Capital Gains Tax and Family Law Property Settlements

When parties to a marriage or a de facto relationship separate, they will usually seek to divide their assets between themselves by way of a property settlement. In some situations, the issue of Capital Gains Tax (“CGT”) will arise. CGT can be costly and, if applicable, it is important that parties understand the implications of CGT on their property settlement.

What is CGT?

CGT is referred to in the Income Tax Assessment Act 1977. Essentially, CGT is a federal tax that is payable on the profit, or ‘capital gain’, made on the sale of an asset. The capital gain is calculated based on the difference between the sale price of the asset and its purchase price, including any stamp duty, real estate agents’ fees and legal fees. After the asset is disposed of, the capital gain is dealt with as income on your next tax return.

Some assets are exempt from CGT, including: the family home/primary residence, cars, motorcycles and any household items that cost less than $10,000 to acquire the asset and collectable items such as art or jewellery that were acquired for less than $500.  In family law matters, the assets that are likely to attract CGT are investment properties, shares and even cryptocurrency.

CGT Rollover

Upon the breakdown of a relationship, if an asset is transferred from one party to the other pursuant to court orders or a formal agreement, the transfer will usually qualify for the CGT rollover. This means that the CGT that would normally have been applied to the disposal of an asset, is deferred until after the party who receives the asset, later disposes of it. When the party disposes of the rollover asset, CGT will be calculated as though that party had owned it from the time their former spouse acquired it. The CGT rollover will not apply without court orders or formal agreement.

Former matrimonial home

As already mentioned, the former matrimonial home is exempt from CGT regardless of whether it is sold or transferred. However, if there has been a period of time where the property was not the main residence of the parties, for example, if the property was rented out as an investment property, the sale or transfer of the property may attract CGT. If this is the case, CGT will apply to the period when the property was not the main residence.

How is CGT to be treated in family law property settlements

In the matter of Rosati v Rosati (1998) FLC 92-804), the Full Court of the Family Court of Australia summarised the general principles to be followed in relation to the treatment of CGT. [Refer to previous article https://solariandstock.com.au/2020/11/15/capital-gains-tax-and-family-law-property-settlement/ ]. Essentially, Rosati confirmed that a potential CGT liability should not automatically be taken into account in a property settlement. Rather, each case will depend on its own circumstances.

It is important that family lawyers are aware of any potential taxation implications of a proposed property settlements and take into consideration the effect of any taxation implications.

It is important to obtain legal advice from a FL lawyer to determine whether potential CGT liability is to be included in  Family Law division, shared between the parties or borne by one party alone, before any settlement is reached. To speak with one of our experienced Solicitors, please contact Solari and Stock on 8525 2700 or click here to request an appointment with one of our Family Law Team.

Article written by Kirstin Attard
Photo by Jon Tyson on Unsplash