Edited version of private advice

Authorisation Number: 1052338918219

Date of advice: 10 December 2024

Ruling

Subject: Capital gains tax - matrimonial

Question 1

Are you liable for capital gains tax under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the disposal in the 20XX income year of your investment property which you owned jointly with your former spouse?

Answer 1

Yes

Question 2

Are you liable for capital gains tax under Part 3-1 of the ITAA 1997 in respect of the sale of shares in the 20YY income year?

Answer 2

Yes

This ruling applies for the following periods:

For the income year ended 30 June 20XX

For the income year ended 30 June 20XX

Relevant facts and circumstances

Background

The taxpayer married their spouse in 20AA. In later years, the taxpayer and spouse acquired a share portfolio account and a rental investment property. The share portfolio account had a margin loan attached to it.

The taxpayer and spouse later separated. Sometime later, the taxpayer and spouse sold the rental property in the 20XX income year. A capital gain was made on the sale of the property.

The proceeds from the sale of the rental investment property was placed into a joint bank account. Prior to the sale of this property, the joint bank account had been made a dual signatory bank account by the spouse. As a result, the signature of both the taxpayer and spouse was required for withdrawals from this account.

About a year later after the sale of the rental property, a court order was made by consent (Consent orders)in the Federal and Family Court between the taxpayer and spouse regarding their property.

Under the Consent orders, the Court directed that the following, amongst other things, be undertaken by the taxpayer and spouse:

•                     the joint bank accounts be closed and the proceeds paid to the spouse;

•                     the share portfolio account was to be transferred to the spouse, including the margin loan. The spouse was to indemnify the taxpayer for the margin loan.

Sometime after the Consent orders were made, the taxpayer and spouse sold the shares in 20XX income year. In this regard, the taxpayer and spouse co-signed a form for the sale of the share portfolio account (share portfolio account closure form). This form, which the taxpayer had co-signed, also authorised that funds be directed to the spouse's personal bank account.

The net proceeds from the sale of the shares held in the share portfolio account were paid into the spouse's personal bank account.

Divorce proceedings commenced after the Consent order was made.

Relevant legislative provisions

The Income Tax Assessment Act 1997 section 102-20

The Income Tax Assessment Act 1997 section 103-10

The Income Tax Assessment Act 1997 subsection 104-10(3)

The Income Tax Assessment Act 1997 subsection 104-10(4)

The Income Tax Assessment Act 1997 subsection 108-5(2)

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

The Income Tax Assessment Act 1997 Subdivision 126-A

Reasons for decision

Question 1

Section 102-20 provides that a capital gain or capital loss results from a capital gains tax (CGT) event occurring to a CGT asset. Examples of a CGT asset include land and buildings, shares in a company and units in a unit trust (see section 108-5).A CGT also includes a part of, or an interest in, a CGT asset and an interest in an asset of a partnership - see subsection 108-5(2).

The most common CGT event is CGT event A1. Section 104-10 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 or dispose of shares in a company.

Subsection 104-10(3) 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) 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.

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 (see subsection 116-20(1)).

Note 2 to subsection 116-20(1) states that in 'some situations you are treated as having received money or other property, or being entitled to receive it: see section 103-10.

Under section 103-10, a taxpayer will, in certain situations, be deemed to have received or entitled to receive money property even though a taxpayer actually does not receive money or property.

Section 103-10 states that if money or other property has been applied for a taxpayer's benefit in relation to a CGT event (including the discharge of all or part of a debt owed) or has been applied at the taxpayer's direction, the CGT provisions apply as if that money or other property has actually been received by the taxpayer.

Application of the law to your circumstances

When the investment property was sold in 20XX income year, this triggered an A1 CGT event. The capital proceeds (i.e the monies from the sale of this investment property) were deposited into a joint bank account that you held with your former spouse.

The fact that these monies were held in a joint bank account in which your ability to withdraw funds was restricted as a result of a private arrangement with your spouse does not alter the fact that capital proceeds were received by you upon completion of the sale of the property.

The Consent orders allocating the remaining funds in the bank account to your former spouse occurred at a much later time in the 20XX income year after the sale of the property occurred and the receipt of the proceeds by you.

In the alternative, section 103-10 will deem that you have received an amount of capital proceeds from the sale of this investment property. This is because the capital proceeds from the sale of the investment property which was paid into the joint bank account was applied for your benefit. These monies were included within the marriage property pool and dealt with within the Consent orders for your property settlement.

The fact that the money in respect of your ownership interest went to your spouse as a result of the Consent orders 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.

Consequently, any capital gains arising from the sale of the Goondiwindi property is to be shared between yourself and your former spouse according to your legal interests in the property.

Question 2

In regard to the sale of the shares, we have considered the provisions in Subdivision 126-A which deals with the CGT consequences of a marriage or relationship breakdown. These provisions allow in certain situations for the consequences of a CGT asset transfers between former spouses to be disregarded or deferred.

Under these provisions, if an asset is transferred to a former spouse as a result of a marriage or relationship breakdown, there is an automatic rollover.

The rollover allows the transferee (i.e. the spouse receiving the asset) to defer the capital gain to when they later dispose of or sell the transferred asset.

For the spouse that transferred the asset any capital gains are disregarded.

For the rollover to apply the transfer of the asset to a spouse must have resulted from certain qualifying agreements. These agreements include:

•                     a court order made by consent under the Family Law Act 1975;

•                     financial agreement that is binding under the Family Law Act 1975 (sections 90G and 90UJ)

Application to your circumstances

The Consent orders stipulated that the share portfolio together with the margin loan facility was to be transferred to Former spouse. It also stipulated that the former spouse was to indemnify the taxpayer for the margin loan.

However, this did not happen here. Instead, you and your former spouse sold the shares, as evidenced by the completion of share portfolio account closure form.

Accordingly, the marriage breakdown rollover provision in section 126-5 does not apply as your interest in the shares was not transferred to your former spouse but was sold.

This being the case, the normal concepts in CGT apply and the sale of shares is considered an A1 CGT event as there was a change of ownership of the shares when you sold them.

As explained earlier in this document, a capital gain is made if the capital proceeds from the disposal of a CGT asset are more than the asset's cost base and a capital loss if those capital proceeds are less than the asset's reduced cost base.

In this case, you signed the share portfolio account closure form which contained an authorisation for the change in the share portfolio account bank account to your former spouse's personal bank account for payments from the investment account sale. As a result, the net proceeds of the sale of the shares was paid into your former spouse's own bank account.

In effect, you directed that the share sale proceeds should be given to your former spouse, as evidenced by signing the closure form. As the sale proceeds were applied to your former spouse at your direction, section 103-10 will treat you having received capital proceeds, even though you did not actually receive any.

Accordingly, you are liable for your share of the capital gains arising from the sale of the shares held in the share portfolio account.