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28 January 2015

Investment Properties – Capital Gains Tax and Family Law

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An investment property can form part of a property pool in a family law dispute. Such properties are held in the names of one or both of the parties, with relatives, or in the name of a corporate entity.

If the property was acquired after 19 September 1985, a transfer of the property will generally be a Capital Gains Tax (“CGT”) event.

CGT may be payable or rolled over as part of a property settlement.

What is CGT?

It is a tax imposed on the gain from the disposal of an asset acquired after 19 September 1985. It isn’t a separate tax, it is part of income tax. The tax is imposed upon the net capital gain which accrues to the taxpayer. You are taxed on your net capital gain at your marginal tax rate.

Roll-over relief?

For the roll-over to apply, the transfer of the property must have happened, after a relationship breakdown, because of: –

  • An Order of a Court;
  • A Court Order made by consent under the Family Law Act 1975; or
  • By a financial agreement.

The roll-over ensures the transferor spouse does not have to pay tax on the gain nor can they claim a capital loss that would otherwise arise. In effect, the spouse who receives the asset (the transferee spouse) will make the capital gain or capital loss when they subsequently dispose of the asset.

E.g.

John acquires Mary’s interest in the investment property by way of a Court Order. John will need to be aware that he will also be responsible for the CGT liability. The CGT owed by Mary will roll-over to John. This is despite the matrimonial asset division which means that if John eventually sells the property he will have to pay CGT on the value increase since the property was originally acquired by John and Mary.

 When don’t you get roll-over relief?

  • If the property is transferred under a private or an informal agreement from one spouse to the other after a relationship breakdown and not by way of either a Court Order, Consent Order or a financial agreement the roll-over will not apply. This may generate a substantial CGT consequence to the transferor (spouse transferring their interest) and would need to be considered in that parties tax return for that financial year.
  • If the separated parties sell their investment property CGT will be payable to the ATO. The parties CGT liability will need to be assessed and it will be payable when the financial year ends. Although the parties may hold their share of the property equally, they may pay different amounts of tax because of their other income.
  • If a different property is transferred instead of the property that was to be transferred pursuant to the Court Order, Consent Order or financial agreement. If there is agreement subsequently to transfer a different property other than the property specified in the legally binding document and the parties want the roll-over relief the parties should consider obtaining a variation of legally binding document before the property is transferred.
  • A Court Order that confirms a transfer has already occurred will not provide roll-over relief.

There may be instances when roll-over relief is intentionally avoided so that a CGT event is not triggered. This would be to offset existing losses in appropriate circumstances.

How is potential future CGT or existing CGT calculated?

An accountant will need to be engaged to provide such advice.

It is important to obtain expert accounting advice as to the future CGT and your options regarding CGT and legal advice about the terms of the property settlement prior to entering into the agreement.

If you would like to obtain advice about your property settlement negotiations or discuss how potential future CGT may be considered in your separation please make an appointment with one of our solicitors.

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