Issue
Does a payment, representing the increase in value of a CGT asset, made by a taxpayer to their former spouse on the transfer of the asset to the taxpayer under a Family Court order, form part of the taxpayer's cost base or reduced cost base of the asset under Division 110 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The payment does not form part of the taxpayer's cost base or reduced cost base of the CGT asset under Division 110 of the ITAA 1997.
Facts
The Family Court made a property order in relation to the taxpayer's marriage breakdown.
The order required: • the taxpayer's former spouse to transfer their interest in an asset to the taxpayer; and • the taxpayer to pay to their former spouse an amount of money representing the increase in value of the CGT asset over the former spouse's period of ownership.
Reasons for Decision
Under Division 110 of the ITAA 1997 there are five elements which may be included in of the cost base and reduced cost base of a CGT asset. These elements are the same except for the third element.
The first element of the cost base is the money paid or required to be paid and the market value of any other property given or required to be given in respect of acquiring a CGT asset (subsection 110-25(2) of the ITAA 1997).
This element is modified by subsection 126-5(5) of the ITAA 1997. Under subsection 126-5(5), if a CGT asset is transferred between spouses because of a court order under the Family Law Act 1975 , the first element of the cost base in the hands of the transferee (taxpayer) is the asset's cost base in the hands of the transferor (former spouse) at the time the taxpayer acquired it. The first element of the asset's reduced cost base (if applicable) is calculated similarly.
The payment therefore cannot form part of the first element of the cost or reduced cost base of the asset that the taxpayer acquired from their former spouse.
The four remaining elements that may form part of the cost base or reduced cost base are: • incidental costs of acquiring a CGT asset; or that relate to a CGT event that happens in relation to the asset (subsection 110-25(3) of the ITAA 1997) • in respect of the cost base - non-capital costs of ownership of a CGT asset acquired after 20 August 1991 (subsection 110-25(4) of the ITAA 1997) • in respect of the reduced cost base - various balancing adjustment amounts as set out in subsection 110-55(3) of the ITAA 1997 • expenditure incurred to increase the value of a CGT asset (subsection 110-25(5) of the ITAA 1997) • expenditure incurred to establish, preserve or defend your title or right over a CGT asset (subsection 110-25(6) of the ITAA 1997)
The payment does not form part of any of these four elements. It is not an 'incidental cost' as that term is defined in section 110-35 of the ITAA 1997. It does not constitute a non-capital cost and is not a balancing adjustment amount. The payment was not made to increase the asset's value nor was it incurred in respect of the taxpayer's title or right over the asset.
Accordingly, the payment under a family court order, representing the increase in value of a CGT asset, made by a taxpayer to their former spouse on the transfer of the asset to the taxpayer, does not form part of the taxpayer's cost base or reduced cost base of the asset under Division 110 of the ITAA 1997. Note: This note has been added to explain the legislative changes made to certain capital gains provisions, as a result of Act No 32 of 2006, which received Royal Assent on 6 April 2006. For CGT events happening on or after 1 July 2005, the range of expenditure that may be included in the second, third and fourth elements of the CGT cost base of an asset has been increased. However, these changes do not affect the decision in this interpretative decision. [HISTORY: This ID has been amended to explain the legislative changes made to certain elements of the CGT cost base, where the relevant CGT event happens on or after 1 July 2005.]