15 Nov Capital Gains Tax and Family Law Property Settlement – is it a Liability to be taken into consideration in Family Law Matters or not?
When calculating the value of the assets available for division between parties, the court may take into consideration any capital gains tax (“CGT”) implications of asset disposal.
In 1998, in the case of Rosati v Rosati, the following general principles in relation to capital gains tax in family law matters:-
1. Whether capital gains tax should be taken into account when determining the value of an asset or not, will depend on the circumstances of the case. These circumstances are:-
“the method of valuation applied to that particular asset, the likelihood or otherwise of that asset being realised in the foreseeable future, the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to the asset.”
2. Allowance should generally be made for any capital gains tax in assessing the value of that asset, if:
“the Court orders the sale of [that] asset, is satisfied of that a sale is inevitable, or would probably occur in the near future, or if the asset is one which was acquired solely as an investment and with a view to its ultimate sale for profit.”
3. However, if none of the circumstances referred to above apply, if the Court is satisfied that there is a significant risk that the asset will have to be sold in the short or mid-term, then the Court, whilst not making allowance for the CGT payable on such a sale in determining the value of the asset, may take that risk into account as a relevant s 75(2) factor, the weight to be attributed to that factor varying according to the degree of the risk and the length of the period within which the sale may occur.
4. There may be special circumstances where even if there is no risk or likelihood of the sale of the asset, it may be appropriate for the Court to take into account the capital gains tax liability at the full rate or a discounted rate, depending on the risk of sale and the length of time likely to elapse before the sale.
In a recent decision of Shnell & Frey, the Court held that the Wife’s potential capital gains tax should be taken into consideration when determining a property split, even though the property was not to be sold in the settlement. This is a big difference to how the Court previously dealt with the issue of a future Capital Gains Tax liability.
The parties, aged 68 and 62 respectively, were both professionals and separated in 2015 after a 35-year marriage. The parties had two adult children. The husband was the primary income earner and the wife the primary homemaker and parent, although the wife was also engaged in paid employment during the marriage.
The wife contended that CGT on a property in her name should be deducted as a joint liability. The wife’s evidence was that it was her intention to sell the property within the next two years, but during cross-examination she conceded that a final determination about when to sell would be made having regard to her position at that point in time. The husband sought that the CGT should not be deducted as it was not certain that the wife would incur CGT.
The Court rejected that the CGT on the possible sale of a property owned by the wife should be deducted from the value of the assets in the balance sheet given there is uncertainty surrounding the calculation of GST liability and the timing of any potential sale. However, the Court held that the be CGT be taken into account as a factor relevant to s 75(2)(o) stating:
“The CGT consequences of a possible sale at some point in the future is nevertheless a factor to consider under s 75(2)(o) of the Act because I consider that there is a significant possibility that the wife will sell at some point”
Whether or not CGT will be taken into account in determining the value of a particular asset will be decided by the Court on a case by case basis. It is important that you obtain appropriate tax and legal advice prior to negotiating a settlement involving assets which may be subject to CGT.
Are you about to undertake a Family Law Property Settlement? Contact Solari and Stock Miranda on 8525 2700 to make an appointment with one of our experienced Family Law Team, or click here to request an appointment.