Private ruling: Capital gains tax
Date of advice: 19 April 2018
Published: August 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the marriage breakdown rollover provisions under Subdivision 126-A of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard the capital gain on the disposal of the property? | A1: No. | Q2: Are you entitled to a partial main residence exemption under Subdivision 118-B of the ITAA 1997 for the capital gain made on the disposal of your 50% ownership interest in the property that you acquired several years ago? | A2: Yes. | Q3: Are you entitled to a full main residence exemption under Subdivision 118-B of the ITAA 1997 for the capital gain made on the disposal of your 50% ownership interest in the property that you acquired from entity A on the date of death? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20. | Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Section 108-05. | Income Tax Assessment Act 1997 Section 116-20. | Income Tax Assessment Act 1997 Section 116-30. | Income Tax Assessment Act 1997 Section 118-185. | Income Tax Assessment Act 1997 Section 118-195. | Income Tax Assessment Act 1997 Section 118-197. | Income Tax Assessment Act 1997 subdivision 126-A. | Income Tax Assessment Act 1997 Section 126-5.

Reasons for decision: Detailed Reasoning - Capital gains tax provisions: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The property is a CGT asset (section 108-5 of the ITAA 1997). Under section 104-10 of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity. The transfer of the property to entity B is therefore a CGT event A1. You make a capital gain if the capital proceeds from the disposal is more than the asset’s cost base. You will make a capital loss if those capital proceeds are less than the reduced cost base (subsection 104-10 of the ITAA 1997). | Detailed Reasoning - Marriage breakdowns: CGT generally applies to all changes of ownership of assets on or after 20 September 1985. However, subdivision 126-A of the ITAA 1997 outlines the circumstances where a capital gain may be disregarded following a marriage breakdown. If certain conditions are met there is an automatic roll-over of the capital gain for the transferring spouse if a CGT event happens as a result of a marriage breakdown. Under paragraph 126-5(1)(a) of the ITAA 1997 there is a roll-over if a CGT event happens because of a court order under the Family Law Act 1975 . In your case, there was no CGT event that occurred because of a court order. In the court order, there was no reference to the property. That is, there was no order to transfer the property to either party. The CGT event that occurred in 20XX, more than 20 years after the decree nisi, did not happen because of the court order. Your individual circumstances are acknowledged, however the Commissioner has no discretion to apply the roll over or CGT exemption under subdivision 126-A of the ITAA 1997. It follows that Taxation Determination TD 1999/60 also has no application in your circumstances. We acknowledge that you may not always have been aware of your ownership in the property after your divorce and did not pay for the property expenses. However, it remains that you continued to be an owner in the property. The Commissioner can only consider what actually occurred rather than what was intended to occur. That is, the legislation applies to what in fact happened rather than what may have been in mind at some earlier point in time. In your case, you owned 2 separate 50% interests in the property. One 50% interest you acquired when the property was purchased several years ago, the other 50% interest was acquired on the date of death of your late ex-spouse. | Detailed Reasoning - 50% interest in the property acquired several years ago - partial main residence exemption: Section 118-185 of the ITAA 1997 provides that you are entitled to a partial exemption from CGT where a dwelling was your main residence for part of your ownership period. Subsection 118-185(2) of the ITAA 1997 provides a formula which allows you to calculate the assessable capital gain amount to take into account the proportion of your main residence days in the property to the total number of ownership period days of the property. The capital gain or loss is calculated using the following formula: Capital gain or loss amount X non-main residence days total ownership period days You will be entitled to a partial main residence exemption in relation to the period from purchase until you moved out of the property. Your non-main residence days will be the total number of days that you were not residing in the dwelling, to the date your legal ownership in the property ended. The total number of days in your ownership period will be the total days from the date of purchase until the date your legal ownership in the property ended. | Detailed Reasoning - 50% interest acquired on date of death of your late ex-spouse – full main residence exemption: As a joint tenant in the property, the 50% ownership interest in the property belonging to your late ex-spouse passed to you on the date of death. That is, you, as surviving joint tenant, own the whole of the property from the date of death. Under sections 118-195 and 118-197 of the ITAA 1997, the capital gain made on the 50% share of the property acquired from your late ex-spouse is disregarded as you disposed of that 50% interest in the property within two years of your late ex-spouse’s death. | Detailed Reasoning - Capital proceeds: Under section 116-20(1) of the ITAA 1997 the capital proceeds from a CGT event are the total of the money the entity has received, or are entitled to receive, in respect of the event happening and the market value of any other property received, or is entitled to receive, in respect of that event happening (worked out as at the time of the event). If you receive no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset that is the subject of the event. The market value is worked out as at the time of the event (subsection 116-30(1) of the ITAA 1997). As you received no money when transferring the property, the market value substitution rule applies.

Relevant facts: You married entity A several years ago. | You and entity A purchased a property as joint tenants as your family home. The property was less than AA hectares. You and your spouse’s name were shown as co-owners of the property. | The loan for the property was in joint names. | Later you applied for a decree of dissolution of your marriage. | You left the family home. | The Court held that the marriage had broken down irretrievably and the marriage to be dissolved. | There was no mention of any asset ownership and/or transfers during or after the Family Law court proceedings. | After the divorce you did not follow up on ownership and/or transfer of the family home given that you assumed that your spouse would revert to being the sole proprietor of the property as they solely paid for the property since purchase and continued to pay for the property after the marriage breakdown. Your former spouse continued to live at the property as their main residence after the marriage breakdown up until their death. | Since the marriage breakdown your former spouse had never brought to your attention that you still had part ownership in the property. | As soon as you became aware of this fact you started the property transfer process which was not finalised until after his death. | Your relation requested you to sign some documents to appoint a settlement agent to start the process of relinquishing your right over the property to your former spouse. | Entity B is the sole beneficiary to your former spouse’s estate. | In the will, no particular items or assets were listed. | Probate for the estate was granted. | When attempting to transfer the title to entity B, the lawyers discovered that your former spouse was not the sole owner of the property and that entity B could not be awarded 100% ownership of the property. | As you believed that your former spouse was the sole owner of the property, you did not dispute the wishes. | On the relevant form, you made a declaration in support of your application to be registered as the sole proprietor of the land. Another form shows you as the transferor. | You transferred the property to entity B for them to acquire 100% ownership of the property. The Certificate of Duty shows the transfer was under a ‘natural love and affection’ arrangement and there was no monetary consideration paid for the transfer of the property between you and entity B. | Entity B is now showing as the owner on the Record of Certificate of Title.