Edited version of private advice

Authorisation Number: 1052053312784

Date of advice: 14 November 2022

Ruling

Subject: CGT - marriage breakdown

Question 1

Does the marriage or relationship breakdown rollover under section 126-5 of the Income Tax Assessment Act 1997 apply in your situation?

Answer

No. The rollover provision applies where one person's interest in the property is transferred to the other person. Your interest was not transferred under the Court Orders.

Question 2

Are you exempt from paying capital gains tax (CGT) because of your circumstances?

Answer

No. Unless you elect to treat the property as your main residence.

This ruling applies for the following period:

The income year ended 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

You separated from your ex-spouse on DD MM YYYY and divorced approximately X years later.

At the time of separation, you owned 2 properties with your ex-spouse, Property 1 and Property 2.

Property 1 was the family home of you and your ex-spouse. Your ex-spouse stayed in Property 1 following the separation and maintained the mortgage over Property 1.

You moved into Property 2 around the time of the separation and maintained the mortgage over Property 2.

Pursuant to Court Orders, Property 1 was to be sold and your ex-spouse was to receive all the profit or loss from the sale.

Property 1 was sold to a third party.

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 118-110

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-185

Income Tax Assessment Act 1997 section 126-5

Reasons for decision

CGT event A1

CGT is the tax that you pay on certain gains you make. You may make a capital gain when a CGT event happens to an asset that you have an ownership interest in. The most common CGT event is CGT event A1. Section 104-10 of the ITAA 1997 explains that CGT event A1 occurs whenever there is a change in the ownership of a CGT asset, for example, when you dispose of an asset to someone else.

CGT event A1 occurred when you and your ex-spouse entered into a contract to sell Property 1 to the new owner.

When calculating the capital gain or capital loss from the sale of a property, it is important to determine who the legal owner of the property is. In the absence of evidence to the contrary, property is considered to be owned by the person(s) registered on its legal title.

Capital proceeds

Under subsection 116-20(1) of the ITAA 1997, your capital proceeds from a CGT event include the total of the money you have received, or are entitled to receive, in respect of a CGT event happening.

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, such that you are taken to have received the market value of your ownership interest in the property at the time the CGT event occurs.

In your case, however, 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 your capital gain. The money is considered to have been dealt with on your behalf under your Consent Orders.

The fact that your Consent Orders required 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 does not entitle you to a CGT exemption. The capital gain from the sale of Property 1 is to be shared between yourself and your ex-spouse according to your legal interests in the property.

The marriage or relationship 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. If the rollover applies, the spouse transferring the asset disregards any capital gain or capital loss they make on the transfer of their ownership interest.

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.

In your case, you did not transfer your ownership interest in Property 1 to your ex-spouse. Rather, Property 1 was sold to a third party.

The legislation says 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.

The main residence exemption

Section 118-110 of the ITAA 1997 provides that a capital gain or capital loss you make from a CGT event that happens to your ownership interest in a dwelling is disregarded if the dwelling was your main residence throughout your ownership period. This is called the main residence exemption.

You may be eligible for a partial main residence exemption under section 118-185 of the ITAA 1997 where you dispose of your ownership interest in a dwelling that was your main residence for only part of your ownership period.

To be your main residence, your property must have a dwelling on it and you must have lived in it. The length of time you stay in the dwelling and whether you intend to occupy it as your home may also be relevant.

Generally, a dwelling is considered to be your main residence if:

•                     you and your family live in it

•                     your personal belongings are in it

•                     it is the address your mail is delivered to

•                     it is your address on the electoral roll

•                     services such as gas and power are connected.

To be entitled to apply the main residence exemption to a period of ownership:

•                     The dwelling must have been your main residence

•                     You must not have been treating any other property as your main residence

•                     The property must not have been used to produce income

•                     The land adjacent to the dwelling must not exceed 2 hectares in size.

Property 1 was your family home until you separated from your ex-spouse. Therefore, you may choose to treat Property 1 as your main residence for the period you lived there and apply the main residence exemption to the capital gain you made from the disposal of Property 1. You may be able to treat Property 1 as your main residence after you moved into Property 2. However, only one property at a time may be treated as your main residence.

If you do not treat Property 1 as your main residence, or only receive a partial main residence exemption, you will be able to apply the 50% discount to any capital gain, as you held the property for more than 12 months.