Private ruling: Capital gains tax - calculation of cost base
Date of advice: 7 September 2016
Published: November 2016
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2016

Ruling: Q1: Will your cost base for the 50% interest in property 2 that you acquired in 20XX include the market value at the time of transfer? | A1: Yes.

Relevant facts and circumstances: You jointly owned a property 1 with your spouse until 20XX. Property 1 was your main residence. You jointly owned a rental property (Property 2) with your spouse until 20XX. You had a deed of financial agreement written up with your solicitor in 20XX to divide your matrimony assets and properties. Under the financial agreement you were required to transfer your share of the interests in Property 1 to your spouse. Under the financial agreement your spouse was required to transfer their share of the interests in Property 2 to you. The property transfers were completed in 20XX. Stamp duty was paid on the transfers of the properties. In 2011 it was bought to your attention that your financial agreement had not been correctly drafted, and was not made under a court order. At the time the property transfers occurred, you believed your financial agreement to be binding and therefore the marriage breakdown roll-over applied. No capital gains or losses were declared for the property transfers in 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Subsection 110-25(2) | Income Tax Assessment Act 1997 Subsection 110-55(2) | Income Tax Assessment Act 1997 Subsection 112-20(1) | Income Tax Assessment Act 1997 Paragraph 112-20(1) (c)

Reasons for decision: Summary: Marriage breakdown - rollover In the event 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. This roll-over also establishes that the cost base used is the sum of the initial amount paid to acquire the asset. 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. A CGT asset transferred between spouses by a private agreement is not viewed as having been transferred because of a court order. Even in the event that a court order later sanctions the transfer, it will not be viewed that the CGT asset was transferred under the court order as the ownership interest in the CGT asset has been disposed of prior to the court order, the date the transfer occurred. Cost base The cost base consists of five elements, as listed in Section 110-25 of the ITAA 1997. These elements are added together to calculate the cost base. Briefly these are: 1. Money paid or required to be paid for the property, including property given. 2. Incidental costs of acquiring the property, or costs in relation to the CGT event, for example, stamp duty, legal fees, agent's commission etc. 3. Costs of owning the asset such as rates, land taxes, repairs and insurance premiums. These costs can only be included if the asset was acquired after 20 August 1991. This does not include an amount that you have deducted or can deduct previously. 4. Capital expenditure you incur to increase or preserve the value of the asset such as renovations that are improvements rather than repairs. 5. Capital expenditure you incur to preserve or defend your title or right to the asset. The First element Under the general cost base and reduced cost base rules, the first element of the cost base and reduced cost base of an asset is the sum of the amount paid (or required to be paid) and the market value of property given (or required to be given) in respect of acquiring it: subsections 110-25(2) and 110-55(2) of the ITAA 1997. The market value substitution rule generally applies where parties do not deal at arm's length in connection with the acquisition of an asset (paragraph 112-20(1)(c) of the ITAA 1997). If the market value substitution rule applies, the first element of the cost base or reduced cost base of a CGT asset that is acquired from another entity is its market value at the time of acquisition: subsection 112-20(1) of the ITAA 1997. The treatment of acquiring further interests in a property is established in Taxation Determination TD 2000/31, Income tax: capital gains: if you own an interest in a CGT asset and you acquire another interest in that asset, do the interests remain separate CGT assets for capital gains purposes or do they become a single asset? This establishes that when you acquire a further interest in a property, the interests you have remain separate CGT assets for capital gains purposes. Application to your circumstances As you did not receive the transfer of your share in the Property 2 because of a court order, the conditions for the marriage breakdown rollover have not been met. Therefore in calculating the cost base for your interests in Property 2, as there is a separate date of acquisition for each interest, there is a separate cost base for each interest and the capital proceeds are determined separately for each interest. For your second ownership interest you will be required to use the market value of Property 2 at the date the asset was transferred to you as the transfers of the properties are not considered to have been dealt at arm's length. For the first element of the cost base, each interest is calculated separately. The first interests cost base includes 50% of the cost to acquire the asset when you first acquired it with your spouse. The second interests cost base includes 50% of the market value of Property 2 that you acquired when the title was transferred solely in your name in 20XX.