Section 126-5

Income Tax Assessment Act 1997 paragraph 126-5(5)(a)

Reasons for decision

The Capital Gains Tax (CGT) provisions are contained in Part 3-1 and 3-3 of the ITAA 1997. Under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) you make a capital gain or a capital loss when a 'CGT event' happens. The most common CGT event A1 happens when you dispose of the asset to another party (for example disposal of a dwelling) (section 104-10 of the ITAA 1997).

For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset for example, if you sell an asset for more than you paid for it, the difference is your capital gain.

Under section 104-10 of the ITAA 1997 CGT event A1 will happen where a CGT asset is disposed of under a contract. Paragraph 104-10(3)(a) of the ITAA 1997 provides that the time of the event is when the contract is entered into for the disposal, not when settlement takes place.

Marriage breakdown rollover

Generally, CGT applies to all changes of ownership of assets on or after 20 September 1985. However, under section 126-5 of the ITAA 1997 if an asset is transferred to you as a result of a marriage breakdown, there is automatic roll-over in certain cases (you cannot choose whether or not it applies).

However, for roll-over to apply in relation to a disposal of an asset to a spouse, the following conditions must be met:-

• the transfer must happen because of an order or court order make by consent under the Family Law Act 1975 (FLA 1975) or a similar law of a foreign country,

• a maintenance agreement approved by a court under section 87 of that Act for a similar agreement under a foreign law, or

• a court order under a State, Territory or foreign law relating to de facto marriage breakdowns.

In effect, the one who receives the asset will make the capital gain or loss when they dispose of the asset.

Under paragraph 126-5(5)(a) of the ITAA 1997, for the disposal of an asset acquired by the transferor 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.

Cost base

In working out your capital gain, you determine the cost base of the CGT asset involved in the CGT event.

Section 110-25 of the ITAA 1997 sets out the elements that form part of the cost base; the cost base is made up of five elements:

1. The first element is made up of money paid or required to be paid to acquire the CGT asset.

2. The second element will include incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller or buyer, fees paid to an accountant.

3. The third element consists of non-capital costs incurred in connection with your ownership of a CGT asset. Examples are interest, rates, repairs and insurance premiums. These costs cannot be indexed or used to work out a capital loss. Do not include expenditure for which you have claimed, or could be allowed, a deduction for income tax purposes in any year.

4. The fourth element includes capital expenditure you incur to increase the value of the CGT asset if the expenditure is reflected in the state or nature of the asset at the time of the CGT event.

5. This includes capital expenditure you incur to preserve or defend your title or rights to the asset.

Element 4

Under subsection 110-25(5) it provides that the fourth element of the cost base of a CGT asset is that capital expenditure incurred to increase the asset's value, provided that expenditure Is reflected in the state and nature of the asset at the time of the CGT event.

ATO Interpretative Decision ATO ID 2001/665 Capital gains tax: Cost base: fourth element of cost base expresses the ATO view on expenditures that can be included in the fourth element of the cost base.

That is, for expenditure to be included in the fourth element of the cost base under subsection 110-25(5) of the ITAA 1997, it must be incurred 'to' enhance the value of the asset. It is immaterial whether or not the expenditure in fact enhances the value of the asset.

Application to your circumstances

Marriage breakdown and cost base

CGT event A1 occurred when your spouse transferred his 50% interest in the investment property into your name. However, as the transfer of the property, to you, was done under a Family Law Court Settlement there is an automatic marriage breakdown, which applies to your spouse's 50% interest in the property and the CGT event is disregarded.

Consequently, the first element of the cost base of the property will be your spouse's cost base; their 50% interest in the property plus any other elements of the cost base which may apply, at the time the asset was transferred to you under the Family Law Court Settlement. However, this does not include your spouse's share of the market value of the property.

For example

M and J purchased a property in, in joint names; each has a 50% interest. M and J's marriage breaks down and through a Family Law Court Settlement agree that Mark will transfer his 50% interest in the property to J.

Because there is a Family Law Court Settlement the CGT marriage breakdown rollover automatically applies to disregard the CGT A1 Event, when the property is transferred to J.

Consequently, the first element of the property's cost base in J's hands will be M's cost base at the time of transfer, being M's 50% share in the property when it was acquired, plus any elements of the cost base that may be included up to the time of transfer (but not including expenditure for which M had claimed, or could be allowed, a deduction for income tax purposes in any year under element 3).

Timing of the CGT Event and elements of the cost base

You entered into a contract for sale of the property in the financial year ended xx, however it did not settle until xx financial year, accordingly, the timing of the CGT event will be when you entered into the contract for sale.

You incurred costs from the sale of the property; under the second element you may include incidental costs in relation to the CGT event, for example agent's commission, advertising to find a buyer, fees paid to an accountant.

Between the years xx and xx the property was improved/renovated, as long as the improvement expenditure is reflected in the state or nature of the asset, not necessarily in its value, at the time of the CGT event, the expenditure would qualify for inclusion in the fourth element of the cost base.