Edited version of private advice

Authorisation Number: 1052200741471

Date of advice: 15 December 2023

Ruling

Subject: CGT disposal - capital proceeds

Question

For the purposes of calculating the capital proceeds received on the sale of the Property in 20XX, can you use the market value of the Property obtained in 20XX, when the property was required to be sold under a property settlement rather than the sale price received in 20XX, due to extenuating circumstances?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You and Person A separated in 20XX. At the time of the separation, you co-owned the Property. The Property was acquired in 20XX and is less than 2 hectares in size.

In addition to co-owning the Property, you solely owned Property B. Person A solely owned Property C.

On or around DD MM 20XX, the Property was subject to final property orders (Property Orders) pursuant to the Family Law Act 1975.

Pursuant to the Property Orders:

•         It was agreed that the Property was valued at $X.

•         Person A was to sell property C and pay you the agreed settlement amount of approximately $X.

•         Person A was to refinance the Property into their name solely to facilitate the removal of your name from the Mortgage and Certificate of Title. If refinance did not occur, the Property was to be sold.

Property C was sold but you did not receive the agreed settlement amount.

Refinance of the Property did not occur.

Transfer of the Property to Person A did not occur.

In MM 20XX, you sought orders to force the sale of the Property as you had not received the agreed settlement sum and the Property had not been refinanced.

In MM 20XX, the Property was sold to a third party for approximately $X. The Property settled in MM 20XX.

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

Question

For the purposes of calculating the capital proceeds received on the sale of the property in 20XX, can you use the market value of the property obtained in 20XX, when the property was required to be sold under a matrimonial property settlement, rather than the sale price received in 20XX, due to extenuating circumstances?

Answer

No.

Summary

In this case, you held legal ownership in the Property. Capital gains tax (CGT) event A1 happened when the Property was sold to a third party. You are taken to have disposed of your ownership interest at that time. As no exemptions apply, the capital gain from the sale of Property is to be shared between yourself and person A according to your legal interests in the Property. 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 Property.

Detailed reasoning

Capital proceeds

Under subsection 116-20(1) of the Income Tax Assessment Act 1997 (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 the market substitution rule cannot be applied as the property was sold and money was received in relation to the sale. The fact that the property has increased in value and you consider a disproportionate amount of money went to Person A and you only received the amount has agreed to in the final Property Orders made in March 2021 does not alter the calculation of your capital gain. The money is considered to have been dealt with on your behalf under the Property Orders.

The fact that the Property Orders required the sale proceeds of the Property to be paid to Person A 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 is to be shared between yourself and Person A 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 or relationship 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 or relationship 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, your interest was not transferred to Person A under the Property Orders. The legislation specifies that rollover relief can only occur if the asset is transferred to the other spouse.

In your case, the Property was sold to a third party and was not transferred to Person A. This means the capital gain made as a result of the CGT event cannot be disregarded or rolled over.

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.