CGT Rollover Relief – Relationship Breakdown

Remember that the CGT roll over relief does not permanently disregard any portion of a capital gain.  

This is because the entire capital gain generated between the time the asset was originally acquired by the transferor to the time the asset is eventually realised by the transferee (or where another CGT occurs) will be recognised and worn by the transferee. There is no cost base uplift for the transferee to eliminate the capital gain which accrues from the time the transferor spouse originally acquired the asset to the time the asset is transferred to the transferee spouse in accordance with an order or agreement. It is perhaps better to view the roll over relief in section 126-5 as a way of deferring and shifting the tax burden on the CGT asset to the transferee spouse.  

The transferee who acquires the CGT asset will inherit the cost base of the transferor (at the time of transfer) as the first element of the cost base. Therefore, any cost base additions after the transferor acquired the asset may be included in the cost base of the asset in the hands of the transferee (for example, non deductible interest, non deductible land tax, professional fees added to the cost base of the asset).    

By way of example, assume Poppy is required to transfer property to Samuel pursuant to a Family Court Order dealing with the distribution of assets following a relationship break down between the two. Poppy’s cost base of the property (a CGT asset held on capital account) was $1,000,000 at the time she acquired the property. Because of the accumulation of a number of non deductible expenses including renovations (capital works), the cost base of the land at the time of transfer was $1,500,000. When Poppy transfers the property Samuel who inherits the cost base of the property as it was at the time of transfer ($1,500,000) as the first element of the cost base of the asset. From that time onwards, further amounts could be added to the cost base of the asset, as allowable.  

So if Samuel acquires the property and then undertakes further non deductible renovations of $200,000 and eventually sells the land for $2,000,000, he would make a capital gain under CGT event A1 based on $2,000,000 (as capital proceeds) less the cost base of the asset which is $1,700,000 (i.e. $1,500,000 as the first element cost base + $200,000 further cost base additions). Samuel’s capital gain would be $300,000. This realised capital gain may be discountable to Samuel if the combined period of ownership between Poppy and Samuel was at least 12 months and where the other requirements in Division 115 of the ITAA 1997 were also satisfied.  

If a right (a CGT asset in and of itself) is created over an asset, the spouse who acquires that right will recognise as the first element of the cost base of that right the relevant amount/s listed below:    

• CGT event D1: the incidental costs the transferor incurred that relate to the trigger event.  

• CGT event D2: the expenditure the transferor incurred to grant the option.  

• CGT event D3: the expenditure the transferor incurred to grant the right.  

• CGT event F1: the expenditure the transferor incurred on the grant, renewal or extension of the lease.  

Remember that expenditure can includes the market value of any property given.  

For the transferor, any capital gain or capital loss which flows from the creation of the right will be disregarded.  

If the CGT asset transferred was acquired prior to 20 September 1985 (pre CGT), any capital gain to the transferee will generally be disregarded. Importantly, the pre CGT status is preserved to the transferee and to their benefit. The exemption may not be available in certain situations, such as where the majority underlying ownership changes from 20 September 1985 (apart from a change in ownership which is attributed to Subdivision 126-A roll over applying).  

To illustrate, assume there are five individuals that acquire a 20% interest in a property in 1980. On 20 September 1985, all five owners continued to hold their interest. Assume in 2000, the transferor spouse was ordered to transfer their 20% interest in the property to the transferee spouse. Then assume that by 2024, two of the five interest holders as at 20 September 1985  had decided to sell their interest in the property. In this case, because the transferee spouse stands in the shoes of the transferor spouse, the transfer of the asset to them does not constitute a change of ownership. Therefore, as the majority underlying interests of the asset has not changed the asset remains a pre CGT asset which is exempt from CGT. There has only been a 40% change in ownership interests from 20 September 1985 i.e. 2 lots of 20%. Refer to Division 149 of the ITAA 1997 for further information.  

If a collectable (such a jewellery or artwork) or personal use asset (assets used or kept mainly for personal enjoyment such a hobby boat) is passed to a transferee, the CGT rollover relief may also apply to disregard any capital gain or loss (if applicable).  

The relationship breakdown roll over may also be available if a company or trustee of a trust  disposes of a CGT asset to a transferee spouse as set out in section 126-15.  

The types of trigger events which can attract roll over treatment are similar to those listed in section 126-5. For example:  

• where there is a valid court order relating to breakdown of relationships,  

• a maintenance agreement,  

• a financial agreement under the Family Law Act. 

• something done under a written agreement where that is binding because of a law relating to breakdown of relationships between spouses etc.  

The additional conditions which apply to certain types of agreements (i.e. agreements under section 126-15 (1)(d), (da) or (f)) must also be satisfied, if applicable. These additional conditions include that:  

• At the time of the trigger event, the spouses or former spouses are separated;  

• At the time of the trigger event, there is no reasonable likelihood of cohabitation being resumed; and  

• The trigger event happened because of reasons directly connected with the breakdown of the relationship between the spouses or former spouses.  

Whether spouses have separated is determined according to how the Family Law Act answers that question.  

If relief is available under section 126-15, any capital gain or capital loss made by the transferor entity is disregarded and the transferee will inherit the cost base of transferred assets as it was in the hands of the company or trustee (in the same way as under section 126-5).   

Note that the asset must be transferred directly to the spouse in their individual name. The transfer of an asset to an entity controlled by the spouse will not be adequate for eligibility to roll over relief.  

Section 126-15 also provides a mechanism which enables the cost base of the shareholders interest in the company to be altered where the asset is transferred by the company to a spouse who is a shareholder. Specifically, the cost base of shareholders may be reduced by the fall in market value of the shares caused by the transfer and increased by any dividend assessed to the shareholder.  

However, if the property is transferred to an associate of a shareholder, the cost base of the shareholder’s shares may only be reduced by the fall in market value of the shares.  

Refer to Taxation Ruling 2014/5 for further details.  

There are special rules contained in section 126–20 that apply if a CGT event happens to a roll over asset where the transferor was a controlled foreign corporation (CFC) or a non resident trust.