3 big tax issues in family law property settlement to keep an eye on

Only three things are certain in this life: birth, death and taxes. Since each of us began earning an income, tax has been a constant presence in our lives. 

By Evan Avtzis, Lawyer at Roger Fritz LLP-Kordos Lawyers, Melbourne

When making financial decisions, tax is something that is at the forefront of considerations. Yet, it is an aspect of family law proceedings that is all too often overlooked (or incorrectly considered) during settlement negotiations.

Several tax considerations can arise during Family Law proceedings, and matters can be further complicated as corporate, and Trust structures are introduced.

For many families, one of the main assets, which typically forms the majority of the property pool that is to be divided upon settlement, is the family home. To reach a just and equitable property division, it is quite common that the family home needs to be sold or transferred, which can attract Capital Gains Tax (CGT) or Stamp Duty consequences.

So, what is CGT?

Photo by Nataliya Vaitkevich from Pexels

Put simply, CGT is the tax that is payable on the profit or “gain” that is made when selling, transferring or disposing of:

1. Any kind of property; or
2. Any legal or equitable right that is not property.

The Income Tax Assessment Act 1997 (ITAA) sets out in great detail when CGT is payable and when an exception to CGT can be applied.

In the context of family law proceedings, the most common exceptions to CGT that arise are:

• An asset is exempt if it was acquired before 20 September 1985.
• Cars and other motor vehicles are exempt.
• Real estate property treated as a main residence for tax purposes is exempt for the duration that it was used as a main residence.
• Assets used for personal use (such as furniture or the TV in the living room) purchased for less than $10,000 and collectibles purchased for less than $500 are also exempt.

Tax issues to keep an eye on during a family law property law settlement

1. Selling real estate

As mentioned above, if sold, properties that have been treated as the main residence of a family will be exempt from CGT for the period of time that they were used as a main residence. This means that if the family home needs to be sold as part of property settlements, then no CGT would be payable upon its sale. Two things to keep in mind are that:

• If the property was at any point in time not used as a main residence or rented out, CGT would be appliable for any capital gain made upon the value of the property for the period of time that it was not used as a main residence; and
• If a property is registered in joint names and one party moves out of the home following separation (and begins treating another property as their main residence), this exemption will cease to apply, and CGT liability may begin to accrue from the time of separation.

For other properties, such as investment properties, CGT will apply to any profit made from the sale of the property and will be assessable in the name of the registered owners of the property accordingly. Significant CGT discounts can apply for properties held for over 12 months.

If there are multiple properties in an asset pool that could be sold, careful strategic consideration should be given to which property should be sold to minimise any tax payable.

2. Transferring property

When transferring property (i.e. real estate or motor vehicles) between spouses due to the breakdown of their relationship, it is often the case that such transfers do not attract stamp duty. The reason for this varies from state to state. 

Some states have a blanket exemption for transfers between spouses (such as in Victoria), while others have an exemption for family breakdowns. To ensure that duty is not chargeable on such transactions, it is best practice to ensure that the requirement to transfer the property is captured in any Court Orders made.

Transferring property ownership from one person to another typically attracts CGT liability; however, specific provisions in the ITAA can provide rollover relief for CGT that would otherwise be payable on property transfers between spouses former spouses in certain circumstances. These provisions effectively rollover any CGT that would be payable upon the transfer of property pursuant to Court Orders until such a later time that the property is either sold or transferred again.

3. Considering tax liabilities in the property pool

Any existing tax liabilities form part of the assets and liabilities of a relationship and must be considered in the property pool to be divided. The same, however, does not hold true for future tax liabilities that have not yet crystalised. These future liabilities do not form part of the property pool. So it is essential to obtain expert evidence from your accountant as to what these liabilities are likely to be so that they can be properly considered during settlement negotiations.

In relation to CGT, the Court’s position (as set out in the matter of Rosati v Rosati) is that CGT liability should be considered:

• whenever property is ordered to be sold pursuant to Court Orders; or
• if the sale of property is probable to occur in the near future.

The Court also has discretion under the Family Law Act 1975 to consider CGT liabilities in circumstances where it believes there is a significant risk that property will need to be sold to affect the Orders being made. Evidence of the estimated CGT to be incurred should always be obtained before finalising a matter so that such liabilities are accurately reflected in the property pool to be divided.

To avoid potentially costly oversights when structuring a property settlement or seeking an Order from the Court, it is vital to ensure that this is done with the benefit of expert advice from an accountant and an experienced Family Law solicitor.

If you would like to discuss the tax issues in your family law property settlement, request a callback via the form below or simply call us directly for some friendly legal advice.