the tax implication in the property settlement of a separating couple
Divorce and separation of couples is a complex procedure. It entails different tolls on the family including the emotional and financial stress that they must endure. Financial expenses vary according to the procedure and method that the parties will choose. The least expensive of all is by means of amicable settlement. However, the tax implication in all of this is a constant figure.
The Family Home is one of the assets that need to be settled in a divorce procedure. The division of a family home can be effected by selling it and dividing the proceeds thereof between the spouses after taking into account the need of child support. Transferring a family home to another individual entails payment of Capital Gains Tax (CGT). However this depends on the how the property was used and maintained before and after the separation of the couple.
A party to the separation who received the family home can transfer and sell his rights and interest over the said property to another person. If the said person transfers the same property and currently resides therein without any other residence or home, the property is exempted from Capital Gains Tax. Even if he rents out the said property and has no other residence elsewhere, the exemption is still valid for up to six years.
However, if the recipient of the family home has another residence elsewhere and only uses the property to generate revenue (like renting it out to other persons) the said family home is not covered by the exemption from Capital Gains Tax. The tax levied against the property will be computed based on the market value when it generated revenue for the recipient. It will no longer be treated as a Family Home exempted from tax. It will be an additional asset to the recipient and will be taxed accordingly.
A roll over relief for transfer of assets between spouses is also accorded by law. Under this tax principle, if a former spouse transfer an asset with a tax attribute to another spouse, the transferee will retain the asset with its previous tax attribute. It simply means that the tax liability of the asset is transferred to the transferee. Superannuation and the splitting of superannuation are taxed differently. Capital gains tax will not apply to these, however roll over relief can apply to superannuation and the splitting thereof.
Thus it is important for the spouses to have an open communication in dividing and settling their properties and assets. They should not be hostile with one another and settle which mode of property settlement can provide them the least expenses.
For example, if the spouses have several dwellings, deciding on where will be the main residence and who will receive them can give them the opportunity to avail the tax exemption of the said property from Capital Gains Tax. Prior to the signing of their financial agreement, the spouses must have a clear and laid out plan on how they will settle their assets in order to ease the levy of taxes in their properties.
Disclaimer : This article provides basic information only and is not a substitute for a professional or legal advice. It is prudent to obtain legal advice from a family lawyer.