How capital gains tax affects your family law property settlement
There are many tax issues which can arise during your family law property settlement, including why capital gains tax (CGT) matters, and who should have responsibility for paying CGT.
What is capital gains tax in family law?
CGT is the tax paid on the profit difference between:
- What it cost you to acquire and maintain an asset (known as the cost base); and
- What you receive when you dispose of (sell) the asset
It only applies to assets purchased after 20 September 1985, and CGT does not apply to your principal place of residence.
A 50 percent discount applies to any asset owned for more than 12 months.
In family law, assets transferred under a Financial Agreement or Court Order are subject to rollover relief. This means that CGT is not payable when the asset is transferred as part of a family law property settlement.
The person who keeps the asset will have to pay CGT if they sell it, as if they have owned it alone all along.
Why is capital gains tax important in family law property settlements?
To demonstrate the importance of CGT in family law property settlements, let’s look at an example.
Neil and Peter are a de facto couple own an investment property together. They bought the property for $330,000 and they spent $50,000 renovating the kitchen. Their total cost base is $380,000. After Neil and Peter separate, the investment property is valued at $500,000. If the property were to be sold for this amount, the profit would be $120,000.
As Neil and Peter would have owned the property for three years, the discount would apply. They would have to pay tax on 50 percent of the profit: $60,000.
This would be added to their income and taxed at their marginal rate, in this case 37 percent. The tax payable would be $22,200.
Neil and Peter agree to divide their assets equally. Neil decides that he wants to keep the investment property and Peter agrees.
When Neil and Peter are calculating an equal division, should the investment property be valued at $500,000 or $478,000 (that is, $500,000 less the tax that would be payable if it were sold)?
The court’s approach to capital gains tax in family law: Rosati’s case
The usual approach to CGT in family law cases was described in Rosati’s case in 1998. In this case, the Full Court of the Family Court held that the appropriate course is to take CGT assets into account where:
- The sale is inevitable, or at least probable in the near future; or
- an asset was acquired solely for investment with a view to its ultimate sale for profit.
The Full Court recognised that there may be special circumstances in some cases, which are not defined, which justify CGT being taken into account fully or partially. It also recognised that it may be appropriate to make partial allowance for CGT where there is a significant risk of sale in the short or medium term.
What is the answer for Neil and Peter?
If Neil decided that he would like to live in the property, the CGT is not likely to be taken into account.
If a court were satisfied that Neil would instead retain the investment property for sale, then the CGT may be taken into account.
Questions about CGT in your family law property settlement can be complex. The answers will depend on your circumstances. It is crucial that you have legal and tax advice about any of the possible tax implications of your property settlement.
This article was written by Senior Associate, Jessica Wynd.
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can receive from marshalls+dent+wilmoth and other relevant experts.