Edited version of private advice

Authorisation Number: 1052269142272

Date of advice: 3 July 2024

Ruling

Subject: CGT - sale ofinvestment properties

Question

Are you liable for capital gains tax for the court ordered sale of your investment properties you held jointly with your former spouse?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

X XXXX 20XX

Relevant facts and circumstances

You and your former spouse purchased as joint tenants the investment properties: property A and property B.

On XX XXXX 20XX, you and your former spouse separated.

On XX XXXX 20XX, you and your former spouse began divorce proceedings.

On XX XXXX 20XX, the court ordered by consent until further order that the two investment properties be sold.

The order by consent until further order, also specified that the proceeds of the sale of each of the properties be applied to pay:

•         the liability of the mortgage held against the said property;

•         the costs of the sale and preparation for sale of the property;

•         any real estate agents fee;

•         any conveyancing fee;

•         any tax or other government levy of fees;

•         any other reasonable costs associated with the property as may be agreed between the parties; and

•         the balance of the sale proceeds, after all other liabilities set out above have been paid in full, is to be deposited into bank account A

Both the investment properties were listed for sale and later sold.

On XX XXXX 20XX, settlement occurred for the property A. The funds for the purchase of property A were deposited into bank account A.

On XX XXXX 20XX, settlement occurred for the property B. The funds for the purchase of property B were deposited into bank account A.

On XX XXXX 20XX, the court made orders on a final basis.

On XX XXXX 20XX, the court amended the orders on a final basis dated XX XXXX 20XX.

The court ordered you and your former spouse do all acts and things and sign all documents as may be required to cause all of the funds held in the joint bank account A to be paid to your former spouse.

There was no provision for the tax on the investment properties to be paid out of bank account A before it was transferred to your former spouse.

You were also ordered, within sixty days of the date of final court orders to pay your former spouse $XX.

Upon payment of this amount your former spouse was ordered to transfer to you their rights, title and interest in property C.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 103-10

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 subdivision 126-A

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a capital gains tax (CGT) event occurring. 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 a dwelling to someone.

Subsection 104-10(3) of the ITAA 1997 provides that you dispose of a CGT asset when you either enter into a contract for its disposal, or where no contract exists, when the change of ownership occurs.

Subsection 104-10(4) of the ITAA 1997 provides that you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base and you make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Section 116-20 of the ITAA 1997 provides the definition of capital proceeds. Capital proceeds are the total of the money you have received or are entitled to receive and the market value of any other property you have received or are entitled to receive.

These terms are further defined in section 103-10 of the ITAA 1997. It states this Part (Part 3-1), and Part 3-3 apply to you as if you had received money or other property if it has been applied for your benefit (including by discharging all or part of a debt you owe) or as you direct even if it is received at a later time.

In certain situations, the capital gain or capital loss made as a result of a CGT event can be disregarded or rolled over. Section 126-5 of the ITAA 1997 states that if an asset is transferred to you as a result of a marriage breakdown, there is an automatic rollover in certain cases. The rollover allows the transferee spouse to defer the capital gain to when they later dispose of it.

The rollover applies in relation to a disposal of an asset to a spouse if the transfer happens because of an agreement or court order made under the Family Law Act 1975.

Application to your circumstances

When the investment properties were sold this triggered an A1 CGT event. The proceeds from the sale of these investment properties were deposited into bank account A. In your case, the Federal Circuit and Family Court of Australia made amended orders on a final basis on XX XXXX 20XX, that the funds held within bank account A be distributed to your former spouse. The orders made on the XX XXXX 20XX superseded the orders made on XX XXXX 20XX, which had initially provided for any tax to be paid from the proceeds of sale before it was deposited in bank account A. There was no provision in the final court order dated XX XXXX 20XX for tax to be paid from the funds in the account.

The capital proceeds are applied to your benefit as this money was included within the marriage property pool and dealt with within your consent orders. The fact that the money in respect of your ownership interest went to your spouse 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 CGT from the sale of the properties is to be shared between yourself and your former spouse according to your legal interests in the property.

The marriage breakdown rollover provision contained within section 126-5 of the ITAA 1997 does not apply as the property was not transferred between the parties but was instead sold.

The CGT from the sale of the property is to be shared between yourself and your former spouse according to your legal interests in the property.