Edited version of private advice

Authorisation Number: 1051985592499

Date of advice: 23 May 2022

Ruling

Subject: CGT - marriage breakdown

Question

Will you be liable for capital gains tax (CGT) on the capital gain from the disposal of your ownership interest in an investment property when your ex-spouse will retain all of the proceeds of the sale?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2022

The scheme commences on:

1 July 2021

Relevant facts and circumstances

You and your ex-spouse owned an investment property.

As part of separation agreement with your ex-spouse, the property was sold.

Your ex-spouse is receiving 100% of the net proceeds from the house sale in accordance with the property division of assets

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 116-20(1)

Income Tax Assessment Act 1997 section 116-30

Income Tax Assessment Act 1997 section 126-5

Reasons for decision

Under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997), CGT is the tax that you pay on certain gains you make. You may make a capital gain as a result of a CGT event happening to an asset in which you have an ownership interest. The most common CGT event is CGT event A1. Section 104-10 of the ITAA 1997 explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of an asset to someone else.

A CGT event A1 occurred when you and your ex-spouse transferred the property to the new owner.

When considering the disposal of your interest in a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the property. In absence of evidence to the contrary, property is considered to be owned by person(s) registered on the title.

Capital proceeds

Under subsection 116-20(1) of the ITAA 1997 the 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 received, or entitled to receive, in respect of that event happening (worked out as at the time of the event).

Where on the disposal of an asset, no money or property is received, the market value substitution rule, contained in section 116-30 of the ITAA 1997, generally applies.

However, in your case money was received in relation to the sale. The fact that the money went to your ex-spouse and you did not physically receive any money does not alter the calculation of the capital gain. The money is considered to have been dealt with on your behalf, albeit as part of the settlement agreement.

Taxation Ruling TR 93/32 (TR 93/32) deals with the division of net income or loss between rental property co-owners. It states that the income/loss from the rental property must be shared according to the legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the legal interest is different from the legal title. If the equitable interest does not follow the legal title, there is some basis for the profit or loss to be distributed on the equitable and not the legal basis. However, paragraph 41 of TR 93/32 states the following:

We consider that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. We will assume where taxpayers are related, e.g., husband and wife, that the equitable right is exactly the same as the legal title.

While this ruling deals with net income or loss from a rental property, paragraph 42 explains that any capital gain or loss should be apportioned on the same basis.

The fact that the property division of assets requires the sale proceeds to be paid to your ex-spouse does not confer full legal ownership of the property on them. Such an arrangement is private in nature and has no effect for income tax purposes. That is, the capital gain from the rental property is to be shared according to your legal interest in the property.

Marriage breakdown rollover

In certain situations, the capital gain or capital loss made as a result of a CGT event can be disregarded or rolled over.

Under section 126-5 of the ITAA 1997, where you transfer an asset to your spouse or ex-spouse as a result of a marriage breakdown, there is an automatic rollover in certain cases. The rollover allows the transferor spouse to disregard any capital gain or capital loss that would be realised.

In order for the marriage breakdown rollover to apply, the CGT event must happen 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.

If the rollover applies, the spouse transferring the asset disregards any capital gain or capital loss they make on the transfer.

In your case, you did not transfer the ownership of your investment property to your ex-spouse, rather the property was sold.

The legislation specifies that rollover relief can only occur if the asset is transferred to the other spouse. Accordingly, the marriage breakdown relief provisions do not apply to your situation.

There are no other provisions that would allow you to disregard the capital gain in the circumstances you describe.

Application to your circumstances

In this case, you held a legal ownership in the investment property. CGT event A1 happened when you disposed of your ownership interest. As no exemptions apply, you will be responsible for any capital gains tax liability on the portion of the investment property you owned. It is the ownership of the asset when it is disposed of that determines the CGT liabilities, not who ultimately retains the proceeds of the sale. Therefore, you must include any capital gain made on the disposal of your ownership interest in the investment property.