Capital gains tax: marriage breakdown rollover - transfer of asset from company to individual under court order

Will marriage breakdown rollover under Subdivision 126-A of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard a capital gain made by a company on the transfer of an asset to an individual because of a court order under the Family Law Act 1975?

Yes. In this case, all of the conditions for rollover in section 126-15 of the ITAA 1997 have been satisfied. Accordingly, any capital gain made by the company as a result of the transfer of the property to the individual in accordance with the court order will be disregarded.

A taxpayer was a director and the sole shareholder of a private company. The company acquired a property in 1997 and rented it out.

The taxpayer's marriage broke down. In the 2004-05 income year, as part of the property settlement between the taxpayer and their former spouse, the Family Court made an order that the property owned by the company be transferred to the taxpayer.

Because the market value of the property at the time it was transferred to the taxpayer exceeded its cost base, the company made a capital gain. The company wishes to disregard the capital gain under the marriage breakdown rollover provisions in Subdivision 126-A of the ITAA 1997.

Marriage breakdown rollover is available if the conditions set out in Subdivision 126-A of the ITAA 1997 are satisfied. This rollover is an automatic rollover and will apply whether or not a taxpayer chooses for it to apply: Taxation Determination TD 1999/60

For capital gains tax (CGT) events involving a company, rollover is available if the trigger event involves a company and a spouse or former spouse of another individual because of a court order under the Family Law Act 1975 : subsection 126-15(1) of the ITAA 1997. The consequences of the rollover are set out in section 126-5 of the ITAA 1997.

If the rollover applies, a capital gain or capital loss the company makes from the CGT event is disregarded: subsection 126-5(4) of the ITAA 1997.

For assets acquired by the company on or after 20 September 1985, the first element of the cost base of the property in the hands of the transferee is the asset's cost base in the hands of the company at the time the transferee acquired it. The first element of the reduced cost base is worked out similarly: subsection 126-5(5) of the ITAA 1997.

In this case, the company is transferring the property to the taxpayer as a result of a court order under the Family Law Act 1975. It is therefore considered that the rollover under Subdivision 126-A of the ITAA 1997 will apply.

Accordingly, the company can disregard the capital gain that it made from the transfer. The first element of the cost base and reduced cost base of the property in the hands of the taxpayer will be equal to the cost base and reduced cost base of the property in the hands of the company at the time the taxpayer acquired it. Note 1: If the taxpayer uses the property as their main residence, section 118-180 of the ITAA 1997 will apply to determine their entitlement to a main residence exemption. Note 2: The transfer of the property to the taxpayer may be treated as a dividend in accordance with subsection 109C(1) of the Income Tax Assessment Act 1936.