Private ruling: Capital Gains Tax - Exemption
Date of advice: 18 September 2017
Published: January 2018
Ruling period: Income year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will you be exempt from capital gains tax (CGT) on the sale of your investment property? | A1: No

Relevant facts and circumstances: You acquired an investment property (the property) in 20XX as joint tenant with your former spouse. You and your spouse divorced in 20XX. You have never lived in the property, but your former spouse did for a period of time. In June 20XX orders were made in the Local Court of New South Wales under the Family Law Act 1975 ( the Family Law Act) in relation to the property. The 20XX orders direct you to transfer all of your right title and interest in the property to your former spouse and your former spouse is required to discharge the mortgage against the property. In 20XX further orders dealing with the property were made in the Federal Circuit Court under the Family Law Act (the orders). The following is a summary of those orders relevant to this ruling: ● Order 1 requires the Respondent (your former spouse) to transfer the whole of their right, title and interest in the property to the Applicant (you). ● Order 2 requires your former spouse to discharge the mortgage against the property. ● Order 3 requires your former spouse to deliver up vacant possession of the property to you within 14 days of the date of the Orders. ● Order 4 requires you to list the property for sale. ● Order 6 directs how the proceeds of the sale of the property are to be distributed: 6 (d) provides that the amount required to discharge the joint mortgage over the property be paid to the relevant financial institution. Order 6 (g) directs that the remainder of the sale proceeds (after other costs are accounted for) be paid to your former spouse. ● Order 11 provides that prior to the exchange of contracts, should your former spouse discharge the mortgage over the property and provide proof to you or your representative, you shall withdraw the property from sale. In July 2017 orders were made in the Federal Circuit Court under the Family Law Act which allow a Registrar of the Court (or any other appropriate Court officer) to sign the transfer on behalf of your former spouse. Ownership of the property has yet not been transferred to you in accordance with the orders. The property will be sold at auction in the income year ending 30 June 2018. You will make a capital gain on the sale.

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 106-50 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 126-5 | Income Tax Assessment Act 1997 Division 115

Reasons for decision: Summary: Capital Gains Tax If you dispose of a capital asset, such as real estate or shares, you usually make a capital gain or a capital loss. You dispose of an asset when a change of ownership occurs from you to another person or entity. You will be liable to pay CGT on the disposal unless an exemption or rollover applies. Marriage breakdown roll-over Where an asset is transferred between spouses as a result of a marriage or relationship breakdown, there is generally an automatic CGT roll-over of the asset. In order for the relationship breakdown roll-over to apply, the CGT event must have happened due to: ● an order of a court or a court order made by consent under the Family Law Act 1975 , or a similar law of a foreign country ● a court order under a state, territory or foreign law relating to breakdown of relationship between spouses. The roll-over allows the transferor spouse to disregard any capital gain or capital loss that arises as a result of the transfer. The spouse that receives the asset will make a capital gain or loss when they subsequently dispose of the asset. The first element of the receiving spouse’s cost base for the property will consist of the transferring spouse’s cost base at the time that it is acquired. The receiving spouse will maintain their own cost base for the share of the property which they already own. Ownership for the purposes of Capital gains tax Generally, for CGT purposes the owner of the property is the person registered on the title but it is possible for legal ownership to differ from beneficial ownership, such as where a trust exists. Absolutely entitled Where a beneficiary is absolutely entitled to an asset held by a trustee, section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that any ‘act done by the trustee in relation to the asset’ is treated as if it had been done by the absolutely entitled beneficiary. As a result, if the act triggers a CGT event, the beneficiary will be the person who is subject to any CGT liability rather than the trustee. Express Trusts An express trust is intentionally created by the owner of property in order to confer a benefit upon another. It is created by express declaration, which can be effected by some agreement or common intention held by the parties to the trust. For an express trust to be created it is necessary that there is certainty of the intention to create a trust, certainty of the subject matter of the trust and certainty as to the object of the trust. While trusts can be created orally, all State Property Law Acts contain provisions derived from the Statute of Frauds that preclude the creation or transfer of interests in land except if evidenced in writing. In your case, the orders, made by consent, provide that your former spouse will transfer the “whole of their right title and interest” in the property to you by signing of a property transfer in registrable form. Furthermore, your former spouse is required to deliver up vacant possession of the property to you within 14 days of the date of the orders, and is thereafter restrained from entering the property. This indicates the intention that you receive both the legal and beneficial ownership of the property, rather than the existence of an express trust in your former spouse’s favour. Constructive Trusts A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned, whenever equity considers it unconscionable for the party holding title to the property in question to deny the interest claimed by another. The existence of a constructive trust is, however, dependent upon the order of the Court, even though that order may operate retrospectively by dating the origin of the trust from some earlier wrongful act. In your case, orders have been made under the Family Law Act which direct your former spouse to transfer their ownership interest in the property to you. The orders are made in relation to finalising property and financial matters between you and your former spouse, and do not concern the existence or declaration of a trust. Resulting or Implied Trusts A resulting trust, sometimes called an implied trust, is a trust that arises by operation of law in favour of the creator of some prior trust or other interest in certain circumstances. Those circumstances fall into two broad classifications: ● cases in which a settlor fails to completely dispose of the beneficial interest, or where a surplus arises after the original purpose of a trust has been satisfied or has ceased to exist; and ● cases in which someone purchases property in the name of another. A trust is presumed in favour of the party providing the purchase money. Where an individual purchases and pays for a property but legal title to it is transferred to another person at their direction, if that person is a stranger, the presumption of resulting trust arises and the property is held in trust for them. But where the property is transferred to the taxpayer’s immediate family, the presumption of resulting trust is replaced by the presumption of advancement which deems the purchase to be prima facie intended to advance the interests of the family members (i.e. an absolute gift).The consequence of the presumption of advancement being upheld is that the parties will hold their equitable interests in the property in the same proportions as their legal interests. Your case is dissimilar to the above example, because ownership of the property is to be transferred to you pursuant to an order of the court in the context of finalising your financial affairs with your former spouse. You are directed to pay any remainder of the sale proceeds to your spouse after the mortgage and other costs have been discharged. This is an adjustment of property interests ordered by consent under the Family Law Act , rather than in recognition that a trust exists. Conclusion In your case, you will obtain ownership of the property pursuant to orders made under the Family Law Act 1975 relating to break down of relationships between spouses. This will occur whether your former partner signs the transfer, or an officer of the Court signs in their place. Your obligations in respect to the sale of the property and payment of any residual proceeds to your former spouse will arise after you have become the owner of the property for CGT purposes. We do not consider that order 6 (g), which directs you to pay any remainder of the sale proceeds (once other costs and discharge of the mortgage have been accounted for) to your former spouse creates or results in you holding any express, constructive, or implied trust over the property in their favour. Therefore, section 106-50 of the ITAA 1997 will not apply. When you sell the property as ordered, CGT event A1 will occur. You will be liable to pay CGT in relation to the disposal because the property has never been your main residence.