Marriage or relationship breakdown

Overview

Read this section if your marriage or relationship ended on or after 20 September 1985 and you transfer an asset or a share of an asset to your spouse, you receive an asset or a share of an asset from your spouse, or a company or trustee of a trust transfers an asset to you or your spouse.

When we talk about ‘your spouse’, this includes your former spouse. It does not include your spouse's or your former spouse's legal personal representative (such as an executor).

Transfer of an asset means transferring ownership of an asset to the transferee spouse and includes creating an asset in their favour (such as a right to use property).

Where we talk about an asset, this includes a share of, or an interest in, a jointly owned asset.

Transferee spouse refers to the spouse to whom an asset is transferred, while the transferor is the person (or a company or the trustee of a trust) who transfers an asset to the transferee spouse.

As a general rule, CGT applies to all changes of ownership of assets on or after 20 September 1985. However, if you transfer an asset to your spouse as a result of the breakdown of your marriage or relationship, there is an automatic rollover in certain cases. You can't choose whether or not it applies.

This rollover ensures the transferor spouse disregards a capital gain or capital loss that would otherwise arise. In effect, the one who receives the asset (the transferee spouse) will make the capital gain or capital loss when they subsequently dispose of the asset. If you are the transferee spouse, the cost base of the asset is transferred to you.

Conditions for the marriage or relationship breakdown rollover

For the rollover to apply, the CGT event must have happened because of:

• an order of a court or 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 financial agreement that is binding under section 90G of the Family Law Act 1975 (known as a ‘binding financial agreement’) or a corresponding written agreement that is binding because of a corresponding foreign law
• an award made in an arbitration referred to in section 13H of the Family Law Act 1975 (known as an ‘arbitral award’) or a similar award under a corresponding state, territory or foreign law
• a written agreement that is binding because of a state, territory or foreign law relating to breakdowns of relationship between spouses and because of such law, a court is prevented from making an order      
  • about matters to which the agreement applies, or
  • that is inconsistent with the terms of the agreement for those matters, unless the agreement is varied or set aside.

These are referred to below as ‘binding agreements’ used by separating couples. The following agreements relating to relationship breakdowns meet these requirements:

• a domestic relationship agreement or termination agreement that complies with subsection 47(1) of the New South Wales Property (Relationships) Act 1984
• a recognised agreement within the meaning of the Queensland Property Law Act 1974
• a cohabitation agreement that is a certificated agreement within the meaning of the South Australian's Domestic Partner Property Act 1996
• a personal relationship agreement or separation agreement that complies with subsection 62(1) of the Tasmanian Relationships Act 2003
• a financial agreement that complies with subsection 205ZS(1) of the Western Australian Family Court Act 1997
• a domestic relationship agreement or termination agreement that complies with subsection 33(1) of the Australian Capital Territory’s Domestic Relationships Act 1994
• a cohabitation agreement or separation agreement that complies with subsection 45(2) of the Northern Territory’s De Facto Relationships Act
• a relationship agreement that complies with subsections 59(1) and (2) of the Victorian Relationships Act 2008 (which came into effect on 1 December 2008).

From 1 March 2009 the rollover also applies to CGT events that happen because of a financial agreement that is binding because of section 90UJ of the Family Law Act 1975 (known as a ‘binding financial agreement’) or a corresponding written agreement that is binding because of a corresponding foreign law. Section 90UJ relates to agreements made between parties to a de facto relationship.

In addition, from 2009–10 the marriage breakdown rollover was extended to same-sex couples.

Timing of the CGT event

Because certain changes to the marriage or relationship breakdown rollover rules apply to CGT events that happened after 12 December 2006 it is important to know when those events happened. Appendix 1 contains information about the timing of CGT events.

If an asset was transferred under a contract, the CGT event happened when the contract was entered into.

A binding financial agreement may be a contract. The time at which a contract is entered into depends on the terms and conditions of the agreement and the relevant legislation being satisfied such that the agreement can take effect. In the case of a binding financial agreement, a separation declaration has to be made under section 90DA of the Family Law Act 1975 before the agreement can take effect.

A binding agreement used by a marriage or relationship breakdown couple may be a contract. The time at which a contract was entered into depends on the terms and conditions of the agreement and the relevant legislation being satisfied such that the agreement could take effect.

If there is no contract, the CGT event happened when the change of ownership of the asset occurred.

Transfers made because of a court order or arbitral award are not made under a contract. Therefore, no CGT event happened until the asset was transferred under the order or award.

If the asset was transferred under an agreement to which CGT event B1 (see Appendix 1) applied, the event happened when use of the asset passed to the transferee spouse.

Binding financial agreements can be entered into before, during or after marriage or relationship. Arbitral awards allow property and financial matters of separating couples to be settled using arbitration. These arrangements allow separating couples to settle their affairs without having to go through court processes, which are often costly and protracted.

Rollovers that don't require court intervention

For transfers that happen because of a binding financial agreement, or a binding agreement used by a separating couple, the rollover only applies if at the time of the transfer:

• the spouses involved were separated
• there is no reasonable likelihood of cohabitation being resumed, and
• the transfer happened because of 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
• 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 factors are present that suggest the transfer was not directly connected to the marriage or relationship breakdown.

Relevant CGT events

For the rollover to apply, one of the following events must have happened. The transferor:

• disposed of an asset to the transferee spouse (CGT event A1)
• entered into an agreement with the transferee spouse under which
  • the right to use and enjoy a CGT asset passed to the transferee spouse
  • title in the asset will or may pass to the transferee spouse at the end of the agreement (CGT event B1). There is no rollover if title in the CGT asset does not pass to the transferee spouse when the agreement ends
• created a contractual or other right in favour of the transferee spouse (CGT event D1)
• granted an option to the transferee spouse or renewed or extended an option granted to them (CGT event D2)
• owned a prospecting or mining entitlement, or an interest in one, and granted the transferee spouse a right to receive income from operations carried on by the entitlement (CGT event D3), or
• was a lessor and granted, renewed or extended a lease to the transferee spouse (CGT event F1).

There is no rollover for the transfer of trading stock.

Consequences of the rollover

In this section:

• You transfer the asset
• The asset is transferred to you

You transfer the asset

If you transferred the asset, the consequences of the rollover are:

• you disregard any capital gain or capital loss for assets acquired before 20 September 1985
• for assets acquired on or after 20 September 1985, the marriage or relationship breakdown rollover ensures you disregard any capital gain or capital loss you make from the CGT event that involves you and the transferee spouse.

The asset is transferred to you

You will need to determine the date the asset was acquired before being transferred to you.

Assets acquired before 20 September 1985

If a CGT asset, including a share of a jointly owned asset, was transferred to you because of the breakdown of your marriage or relationship and it was acquired by the transferor before 20 September 1985, you are also taken to have acquired the asset before that date. You disregard any capital gain or capital loss you make when you later dispose of the asset.

However, if you made a major capital improvement to that asset after 20 September 1985, you may be subject to CGT when you dispose of it or another CGT event happens to that asset.

For more information, see Other capital improvements to pre-CGT assets.

Assets acquired on or after 20 September 1985

The rules are different if the asset was acquired by the transferor on or after 20 September 1985. In this case, if you received the CGT asset (or a share of a jointly owned asset) and there was a marriage or relationship breakdown rollover, you are taken to have acquired the asset (or share of the asset) at the time it was transferred from your spouse (or the company or trustee).

To calculate your capital gain or capital loss when a later CGT event happened, the first element of your cost base and reduced cost base are the same as the cost base and reduced cost base of your spouse (or the company or trustee) at the time of the transfer. Your cost base and reduced cost base also include any costs incurred by you or the previous owner (your spouse, the company or trustee) in transferring the particular asset on the breakdown of your marriage or relationship, such as conveyancing costs and stamp duty. General legal costs relating to the breakdown or incurred in seeking a property settlement, and payments made under a Family Court order representing the increase in value of the CGT asset, are not included.

If the transferor’s cost base includes an amount of indexation, you may later have to recalculate the first element of your cost base to exclude that amount if you want to apply the CGT discount to your capital gain.

If you acquired the asset from your spouse (or the company or trustee) before 11:45 am AEST on 21 September 1999, you may be able to use the indexation method when calculating your capital gain. This can only apply if your and your spouse’s combined period of ownership is 12 months or more (or your and the company’s or trustee’s combined period of ownership is 12 months or more).

If you acquired the asset after 11:45 am AEST on 21 September 1999, you can't use the indexation method when calculating your capital gain but you may be able to use the discount method. You can use the discount method to calculate your capital gain if your and your spouse’s combined period of ownership is 12 months or more. If the period is less than 12 months, you use the 'other' method.

Collectables or personal use assets remain collectables or personal use assets when they are transferred from your spouse (or the company or trustee) in the case of a marriage or relationship breakdown rollover.

For information about collectables and personal use assets, see What is a CGT asset?

There are several instances where your spouse (or a company or trustee) may create an asset in your favour. Table 5 explains how to calculate the first element of your cost base and reduced cost base of that asset in each case.

Table 5: Calculation of cost base

CGT event	First element of cost base and reduced cost base
Creating contractual or other rights (D1)	Incidental costs incurred by the transferor that relate to the event
Granting an option (D2)	Expenditure incurred by the transferor to grant the option
Granting a right to income from mining (D3)	Expenditure incurred by the transferor to grant the right
Granting a lease (F1)	Expenditure incurred by the transferor on the grant renewal or extension of the lease

You are taken to have acquired the asset at the time specified by the CGT event. For example, for CGT event D1, you acquired the asset at the time you entered into the contract, or, if there is no contract, at the time the right was created. For more information, see Appendix 1.

CGT assets transferred by a company or trust

If a company or a trustee of a trust transferred a CGT asset to a spouse, adjustments are required to the relevant cost base and reduced cost base of interests in the company or trust. These may have been shares (or indirect interests in shares) in the company, units in a unit trust and other interests in the trust. They are reduced in value by an amount that reasonably reflects the fall in their market value as a result of the transfer of the CGT asset.

If the transferor was a controlled foreign corporation or a foreign trust, there are special rules for working out the capital gain or capital loss for a subsequent CGT event.

Generally, the transfer of an asset from a private company to a spouse who is a shareholder or an associate of a shareholder is treated as a payment for the purposes of Division 7A of the Income Tax Assessment Act 1936, which the company may be taken to have paid a dividend because of that payment.

For more information, see Payments by private companies.

If these rules apply to you, seek help from us or a recognised tax adviser.

Superannuation interests

Payment splits

A CGT rollover may apply if an interest in a small superannuation fund is subject to:

• a payment split on the breakdown of relationship between spouses
• a CGT asset of a small superannuation fund is transferred to another complying superannuation fund.

A small superannuation fund is one that is a complying fund with no more than 6 members.

Transfer of own interest in a small superannuation fund

A trustee of a small superannuation fund also qualifies for CGT rollover when the trustee transfers an asset or assets reflecting the entire personal interest of one of the spouses or former spouses to the trustee of another complying superannuation fund for the benefit of that spouse. For the rollover to apply both spouses must hold an interest in the small superannuation fund before the transfer. This allows spouses to separate their superannuation arrangements on the breakdown of their relationship without any CGT liability.

To qualify for a rollover, the spouses have to be permanently separated at the time of the transfer, the transfer has to have happened because of reasons directly connected with the breakdown of the relationship between spouses and, the transfer has to have been made in accordance with:

• a court order made under section 79 or subsection 90AE(2) or 90AF(2), section 90SM or 90YX of the Family Law Act 1975 or a corresponding foreign law
• a court order made under a state, territory or foreign law relating to breakdowns of relationship between spouses that corresponds to an order made under the Family Law Act 1975
• an award made in an arbitration referred to in section 13H of the Family Law Act 1975 (known as an arbitral award) or a corresponding award made in an arbitration under a corresponding state, territory or foreign law
• a financial agreement that is binding under section 90UJ of the Family Law Act 1975 (known as a ‘binding financial agreement’) and was made on or after 1 March 2009
• a financial agreement that is binding under section 90G of the Family Law Act 1975 (known as a ‘binding financial agreement’) or a corresponding written agreement that is binding because of a corresponding foreign law
• a written agreement that is binding because of a state, territory or foreign law relating to breakdowns of relationship between spouses and, that because of such a law, a court is prevented from making an order about matters to which the agreement applies, or that is inconsistent with the terms of the agreement for those matters, unless the agreement is varied or set aside.

Once the trustee has obtained a CGT rollover for such a transfer, the rollover is no longer available for a transfer of any asset reflecting the personal superannuation interest of the other spouse if that later transfer arises out of the same marriage or relationship breakdown.

The consequences of the rollover for the transfer of a superannuation interest are the same as for the transfer of other assets between spouses as a result of a marriage or relationship breakdown.

Cash settlements

Changes to the law ensure that no CGT liability arises in relation to the ending of spouses’ rights that directly relate to the breakdown of their marriage or relationship, including if they receive cash as part of a breakdown settlement. No CGT liability arises if, at the time the rights end, the spouses were separated and there was no reasonable likelihood of cohabitation being resumed.

Real estate that was a main residence

You will need to determine the date the CGT event happened.

Transfers where the CGT event happened on or before 12 December 2006

If a dwelling (or an interest in a dwelling) acquired by your spouse on or after 20 September 1985 was transferred to you under a CGT event that happened on or before 12 December 2006, and marriage or relationship breakdown rollover applies, you are entitled to an exemption from CGT (when you dispose of it) for the period it was your main residence after it was transferred to you.

If the dwelling was your main residence, you may only qualify for a partial exemption if:

• it was your main residence for only part of the period after it was transferred to you
• you used the dwelling to produce assessable income, or
• the land on which the dwelling is situated is more than 2 hectares.

Keep all relevant records. Make sure you get any records you need from your spouse if you don’t already have a copy, including records that show:

• how and when they acquired the dwelling (or the interest in a dwelling)
• its cost base when they transferred it to you.

For more information, see Real estate and main residence.

Transfers where the CGT event happened after 12 December 2006

If a dwelling (or an interest in a dwelling) acquired by your spouse on or after 20 September 1985 was transferred to you under a CGT event that happened after 12 December 2006, and the marriage or relationship breakdown rollover applies, you take into account the way in which both of you used the dwelling during your combined period of ownership when determining your eligibility for the main residence exemption.

This means you are entitled to a full exemption from CGT (when you dispose of it) if the land on which the dwelling is situated is 2 hectares or less, and:

• during the period your spouse owned the dwelling, it was their main residence and was not being used by them to produce assessable income, and
• during the period you owned the dwelling, it was your main residence and was not being used by you to produce assessable income.

If any of these conditions are not met, you may qualify for a partial exemption.

If the dwelling was not your or your spouse’s main residence during all of your combined period of ownership, you work out the proportion of your capital gain that is taxable using the formula:

A × (B + C) ÷ D

Where:

• A is total capital gain or capital loss
• B is number of days it was not your spouse's main residence during their ownership period
• C is number of days it was not your main residence during your ownership period
• D is number of days in your combined period of ownership.

For more information, see Real estate and main residence.

Keep all relevant records. Make sure you get any records you need from your spouse if you don’t already have a copy, including records that show:

• how and when they acquired the dwelling (or the interest in a dwelling)
• its cost base when they transferred it to you
• the extent (if any) to which it was used to produce income during their ownership period (for example, the periods when it was rented out or available for rent) and the proportion of the dwelling that was used for that purpose
• the number of days (if any) it was their main residence during their ownership period.

Home first used to produce income rule applies to combined period of ownership

If a dwelling acquired on or after 20 September 1985 is used as a main residence from the time it is acquired and is later used to produce income, the ‘home first used to produce income’ rule may apply. For the rule to apply, the first income-producing use must be after 20 August 1996 and the dwelling must qualify for full main residence exemption immediately prior to it being used to produce income. See Home first used to produce income.

If the dwelling (or an interest in the dwelling) is transferred to you under a CGT event that happened after 12 December 2006 and the marriage or relationship breakdown rollover applies to the transfer, the CGT main residence exemption rules take into account the way you and your spouse use the dwelling during your combined period of ownership.

Where the ‘home first used to produce income’ rule and the marriage or relationship breakdown rollover apply and the dwelling (or an interest in the dwelling) was transferred to you by your spouse, you are taken to have acquired it at the time it is first used to produce income for its market value at that time. The first income-producing use may be during your or your spouse’s ownership period.

Choices made under the CGT main residence rules

In certain circumstances, you may choose to treat a dwelling as your main residence for a period, even though you no longer live in it, see Continuing main residence status after dwelling ceases to be your main residence or you are yet to live in it, see Constructing, renovating or repairing a dwelling on land you already own.

Such choices are not required to be made by a transferor spouse where a rollover applies because the capital gain or capital loss is disregarded. However, there is nothing to prevent the transferor spouse making a choice (for example, as part of the negotiations with the transferee spouse and transferee spouse’s advisers about the transfer of a dwelling or an interest in a dwelling).

If there was a period when the transferor spouse and transferee spouse had different main residences before they separated, they need to make a choice to either:

• treat one of the dwellings as the main residence of both of them for the period
• nominate the different dwellings as their main residences (and obtain a partial exemption on both).

Choices relating to the main residence exemption generally need to be made by the day the person lodges their tax return for the income year they transfer or enter into the contract to sell the dwelling (or their interest in it) or another CGT event happens to it. In most cases, the way in which the tax return is prepared is sufficient evidence of that choice.

For the practical reasons of negotiating a property settlement, any choices the transferor spouse decides to make would generally be expected to be made before they transfer the dwelling (or their interest in it) to the transferee spouse.

A signed statement could be provided by the transferor spouse to the transferee spouse at the time of the property settlement as evidence of the making of a choice. Such a statement would be evidence that the transferee spouse could use to support the calculation of any capital gain or capital loss they make when the dwelling is later disposed of or another CGT event happens to the dwelling.

For more information, see Choices.

Dwellings transferred from a company or the trustee of a trust

If a dwelling (or an interest in a dwelling) was transferred to you from a company or trustee of a trust, and the marriage or relationship breakdown rollover applies to the transfer, you are treated as having owned the dwelling while it was owned by the company or trustee. However, you can't get the main residence exemption during any part of the period that the company or trustee owned it (even if you lived in the dwelling during that time).

Therefore, if a dwelling is transferred to you by a company or trustee as a result of your marriage or relationship breakdown, you will be entitled to the exemption only for the period after it was transferred when it was your main residence. You work out the proportion of your capital gain or capital loss that is exempt by dividing the period after the transfer that it was your main residence by the combined period you and the company or trustee owned it.

For more information, see Real estate and main residence.

Consequences of the rollover not applying

If you and your spouse divide your property under a private or informal agreement (not because of a court order, a binding financial agreement, an arbitral award or another agreement or award referred to above), the marriage or relationship breakdown rollover does not apply.

If this is the case, you must take any capital gain or capital loss you make on the transfer of the asset into account in working out your net capital gain (or net capital losses carried forward to future years) in your tax return for that income year.

The spouse to whom the asset is transferred is taken to have acquired the asset at the time of transfer.

Special rules may apply if a spouse receiving property does not pay anything for it, or 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. In these cases, the transferee is taken to have paid the market value of the property and the transferor is taken to have received the market value of the property.

You are said to be dealing at arm’s length with someone if each of you acts independently and neither of you exercises influence or control over the other in connection with the transaction. It depends not only on the nature of your relationship but also the quality of the bargaining between you.

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