Edited version of private advice

Authorisation Number: 1051945947981

Date of advice: 3 February 2022

Ruling

Subject: Capital gains tax

Question

Will the marriage breakdown roll over in section 126-5 of the Income Tax Assessment Act 1997 apply to the transfer of the share in the company?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse separated a couple of years ago.

During the year of separation, you transferred to your former spouse your share in the entity owned by your former spouse.

This transfer took place without any advice from your lawyers.

An agreement between you and your former spouse was reached, and as a result, orders were drawn up under the Family Law Act 1975.

The orders stipulated that you were to transfer your share in the entity to your former spouse.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 126-5

Reasons for decision

Section 126-5 of the Income Tax Assessment Act 1997 outlines that if an asset or an interest in an asset is transferred by a person to their spouse as a result of the breakdown of their marriage or relationship; roll-over applies provided certain conditions are met.

In order for the roll-over to apply, the CGT event must have happened because of:

•         an order of a court or court order made by consent under the Family Law Act 1975 or a similar law of a foreign country,

•         a court order under a state, territory or foreign law relating to breakdown of relationship between spouses.

•         a financial agreement made under Part VIIIA of the Family Law Act 1975,

•         an award made in arbitration referred to in section 13H of the Family Law Act 1975, or

•         something done under a written agreement that is binding because of a State law, Territory law or foreign law relating to breakdowns of relationships between spouses and 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.

Taxation Determination TD1999/53 Income tax: capital gains: if a CGT asset is transferred by agreement between spouses and a court order later sanctions its transfer, was the transfer of assets made 'because of' the court order in terms of section 126-5 or 126-15 for roll-over to apply? states that a CGT asset transferred between spouses by agreement, before a court order is made under the Family Law Act 1975 or a State, Territory or foreign law relating to de facto marriage breakdowns, is not transferred 'because of' the court order.

Therefore, if a person and their spouse divide assets under a private or informal agreement (not because of a court order, a binding financial agreement, an arbitral award or another agreement or award), the marriage breakdown roll-over does not apply. This is because the court order does not cause the CGT event (transfer) to happen.

If this occurs, the person making the transfer must take any capital gain or capital loss they make on the transfer of the asset into account in working out their net capital gain (or net capital losses carried forward to future years) on their tax return for the income year that the transfer of assets occurs.

In your case, you and your former spouse are separated. CGT event A1 occurred when you transferred the share to your former spouse. However, as the transfer of the share happened by mutual agreement before the Court Orders were finalised, the marriage breakdown relief does not apply.