Private ruling: Capital gains tax - cost base
Date of advice: 22 December 2016
Published: June 2017
Ruling period: Year ended 31 June 2015
Date scheme commenced: 1 June 2014

Ruling: Q1: Can you include the market value of the property at the time it was transferred to you in the cost base when calculating your capital gain or capital loss? | A1: Yes. | Q2: Can you include the initial purchase price of the property in 199X, cost of capital improvements (until the property was transferred to you), and the money paid to your former de facto for the property in the cost base when calculating your capital gain or capital loss? | A2: No.

Relevant facts and circumstances: In 199X you purchased a property in your then de facto partner's name (the property). You paid to renovate the property which you lived in with your then de facto partner. Your relationship ended in early 200X and you settled the matter privately. Your former de facto partner remained living at the property for some time until you settled your affairs in 200X. At the time you valued the property at $XXX,X00.00. You agreed to pay your former de facto partner half of the property's value less allowance for items you had bought that your former de facto kept, and other considerations including a holiday they took and the period of time they had possession of the property between the relationship breakdown and the settlement. In early 200X, you paid your former de facto approximately $X0,000.00. In early 200X, you became the legal owner of the property on the title. You have lived in the property for a period of time, and also rented it out for a period of time. In early-mid 201X, you entered into a contract to sell the property, and settled on DD MM YY for approximately $XX0,000.00. This arrangement is a private property settlement not involving the courts.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 112-20

Reasons for decision: Summary: You will use the market value of the property at the time it was transferred to you in the cost base when calculating your capital gain or capital loss. | Detailed Reasoning - Marriage breakdown roll-over: Where an asset is transferred to you from your spouse as a result of a relationship 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. A capital gains tax (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. In your case, the property was not transferred to you because of a court order. Therefore, as the conditions for the rollover have not been met, you will not be eligible for it. | Detailed Reasoning - Cost Base: Section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the general rules of cost base. The cost base of a CGT asset consists of five elements. 1. The total of any money you have paid to acquire the asset; 2. The incidental costs incurred in acquiring the asset (such as stamp duty and brokerage fees); 3. Non-capital costs of ownership (such as interest and costs of maintaining the asset etc); 4. Capital expenditure incurred to increase or preserve the asset's value; and 5. Any costs incurred to establish, preserve or defend your title to the asset. Once you have established the cost base of the property you will be required to subtract the cost base from any consideration received. In your case, as you acquired the property in a non-arm's length transfer, the market substitution rule will apply. Section 112-20 of the ITAA 1997 discusses modifications to the cost base of an asset and states that you substitute the market value as the first element of its cost base if you did not deal at arm's length with the previous owner in acquiring the asset. An individual is said to be dealing at arm's length with someone if each party acts independently and neither party exercises influence or control over the other in connection with the transaction. The law looks at not only the relationship between the parties but also the quality of the bargaining between them. In your case, you have not dealt at arm's length with your former de facto partner. This means that you are required to use the market value of the property when calculating the cost base. The first element of your cost base will be replaced with the market value at that time that you acquired the property in early 200X when calculating any capital gain or loss on the disposal of the property in 201X. As you will use the market value rule, the initial purchase price of the property in 199X, cost of capital improvements prior to the property being transferred to you, and the money paid to your former de facto for the property will not constitute part of your cost base.