Private ruling: capital gains - marriage breakdown
Published: January 2012
Ruling period: 1 July 2010 to 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the lump sum settlement received pursuant to the Financial Agreement assessable under the capital gains tax provisions? | A1: No

Relevant facts and circumstances: You and your spouse were 50% partners in a partnership business. You have been a 'silent' partner for the last six years during which time your spouse has received all income from the business. You separated from your spouse. You and your former spouse entered into a Financial Agreement made under the Family Law Act 1975 (FLA). The agreement is dated after your separation and is binding pursuant to section 90G of the FLA. It requires you to be paid an amount in consideration for surrendering your interests in the business to your former spouse. This amount is based on an agreed value for the business assets. You advise the business was valued by your accountant at this amount about five years ago. The assets are mainly unchanged and the valuation was on the assets of the business. There is no goodwill as the work is done on a sub-contract basis and there are no client lists or existing contracts to sell. The partnership was dissolved after the agreement was made. Your former spouse is now operating the business as a sole trader. In 2011 you were paid the agreed amount by your former spouse in accordance with the Financial Agreement.

Relevant legislative provisions: Income Tax Assessment Act 1997 subdivision 126-A | Income Tax Assessment Act 1997 section 126-5

Reasons for decision: Summary: No capital gains tax is payable on the sale of your business interests to your former spouse. | Detailed Reasoning - Marriage breakdown rollover relief: As a general rule, CGT applies to all changes of ownership of assets acquired on or after 20 September 1985. However, marriage breakdown rollover relief under Subdivision 126-A of the Income Tax Assessment Act 1997 (ITAA 1997) is potentially available when CGT event A1 happens involving asset transfers between spouses or former spouses. Where an asset is transferred to a spouse as a result of a marriage breakdown, there is an automatic rollover for the transferring spouse in certain circumstances. The rollover will allow the transferor spouse to disregard a capital gain or capital loss that would otherwise arise as a result of the disposal of their interest in the asset. In effect, the spouse who receives the asset will make the capital gain or capital loss when they subsequently dispose of the asset. Marriage breakdown rollover relief under section 126-5 of the ITAA 1997 applies if CGT event A1 happens because of something done under a financial agreement made under Part VIIIA of the FLA that is binding because of section 90G of the FLA and, at the time of the CGT event, the spouses involved are separated and there is no reasonable likelihood of cohabitation being resumed. Further, the CGT event must have happened because of reasons directly connected with the marriage. The rationale for the conditions is that there may be situations where asset transfers are not because of reasons directly connected with the breakdown of the marriage. | Detailed Reasoning - In your case:: The transfer was effected in accordance with a financial agreement made binding under section 90G of the FLA. You were separated at the time of the CGT event. CGT event A1 happens as a consequence of your marriage breakdown. As you meet the conditions, the marriage breakdown provisions of subdivision 126-A apply and any capital gain from the sale of your business interests is disregarded as per subsection 126-5(4) of the ITAA 1997

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.