Property Settlement and Capital Gains Tax

Family & Relationship Law eBulletin - 30 June 2014

Summary

If your marriage or de facto relationship has broken down, understanding the implications of capital gains tax on property settlements is something that you will need to think about when you are negotiating your property settlement. In this article we take a look at common types of property division and how they are affected by Capital Gains Tax.

 

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Property and Capital Gains Tax

In Australia, most property settlements that take place following a marriage or de facto relationship breakdown will involve adjusting each party’s interest (ie how much each person owns) in one or all of the following types
of property:

  • Real estate;
  • Shareholdings;
  • Motor vehicles;
  • Businesses.

It’s also quite common for property settlements to involve corporate entities and Family Discretionary Trusts.

Depending on the type of property that is being settled, different Capital Gains Tax rulings and exemptions apply.

How can property be settled?

There are a number of ways in which separating couples can adjust their property interests, including:

1. implementing transfers amongst themselves;

2. by Court Order (either by consent or after a Defended Hearing);

3. by way of Financial Agreement under the Family Law Act.

Real estate

The matrimonial home

The most common form of real estate is the matrimonial home which is often held in the joint names of the separating couple. Generally, a settlement which involves the transfer of the matrimonial home from one person to the other will not be affected by Capital Gains Tax. This is because the Capital Gains Tax legislation contains a main residence exemption.

Family Trusts

Real estate held by a Trustee of a Family Trust can, in some instances, be transferred to a spouse beneficiary through a Court Order or Financial Agreement. This may attract a ‘rollover relief’ which will postpone the payment of Capital Gains Tax.

If the transferee (ie the person receiving the property) was a beneficiary of the Trust at the time the asset was acquired, and if the property is located in Victoria, then the transfer may also be exempt from Victorian Stamp Duty.

Investment properties

Families often have investment properties which are held in the name(s) of one or both of the parties, or in the name of a corporate entity as Trustee for a Family Discretionary Trust.

If the property was acquired after 20 September 1985, a transfer of the property will generally be a Capital Gains Tax event. This means that the difference between the cost of the property and the sale price (or half the difference if the property has been held for more than 12 months), will be added to the income of the transferor and taxed at the transferor’s marginal income tax rate.

When a court order is involved

If the property transfer is the result of orders by the Family Court or Financial Agreements under the Family Law Act 1975, the transfer is covered by ‘compulsory roll over relief’ under the Income Tax Assessment Act.

In this situation, Capital Gains Tax is usually not payable immediately, however the transferee takes it with the understanding that the property is ‘pregnant’ with Capital Gains Tax, which will be payable when he or she sells it.

When a court order is not involved

In some circumstances a transfer of an investment property is not part of a Court Order or Financial Agreement. It may be, for instance, that the registered owner of the property has accumulated capital losses. In this situation it can be beneficial to both parties that the capital gains of a property are offset against the accumulated losses.

A complication can arise if one party leaves the matrimonial residence and purchases another home in which they plan to live. In normal circumstances that party would want to nominate the new home as their main residence for Capital Gains Tax purposes. In this situation, it may be advisable to transfer the former matrimonial residence to the party remaining in the property. The transfer can be done through Court Order, Financial Agreement (or otherwise, depending on the circumstances) to ensure that the owner of the new property is not disadvantaged so far as Capital Gains Tax is concerned.

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Shareholdings

Transfers of shares between spouses and de facto couples are generally subject to Capital Gains Tax unless the transfers are by way of a Court Order or a Financial Agreement and therefore attract “rollover relief”.
 

Motor vehicles

Transfers of motor vehicles are generally not subject to Capital Gains Tax.
 

Businesses

A transfer of a business or a company structure operating a business (or the closure or sale of a business) may well have significant taxation consequences. Specialist advice must be provided in order to ensure that any settlement is undertaken in the most tax effective manner.
 

Getting advice

If you are unsure of the potential impact that Capital Gains Tax may have on your property settlement, it is important to seek appropriate legal and financial advice.

The senior lawyers in the Lander & Rogers Family & Relationship Law group can alert you to the circumstances in which there are likely to be taxation consequences, and direct you towards appropriate providers of taxation advice. Settlements can be crafted in a way which minimises taxation consequences and therefore maximises the asset pool to be divided.

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Further information

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

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