When parties to a marriage or a de facto relationship separate and adjust property interests between them they will either retain, sell, transfer or otherwise dispose of assets they have accumulated during their marriage. As a result, taxation issues can arise in many family law settlements. Family lawyers need to be aware of any potential taxation implications of property settlements and, in appropriate cases, factor this into the split.
The most common taxation issue which arises in family law settlements is capital gains tax, referred to in the Income Tax Assessment Act 1977 (“the ITAA”).
Capital Gains Tax (“CGT”) is a tax payable pursuant to the ITAA on the disposal of an asset that had been purchased after 20 September 1985. This includes the sale, transfer or disposal of that asset to another person or entity. The tax is applied to the profit that is made from such sale, transfer or disposal. It applies to all assets but there are important exceptions which include:
When there is an adjustment of property between parties to a marriage or a de facto relationship, this may give rise to a CGT event when it involves the sale, transfer or disposal of an asset.
As discussed above, if the former matrimonial home has been the main residence of the parties then regardless of whether it is sold, transferred or disposed of, it will not attract CGT as it one of the exceptions under the ITAA. The situation may be different if there has been a period of time where the property was not the main residence of the parties. For example, if the property is rented out as an investment property for a period of time before the parties commence to live in it as their main residence. In such situations a sale, transfer or disposal may attract CGT but the assessment will be restricted to the time period when it was not the main residence.
If an investment property or any other non-exempt asset, is sold as a result of a family law property settlement, then CGT will be assessable on the profit from the sale. If the property is in joint names of the parties then both will be assessed to pay CGT on their share of the profit. If the property is in the name of only one of the parties then that party will be assessed to pay the tax. Similar considerations apply when the asset is held by an entity controlled by one or both of the parties. It is therefore important that any property settlement considers the payment of any CGT on the sale of an asset.
There are discounts that may apply to reduce the ‘profit’ and therefore the tax that is assessed to be paid. These should be carefully identified and evidenced.
In a situation where an asset that is not exempt from CGT is transferred from one party to another (rather than sold) then normally CGT would apply to the transfer. If, however, the asset is transferred as the result of a breakdown of a relationship then there is provision in Section 126 of the ITAA for what is called rollover relief upon the transfer.
Rollover relief means that upon the transfer CGT can be disregarded until such time as the party receiving the asset sells it, transfers it or otherwise disposes of it. For example, if an investment property is transferred to a party after the breakdown of a relationship there is no capital gains tax payable at that time. However if that party subsequently sells or transfers the property, they will be liable for CGT on the later sale. The cost base of the asset is also transferred to the party receiving the asset.
Rollover relief only applies if:
The leading authority on the issue of CGT is the case of Rosati and Rosati  FamCA 38, where the Full Court laid out the following principles:
When finalising family law property settlements, the following are important: