Private ruling: Capital gains tax
Date of advice: 13 January 2020
Published: March 2020
Ruling period: Year ended 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Did capital gains event A1 occur when you sold the shares? | A1: Yes. | Q2: Does the first element of the cost base, of the property, in the hands of the transferee, include the transferors cost base of the property, at the time the transferor transfers the asset to the transferee? | A2: Yes. | Q3: Does the 50% discount apply in relation to any capital gain made on the shares? | A3: Yes.

Relevant facts and circumstances: You are a resident of Australia for taxation purposes. You left Australia in XXXX to live overseas and you returned to Australia and resumed your residency status in XXXX. You married your spouse while overseas. You and your spouse have divorced. The divorce was the subject of a court order. The court order specifically ordered that your former spouse transfer X% of the shares in the company a XX tax resident company, to you. The market value of the shares at the time they were issued to your former spouse, $XXXXX.XX. You sold the shares by way of sale contract on the market to an unrelated third party for a consideration of $XXXXXX during the year ended 30 June 2019, and there were no foreign exchange gains or losses. You have no current year or carry forward capital losses.

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 104-10(3) | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 section 115-5 | Income Tax Assessment Act 1997 section 126-5 | Income Tax Assessment Act 1997 section 126-5(5) | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Family Law Act 1975

Reasons for decision: Summary: The Capital Gains Tax (CGT) provisions are contained in Part 3-1 and 3-3 of the ITAA 1997. Under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) you make a capital gain or a capital loss when a 'CGT event' happens. The most common CGT event A1 happens when you dispose of the asset to another party (for example disposal of a dwelling) (section 104-10 of the ITAA 1997). For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset for example, if you sell an asset for more than you paid for it, the difference is your capital gain. Under section 104-10 of the ITAA 1997 CGT event A1 will happen where a CGT asset is disposed of under a contract. Paragraph 104-10(3)(a) of the ITAA 1997 provides that the time of the event is when the contract is entered into for the disposal, not when settlement takes place. | Detailed Reasoning - Marriage breakdown rollover: Generally, CGT applies to all changes of ownership of assets on or after 20 September 1985. However, under section 126-5 of the ITAA 1997 if an asset is transferred to you as a result of a marriage breakdown, there is automatic roll-over in certain cases (you cannot choose whether or not it applies). However, for roll-over to apply in relation to a disposal of an asset to a spouse, the following conditions must be met:- § the transfer must happen because of an order or court order make 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 for a similar agreement under a foreign law, or § a court order under a State, Territory or foreign law relating to de facto marriage breakdowns. In effect, the one who receives the asset will make the capital gain or loss when they dispose of the asset. Under paragraph 126-5(5)(a) of the ITAA 1997, for the disposal of an asset acquired by the transferor on or after 20 September 1985 the first element of the asset's cost base (in the hands of the transferee) is the asset's cost base (in the hands of the transferor) at the time the transferee acquired it. | Detailed Reasoning - Cost base: In working out your capital gain, you determine the cost base of the CGT asset involved in the CGT event. Section 110-25 of the ITAA 1997 sets out the elements that form part of the cost base; the cost base is made up of five elements: 1. The first element is made up of money paid or required to be paid to acquire the CGT asset. 2. The second element will include incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller or buyer, fees paid to an accountant. 3. The third element consists of non-capital costs incurred in connection with your ownership of a CGT asset. Examples are interest, rates, repairs and insurance premiums. These costs cannot be indexed or used to work out a capital loss. Do not include expenditure for which you have claimed, or could be allowed, a deduction for income tax purposes in any year. 4. The fourth element includes capital expenditure you incur to increase the value of the CGT asset if the expenditure is reflected in the state or nature of the asset at the time of the CGT event. 5. This includes capital expenditure you incur to preserve or defend your title or rights to the asset. | Detailed Reasoning - Marriage breakdown and cost base: CGT event A1 occurred when your former spouse transferred their X % of the shares into your name. However, as the transfer of the shares, to you, was done under a Family Law Court Settlement there is an automatic marriage breakdown rollover, which applies to your former spouse's interest in the shares and the CGT event is disregarded. Consequently, the first element of the cost base of the shares will be your former spouse's cost base. | Detailed Reasoning - Discount Method: Under section 115-5 of the ITAA 1997, you make a discount capital gain if the following requirements are satisfied: · you are an individual, a trust or a complying superannuation entity · a CGT event happens to an asset you own · the CGT event happened after 11.45am (by legal time in the ACT) on 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. You satisfy these requirements. Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years.