Private ruling: Capital gains tax - marriage breakdown roll-over - main residence exemption
Date of advice: 9 February 2016
Published: April 2016
Ruling period: Income year ending 30 June 20XX; and | Income year ending 30 June 20YY
Date scheme commenced: 1 July 20ZZ.

Ruling: Q1: Are you entitled to marriage breakdown roll-over relief from capital gains tax on the disposal of your ownership interest in the shares and Property A? | A1: No. ISSUE 2 | Q2: Are you entitled to full main residence exemption on the disposal of Property A? | A2: No. However, you will be entitled to a partial main residence exemption. | Q3: Are you entitled to a full main residence exemption on the disposal of Property C? | A3: Yes.

Relevant facts and circumstances: Documentation provided with this private ruling forms part of, and should be read in conjunction with this description. You purchased property (Property A) after 20 September 1985 which was your main residence. After a number of years, you were married and you moved into your spouse's dwelling (Property B). Property A was partially renovated and it remained vacant after you moved into Property B. You used Property A to undertake activities relating to your employment. For the purposes of this private ruling, you have made the absence choice in relation to Property A. A number of years later, you and your spouse jointly purchased Property C which was your main residence. The land on which Property C is located is less than two hectares. Property A was rented out a number of years after you had purchased Property C. You and your spouse separated over years after you had purchased Property C and you continued to reside Property C after the separation. A court order was issued around six months after the separations which directed that: • You were required to pay your ex-spouse a specified sum of money on or before a specified date • Your ex-spouse would transfer their ownership interest in Property C to you; and • That in the event that the whole payment of the specified sum was not made by the specified date, then you would transfer Property A to your ex-spouse to be held on trust for sale. You disposed of a parcel of shares to obtain funds to pay part of the specified sum to be paid to your ex-spouse as outlined in the court order. You included a capital gain amount made on the disposal of your shares in your assessment in the income year in which you disposed of the shares. Around seven months after the court order was issued, you sold Property A to obtain the balance of the funds to pay to your ex-spouse and made a capital gain. Around the same time that Property A was sold, you put Property C on the market. For the purposes of this private ruling, Property C will be sold during the period covered by this private ruling and you will make the choice for the main residence exemption to apply to that dwelling for all of your ownership period in the income year in which the dwelling is sold. Assumption Your ex-spouse will make the choice for Property C dwelling to be their main residence for the period they owned the dwelling.

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 115-10 | Income Tax Assessment Act 1997 Section 115-15 | Income Tax Assessment Act 1997 Section 115-20 | Income Tax Assessment Act 1997 Section 115-25 | Income Tax Assessment Act 1997 Section 115-100 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-170 | Income Tax Assessment Act 1997 Section 118-185 | Income Tax Assessment Act 1997 Section 118-190 | Income Tax Assessment Act 1997 Section 126-5

Reasons for decision: Detailed Reasoning - Marriage breakdown roll-over: As a general rule, capital gains tax (CGT) applies to all changes of ownership of assets on or after 20 September 1985. However, if you transfer an asset to your spouse as a result of the breakdown of your marriage or relationship, there is automatic rollover in certain cases. Where you transfer an asset to your spouse as a result of a marriage breakdown, there is automatic roll-over in certain cases when the necessary conditions have been met. The roll-over allows the transferor spouse to disregard a capital gain or capital loss that would otherwise arise. For a roll-over to apply in relation to a disposal of an asset due to marriage breakdown, the following conditions must be met: • the transfer must happen because of an order or court order made by consent under the Family Law Act 1975 (FLA 1975) or a similar law of a foreign country, • a maintenance agreement approved by a court under section 87 of that Act or a similar agreement under a foreign law, or • a court order under a State, Territory or foreign law relating to de facto marriage breakdowns. | Detailed Reasoning - Discount capital gain: You can reduce your capital gain by the discount percentage of 50% when the following conditions have been met: • you are an individual • a CGT event happens to an asset you own • the CGT event happened after 21 September 1999 • you acquired the asset at least 12 months before the CGT event, and • you did not choose to use the indexation method. If you meet the above conditions, you will be able to apply the 50% discount to any capital gain that you have made on the disposal of a CGT asset. Application to your situation In your situation, you and your spouse divorced and court orders were issued which outlined that you were to pay your ex-spouse a specified sum of money by a specified date. Under the court order, if the specified sum of money was not paid to your ex-spouse by the specified date, you were to transfer your ownership interest in Property A to your ex-spouse to be held on trust for sale. You disposed of a parcel of shares and Property A to source the specified sum to pay your ex-spouse in compliance with the court order and made a capital gain on their disposal. The court order did not direct you to dispose of your shares or Property A. Also, you did not transfer your ownership interest in your shares or Property A to your ex-spouse. Therefore, you have not met the conditions as outlined above for the marriage breakdown roll-over exemption to apply and you will not be eligible for the roll-over. As none of the exceptions to the general rule apply, you (as owner) are responsible for any capital gains liability on the disposal of the shares and Property A. We will consider the application of the main residence exemption in relation to Property A below to determine if you are eligible to disregard any of the capital gain made on the disposal of Property A, either partially or in full. If you met the conditions listed above for the 50% CGT discount, you were entitled to apply the 50% CGT discount to any capital gain made on the disposal of the shares. Note: You included a capital gain amount from the disposal of your shares in your assessment. If you consider that there has been an error in the amount of capital gain included in your assessment for the disposal of the shares, you are entitled to seek a review in relation to that issue. However, if you choose to have this issue reviewed you must provide full details and evidence to support that the capital gain amount included in your assessment was incorrect. | Detailed Reasoning - Main Residence Exemption: Generally, any capital gain or capital loss that arises from a CGT event that happens to a dwelling that is a taxpayer's main residence is disregarded. The exemption also extends to land that is adjacent to the dwelling, and it is used in conjunction with it, provided that the total land area is less than two hectares. However, in order to obtain a full exemption from CGT, the dwelling must have been the taxpayer's main residence for the entire period they owned it and must not have been used to produce assessable income. If a taxpayer can reside in more than one dwelling during a particular period, only one of those dwellings can be their main residence at any one time. The capital gains provisions have rules that may extend the main residence exemption to other periods. Generally, these rules would limit the exemption that might otherwise be available in respect of other dwellings. Application to your situation: During the period under consideration, you have owned the following dwellings: • Property A, from settlement on the purchase of the dwelling until settlement on the disposal of the dwelling occurred; and • Property C, from settlement on the purchase of the dwelling until settlement on the disposal of the dwelling occurs. During the period that you have resided in the following dwellings as your common law main residence: • Until you moved into your ex-spouse's dwelling - Property A • From the date you moved into your ex-spouse's dwelling until settlement on the purchase of Property C occurred - Property B; and • From the date settlement on the purchase of Property C occurred to present day - Property C. As outlined above, when you own more than one dwelling during a particular period, only one dwelling can be your main residence at any one time. Accordingly, we have considered the capital gains tax implications in relation to your two properties as follows: | Detailed Reasoning - Property A: You purchased Property A after 20 September 1985 and you lived there until you moved into Property B after you were married a number of years later. Property A remained vacant until it was rented out a number of years later and was rented out until it was disposed of around six years after it was rented out. You jointly purchased Property C around three years after you were married and therefore had an ownership interest in two dwellings for an overlapping period. You have made the choice for the main residence exemption to apply to Property C when it is disposed of. Therefore, for the period that your ownership interest in Property A and Property C overlapped, the main residence exemption will not apply to Property A. Accordingly, as Property A had only been your main residence for part of your ownership interest period, being from settlement on the purchase of the dwelling until you moved into Property B, you are not entitled to a full main residence exemption. However, you have made the absence choice in relation to Property A. This choice extends the main residence exemption and enables you to continue to treat a dwelling as your main residence: • for an indefinite period if the dwelling is not rented out; and • up to six years if the dwelling is rented out, commencing from when the dwelling is fist available for rent. For the period that Property A remained vacant after you moved into Property C, the absence choice will enable you to continue to treat Property A as your main residence. However, Property A was not your ex-spouse's main residence during this period so it is only taken to have been your main residence for capital gains purposes for one-half of this period. You terminated your absence choice when you purchased Property C so that it could be treated as your main residence for capital gains purposes. Consequently, your ownership of Property A can be apportioned as follows: • Until you moved into Property B - it is your main residence • When you moved into Property B until settlement on the purchase of Property C occurred - it is your main residence for on-half of this period; and • From settlement on the purchase of Property C until settlement on the disposal of Property A - it was not your main residence. Therefore, you will not be entitled to a full main residence exemption on the disposal of Property A as it had not been your main residence for all of your ownership period. However, you will be entitled to a partial main residence exemption calculated as follows: Partial main residence exemption If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you are entitled to a partial exemption. You calculate your capital gain using the following formula: Capital gain/ capital loss x Non-main residence days_________ Total number of days in your ownership period Capital gain or capital loss amount is the capital gain or capital loss you would have made from the disposal of the dwelling apart from this Subdivision. Non-main residence days are the number of days in your ownership period when the dwelling was not your main residence. The non-main residence days in your case will be the total days for the period from the date settlement on the purchase of Property C occurred until the date that settlement on the disposal of Property A occurred. Total number of days in your ownership period will be the date from the settlement on the purchase of Property A occurred until settlement on the disposal of Property A occurred. If you met the conditions listed above for the 50% CGT discount, you are entitled to apply the 50% CGT discount to any capital gain made on the disposal of Property A. Note: You will need to make an adjustment to any capital gain or capital loss made on the disposal of Property A if you used the dwelling to produce assessable income, such as if you carried on a business in part of your dwelling, just before you moved out of Property A into Property B. | Detailed Reasoning - Property C: You jointly acquired Property C with your ex-spouse around three years after you were married, and resided in the dwelling. As a result of the divorce settlement, your ex-spouse's ownership interest in Property C was transferred into your name. You have continued to reside in the dwelling and have put it on the market. You will apply a full main residence exemption to any capital gain or capital loss made on the disposal of Property C in your assessment in the income year it is disposed of. Given that Property C will have been your main residence throughout your ownership period, and your ex-spouse's main residence during the whole of the period that they owned a one-half interest in it before they transferred it to you under the court order, any capital gain or capital loss you make on the disposal of Property C can be disregarded.