As a general rule, capital gains tax (CGT) applies to all changes of ownership of assets on or after 20 September 1985. However, if you transfer an asset to your spouse because your marriage or relationship has ended, the related capital gain or loss for the person transferring the asset (the transferor spouse) is automatically disregarded (rolled over) in certain cases.
In effect, the person who receives the asset (the transferee spouse) will make the capital gain or capital loss when they later dispose of the asset. The asset's cost base is transferred to the transferree spouse.
This rollover automatically applies where a marriage or relationship ends on or after 20 September 1985, and:
- one spouse transfers an asset or a share of an asset to the other; or
- a company or trustee of a trust transfers an asset to one of the spouses.
Here are 13 important things to note about the CGT rollover relief for marriage or relationship breakdown:
1. The rollover automatically applies where the conditions for it are met; it is not a optional matter.
Planning: If a transferor taxpayer wishes to realise a capital loss on an asset, the asset should be transferred independently of the tax rule requirements for the rollover.
2. The transfer of the asset must occur pursuant to a specified court order or arrangements (as set out in the rollover provisions), such as a court order under the Family Law Act 1975 or a binding financial agreement between the parties under the Family Law Act 1975.
3. The rollover is only available for the transfer of an asset to a spouse or former spouse (including de facto and same sex spouses). It does not, for example, apply to the transfer of an asset to the deceased estate of a former spouse.
Query: It is not clear, in light of this rule, whether the rollover is available for the transfer of an asset to a child maintenance trust for the benefit of any children of the relationship (albeit, the argument could be made).
4. An asset transferred from a company or trust controlled by a spouse can also qualify for the rollover. Similarly, the rollover can apply where a right is created in the former spouse (eg shares in a company controlled by the other spouse).
5. The consequences for the transferor (be it a spouse or an entity controlled by the spouse) is that any capital gain of loss that would otherwise be realised on the transfer or the asset to the former spouse will automatically be disregarded.
6. In the case of the transfer of an asset acquired before 20 September 1985 (and therefore not subject to CGT), the transferee spouse will be taken to have acquired the asset at that time, and therefore will not be subject to CGT on a later sale or disposal of the asset.
7. In the case of an asset acquired on or after 20 September 1985 (and therefore subject to CGT), the transferee spouse will be taken to have acquired the asset at the time of the change in ownership and for the transferor's "cost". This will include the costs of transfer incurred by either party, and any capital gain or loss to the transferee.
Query: It is not clear whether such costs may include legal costs incurred by the transferor spouse in defending the proceedings as "reasonably" allocated to the asset or assets transferred.
8. For the creation of a CGT asset, the transferee spouse will be taken to have acquired the asset at the time he or she comes to own it and for a cost base equal to the incidental cost incurred by the transferor in creating the asset.
9. For the purpose of meeting the 12-month holding rule and qualifying for the 50% CGT discount on any later disposal of the asset, the combined period of ownership of the asset by the transferor and the transferee spouse is taken into account.
10. Where a company or trust transfers an asset to, or creates an asset in, a transferee spouse, adjustments are required to reduce the cost base of interests (ie shares or trust units) held in the company or trust as a result of the transfer or creation by reference to the market value of the asset transferred.
Warning: The payment of money or transfer of property from a company to a transferee spouse who is a shareholder of the company or an associate will be treated as a deemed dividend (under Div 7A of the Income Tax Assessment Act 1936) in the hands of the transferee spouse. It will be frankable if appropriate (although it is not clear whether a former spouse can be an "associate" of the company for these Div 7A purposes).
11. If a post-CGT dwelling is transferred between spouses, the transferee spouse will be liable for CGT on its later disposal to the extent that it did not qualify as the main residence of either spouse during the combined periods they owned it. As a result, a partial exemption may later arise to the transferee spouse under the relevant partial exemption rules.
Warning: As a result of this rule, it is important to factor any such potential liability into settlement negotiations between the parties.
12. If a post-CGT dwelling is transferred from a company or trust and the transferee spouse makes it his or her main residence, only a partial exemption will be available on its later disposal. This is because a dwelling can never qualify as main residence when owned by a company or trust, even if it was used as a main residence by one or both of the spouses when it was owned by the company or trust.
13. Where "collectables" (eg jewellery, antiques) or "personal use assets" are transferred to a spouse, they retain character as collectables or personal use assets in the hands of the transferee spouse. They are therefore subject to the rules for calculating capital gains and losses on any later sale or disposal by the transferee spouse.
Contact our Tax Consulting experts
If you have any questions about the above article, please contact our Tax Consulting experts:
B.COM, LLB, LLM, M.TAX, CTA
M.TAX, MACC, CPA
While we have made every attempt to ensure that the information contained in this article has been obtained from reliable sources, Kelly+Partners is not responsible for any errors or omissions, or for the results obtained from the use of this information.