Capital Gains Tax & Family Law Settlements

The transfer from one party to the other party of the interest of that party in the former matrimonial home, pursuant to an order of the Family Court or a Family Law property settlement, in the past, had been exempt from Capital Gains Tax (CGT).

If an asset is sold, it is necessary to pay Capital Gains Tax, whether profit has been made or not from when it was first purchased.

It is very important to be aware of the presence of Capital Gains Tax (CGT) when a property settlement is necessary when a marriage or partnership has come to an end. It is particularly important to establish the status of an asset which was purchased before 19th September 1985 or an asset that was acquired on 20th September 1985 or after that date.

When valuing assets that will be liable for CGT that have to be sold due to a court order then CGT must be included in the calculations. It is essential to confirm what assets must be sold so that accurate calculations can be made.

A roll-over permits the putting off of a capital gain or loss from a CGT and takes place automatically when an asset has to be transferred in the situation of a marriage breakdown when all the pre-conditions have ultimately been met

In the situation of an asset which is transferred to a spouse or ex- spouse which includes those that have a de-facto status and is the result of a maintenance agreement or court order the roll- over provisions laid out by the ITAA permits the transferee to own the asset with almost all of the CGT features that were present before the transfer took place.

This means an asset that is pre-CGT keeps that status following the transfer. An example of this is when a property which was purchased before September 19th 1985 can CGT free be transferred to a spouse. It keeps this exemption status while in the hands of the spouse a long as the requirements related to roll-over relief have been met. 

A capital loss or gain which has been generated from a CGT asset gained after September 20th 1985 which is transferred following a court order or through a financial agreement is normally rolled over. An example of this is if the property that is to be transferred has a cost base amounting to $100,000. In the situation of a post-CGT asset the transferee will be the inheritor of the cost base of the transferor while keeping any indexation allowances that may apply.

The transferee will at some point take the responsibility for any CGT liability. This should be included into consent orders or a settlement agreement that has been reached by the ex marriage partner and his or her spouse including a de facto spouse.

The person will inherit any pending capital gain, e.g. if the asset has a value of $400,000 but the cost base at the particular time to the transferor spouse or former spouse is just $100,000, then a large capital gain would take place if the asset was sold and the transferee will be responsible for taking on this liability.

If a pre-CGT asset is received from a present or previous spouse in these circumstances, the true value of that asset could be present market value, less realisation costs. However, if the asset that is to be transferred was gained on or after 20th September 1985 by the person’s current or former spouse, the real value of the asset will be considerably less.

The provisions for roll over provide a benefit to the transferor who will not incur any CGT at the date of transfer. Instead the transferee spouse takes on the CGT cost base from the transferor. CGT is due when the asset is realised. When making a calculation of the net worth of a settlement to a client the lawyer should take into consideration this effect.

In previous years, roll-overs were not applicable to financial agreements. Just recently, the government made a decision to extend the range of the CGT marriage breakdown roll-over provisions to any assets that are transferred to a spouse or former spouse under a financial agreement that is binding or a similar agreement under a corresponding overseas law.

The roll-over is also applicable to assets that are transferred through a written agreement using a state, territory or overseas law that is related to de facto marriage breakdowns where the agreement resembles a financial agreement that is binding.

There might be some circumstances where roll-over relief is avoided deliberately so that capital gain is realised. This could happen in situations in that are designed to offset existing losses in specific instances, e.g., where a primary residence which is CGT exempt but will be later used for income-earning. In this situation, a high cost base might be desirable. In these situations, the lawyer should check carefully the specific circumstances so as to include when undertaking settlement negotiations. 

When negotiating a family law property settlement, the only way a person’s interests can be completely protected is if the tax status of relevant assets is firmly established and then taken into account. The person should get details of the cost base of all assets that are to be transferred to them (including roll-over relief) that might attract CGT later on. The details must include as well as the purchase price and other costs at the date of acquisition, but the dates and value of capital improvements.

This will mean a party may avoid paying out more CGT than is necessary when the asset is eventually sold or otherwise disposed of.