Capital Gains Tax & Relationship Breakdowns
Capital Gains Tax (CGT) applies to any change of ownership of an asset. However, if you transfer an asset to your spouse because of the breakdown of your marriage or relationship, there is usually an automatic “rollover” of the asset.
'Rollover' means the transferor spouse disregards the capital gain or loss that would otherwise arise. In effect, the person who receives the asset (the transferee spouse) will make the capital gain or loss when they subsequently dispose of the asset. The cost base of the asset is also transferred to the transferee spouse.
Generally the rollover applies if:
your marriage or relationship ended on or after 20 September 1985
ownership of an asset, or a share in a jointly-owned asset, is transferred between you and your spouse, or from a company or trust to one of you
the transfer of ownership is because of a court order, formal agreement or award.
You cannot choose whether or not the rollover applies.
Agreements the Rollover Applies to
The rollover doesn't apply if you and your spouse divide your property under a private or informal agreement (that is, not one of the court orders, formal agreements or awards described below).
The rollover applies to CGT events that happen because of either:
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 rollover also applies to CGT events that happen after 12 December 2006, because of one of the following:
A binding financial agreement
An award made in arbitration
A binding written agreement
These additional specific events are explained in full here
From 1 July 2009 the marriage or relationship breakdown rollover is extended to same-sex couples.
Agreements that do not require court intervention
For transfers that happen because of a binding financial agreement or a binding agreement used by a separating couple, rollover only applies if at the time of the transfer:
the spouses involved are separated
there is no reasonable likelihood of cohabitation being resumed
the transfer happened for reasons directly connected with the breakdown of the marriage or relationship.
The transfer may not be 'directly connected with the breakdown' if, for example:
the spouses had an agreement before the breakdown of their marriage or relationship stating that the particular property was to be transferred between them for other reasons not directly related to the marriage or relationship breakdown, or
the agreement provided for the transfer of non-specific property, the transfer does not occur for a considerable time (say, more than 12 months) after the agreement, and there are factors that suggest the transfer was not directly connected to the marriage or relationship breakdown.
CGT events the rollover applies to
The rollover applies to a range of capital gains tax (CGT) events involving the transfer of ownership of assets, where those events occur as a result of a court order, formal agreement or award.
The rollover applies to certain CGT events including the following:
Where the transferor:
Disposes of an Asset to the transferee spouse
Enters into an agreement with the transferee spouse
Creates a contractual or other right in favour of the transferee spouse
A comprehensive list of these applicable events are found here
Timing of the event
It's important to know when the CGT event happens because some of the marriage or relationship breakdown rollover rules apply to CGT events that happen after particular dates.
If an asset is transferred under a contract, the CGT event happens when the contract is entered into.
Please note that:
A binding financial agreement may be a contract.
A binding agreement used by a separating couple may also be a contract
If there is no contract, the CGT event happens when the change of ownership of the asset occurs.
Transfers made because of a court order or arbitral award are not made under a contract.
Therefore, no CGT event happens until the asset is transferred under the order or award.
Consequences of rollover applying or not applying
If the rollover applies
If the marriage or relationship breakdown rollover applies, then:
if you transfer an asset you disregard any capital gain or loss you make from the capital gains tax (CGT) event
if an asset (including a share of a jointly owned asset) is transferred to you, and the transferor acquired the asset on or after 20 September 1985, you're taken to have acquired the asset (or share of the asset), and the transferor's cost base for the asset, at the time it was transferred from your spouse (or a company or trustee).
If the asset transferred to you was acquired by the transferor before 20 September 1985, you're also taken to have acquired the asset before that date. This means it's a pre-CGT asset and you disregard any capital gain or loss you make when you later dispose of the asset.
However, if you make a major capital improvement to such an asset on or after 20 September 1985, you may be subject to CGT when you later dispose of it. This is explained here
If the rollover doesn’t apply
The rollover doesn't apply if you and your spouse divide your property under a private or informal agreement (that is, not one of the court orders, formal agreements or awards).
In this case:
if you transfer an asset, you must take into account any capital gain or loss you make when completing your tax return for that year
if an asset is transferred to you, you're taken to have acquired it at the time of transfer.
Special rules may apply if the amount paid by one spouse for property owned by the other is greater or less than the market value of the property and they are not dealing at arm's length.
ATO Example: Not dealing at arm's length
“Laurie and Jennie separated after living in a relationship for four years. To avoid legal costs, they decide to divide their assets without involving solicitors.
During their relationship they occupied a townhouse owned by Laurie. As part of their informal arrangement, they decided Laurie would keep it.
They also agreed that Laurie would transfer his half share of their rental property to Jennie in return for $6,000. Under the arrangement, Jennie would also become liable for the whole of the mortgage after the date of transfer.
Little or no bargaining took place between Laurie and Jennie and no other assets were transferred.
Jennie is taken to have paid the market value of Laurie’s share of the rental property. (The $6,000 she actually paid and the mortgage liability she assumed from Laurie are ignored.)
This is because:
CGT rollover does not apply (as the transfer did not happen because of a court order or a relevant agreement or award)
Jennie and Laurie did not deal with each other at arm’s length in connection with the transfer.
Laurie is taken to have received the market value of his share of the rental property at the time it was transferred to Jennie.
This means, in working out his net capital gain for the year he transferred the property to Jennie, he takes into account a capital gain or loss based on the market value of his half share at that time”
Disclaimer: Please be aware that all information was obtained from Australian Taxation Office and the applicable income tax laws. The information is an example only of the taxation treatment of assets in the case of a relationship breakdown. This information does not include any legal advice.