Edited version of private advice

Authorisation Number: 1052394916231

Date of advice: 19 May 2025

Ruling

Subject: Capital gains tax

Question 1

Is any capital gain or capital loss you make in relation to the transfer of your ownership interest in the Property to person A disregarded under section 126-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No

This ruling applies for the following period:

Year ending 30 June 20XX.

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You married Person A and jointly purchased the Property, where you lived for several years before using the Property for rental purposes.

You and Person jointly purchased another property, Property X, where you both lived.

After some years you and Person A officially separated, with Person A vacating the Property to move into Property X which was their main residence from that time until the present time.

You and Person A made a verbal agreement in relation to transferring your respective ownership interests the two properties to each other to each other to enable funds from Person A's refinancing of loans to be released. As a result of the verbal agreement:

•                You transferred your ownership interest in the Property to Person A; and

•                Person A transferred their ownership interest in Property X to you.

A Financial Agreement under section 90C of the Family Law Act 1975 (the Agreement) was prepared by a legal firm which considered the transfer of your and Person A's respective ownership interests in the two properties being transferred to the other resulting in you having sole ownership of Property X and Person A having sole ownership of the Property.

The Agreement is not dated and has not been signed by you and Person A at this point.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Subdivision 126A

Reasons for decision

Summary

You do not meet the necessary conditions to be eligible for the marriage breakdown roll-over. Therefore, you cannot disregard any capital gain or capital loss made as a result of transferring your ownership interest in the Property to Person A under the marriage breakdown roll-over.

Detailed reasoning

Marriage breakdown roll-over

You make a capital gain or capital loss if a capital gains tax (CGT) event happens. The most common event is CGT event A1 which occurs if you dispose of a CGT asset, such as when your ownership interest in a property is disposed of to another party under section 104-10 of the ITAA 1997.

Under subsection 108-5(1) of the ITAA 1997, a CGT asset is any kind of property or legal or equitable right that is not property. A CGT asset is also part of, or in interest in the CGT asset under subsection 108-5(2) of the ITAA 1997.

Subdivision 126-A of the ITAA 1997 provides that where an asset is transferred from you to your spouse/ex-spouse as a result of a relationship breakdown, there is automatic roll-over in certain cases when the necessary conditions have been met.

The roll-over allows the spouse doing the transferring, being the transferor, to disregard a capital gain or capital loss that would otherwise arise as a result of the transfer of their CGT asset to their spouse/ex-spouse, being the transferee. The CGT which normally applies when ownership of an asset changes is deferred.

Once the transfer of a CGT asset is completed the person who received the CGT asset from their spouse/ex-spouse will be subject to any CGT when a CGT event happens to the CGT asset in the future, such as when they dispose of it in the future.

Section 126-5 of the ITAA 1997 states that to be eligible for the roll-over, the CGT event must occur because of one of the following occurring (collectively referred to as the qualifying agreements):

•                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, or

•                a court order under a state, territory or foreign law relating to breakdown of relationship between spouses.

•                a financial agreement that is binding under section 90G of the Family Law Act 1975 (known as a 'binding financial agreement') or a corresponding written agreement that is binding because of a corresponding foreign law

•                an award made in arbitration referred to in section 13H of the Family Law Act 1975, or

•                something done under a written agreement that is binding because of a State law, Territory law or foreign law relating to breakdowns of relationships between spouses and because of such a law, prevents a court making an order about matters to which the agreement applies, or that is inconsistent with the terms of the agreement in relation to those matters, unless the agreement is varied or set aside.

Taxation Determination TD1999/53 Income tax: capital gains: if a CGT asset is transferred by agreement between spouses and a court order later sanctions its transfer, was the transfer of assets made 'because of' the court order in terms of section 126-5 or 126-15 for roll-over to apply? states that a CGT asset transferred between spouses by agreement, before a court order is made under the Family Law Act 1975 or a State, Territory or foreign law relating to de facto marriage breakdowns, is not transferred 'because of' the court order.

The roll-over doesn't apply to property, or ownership interest in a property, that's transferred under a private or informal arrangement. This includes anything outside of a court order, binding financial, formal agreement or other qualifying agreement as listed above to be eligible for the roll-over. Therefore, a CGT asset transferred between spouses by a private agreement is not viewed as having been caused because of one of the qualifying agreements listed above, even in the event that one of the above qualifying agreements later sanctions/allows for the transfer.

When the spouses are not eligible for the marriage breakdown roll-over, the person making the transfer must take any capital gain or capital loss they make on the transfer of the asset into account in working out their net capital gain (or net capital losses carried forward to future years) on their tax return for the income year that the transfer of assets occurs.

Application to your situation

You and Person A each held an equal ownership interest in the Property. You transferred your ownership interest in the Property to Person A resulting in them having sole ownership of the Property.

Following the transfer of your ownership interest you no longer have any ownership interest in the Property and you will not be subject to any further CGT implications in relation to this property after the transfer occurred when any future CGT event occurs, such as when the Property is sold in the future.

We have considered the following when determining whether you are eligible for the marriage breakdown roll-over in relation to the transfer of your ownership interest in the Property:

•                You and Person A separated and there was no reasonable likelihood of reconciliation.

•                You and Person A made a verbal agreement in relation to the transfer of your respective ownership interests in the Property and Property X to each other to enable funds from Person A's refinancing of loans to be released.

•                You and Person A transferred your respective ownership interests in the two properties to each other, with you each holding sole ownership of one of the properties; and

•                The Agreement has prepared which considers the transfer of the ownership interests in the two properties, but which has not been signed by both you and Person A at this point.

In accordance with the principles contained in TD1999/53, the transfer of the CGT asset must be caused because of one of the qualifying agreements contained in section 126-5 of the ITAA 1997 as outlined above.

Based on the information provided, it cannot be viewed that the transfer of your ownership interest in the Property was caused because of the Agreement. The transfer had occurred as a result of a verbal agreement to enable Person A to obtain loan funds.

While the Agreement has been prepared, it is not a legally binding document as both you and Person A have not signed it, and it is not dated. Therefore, the Agreement is not the cause of the transfer of your ownership interests in the Property.

While a financial agreement may be signed by you and Person A in the future that sanctions the transfers of your respective ownership interests in the properties to each other, the ownership interests in the properties were not transferred because of any financial agreement. As the ownership interests had already been transferred prior to any financial agreement being made legally binding, the transfer was not caused because of a financial agreement.

CGT event A1 occurred in relation to the transfer of your ownership interests in the Sonia Street Property. However, the transfer had not occurred, or been caused, because of one of the qualifying agreements listed above, but as a result of a private verbal agreement between you and Person A.

Therefore, the marriage breakdown roll-over provisions under section 126-5 of the ITAA 1997 do not apply. Accordingly, any capital gain or capital loss that arises in relation to the transfer of your ownership in the Property to Person A will count toward the calculation of your net capital gain.

Note: For CGT purposes, where a CGT event A1 occurs between spouse's/ex-spouse's it is viewed that their dealings are not at arm's length. Therefore, the capital proceeds received by the spouse transferring their CGT asset to their spouse/ex-spouse viewed as being the market value of the CGT asset at the time the transfer occurred.