It’s very important that property you receive in your divorce settlement does not have a capital gain larger than your ex-spouse. Regarding determining which items are taxable a list of the most common items involved in a property settlement such as the marital home, investment properties and companies.
If the home or an interest in the home (after 20th September 1985) was purchased/ made and the partner then sells the property the Capital Gains Tax may be charged depending on how the property was used before and after the relationship broke down.
If the partner receiving the property continues to live in the property until it is sold and does not own another home elsewhere, then the main ‘residence exemption’ will continue to apply and no capital gains tax will need to be paid on the property if sold. If the partner is receiving the property rents it out and does not own property elsewhere then a ‘temporary absence rule’ may apply.
This is beneficial in that the property may continue to enjoy the tax-free treatment for up to six years until the property becomes exposed to partial Capital Gains Tax.
As it has been said before there are some benefits of finalizing the property settlement via a court order. It allows both parties to know their rights and most importantly means that the transfer of ownership between each partner is exempt from stamp duty.
The $30 000 or so looks like a whole lot more when costly divorce settlements are taking place, and both parties would want to retain as much money as they can. Although there is no exemption to Capital Gains Tax, the affected party will get ‘rollover relief’ which means that the Capital Gains Tax is paid at a later date rather than at the time of transferring the property.
As you may only be looking at your financial commitment in the short term costs such as future ‘rollover relief’ may distort the number of financial obligations you will have during your lifetime and thus can have severe long-term implications if not catered for in the affected partner’s financial budget.
For example, if your partner retains the former matrimonial home and you retain the investment property which is both valued at the same price, then you will be liable for CGT, while the sale of the home is likely to be exempt. Each situation is unique, and it is highly recommended that you speak to a financial advisor as part of your property settlement to obtain specialised advice. A financial advisor can also assist you in organising your finances after your property settlement.
In most cases, if a company transfers assets to another company, then they are often required to pay Capital Gains Tax. This will not occur if a special exemption applies. If partner A transfers the asset to partner B then the law will treat it as though it has been sold at its market value. Taxation law, however, provides for a Capital Gains Tax CGT which is similar to a rollover of funds at the matrimonial home. It means that any capital gain or loss on the asset transfer if the transfer is a result of a marriage breakdown. It is also possible that a stamp duty exemption will apply.
If both partners own shares in a private company then division 7A rules may come into play. This division may cause complication in that it may give rise to unintended tax consequences in the property settlement.
Briefly speaking the division states that if a private company has a distributable surplus and then makes a payment to a partner who is a shareholder or an associate of the company in which he/she holds shares in then the payment will be treated as a taxable dividend. This payment also includes the transfer of property.
Division 7A rules may also apply to a loan which is not repaid by the year-end and is provided by the private company. As per the division, the loan will not need to be paid if the economic benefit is provided to the shareholder or the associate of the company in which he/she holds shares in.