Tax implications of family law property division – part 1

When a relationship ends there are many expected outcomes but an issue not often discussed is the tax implications of property division.

Today I am looking at just one: capital gains tax (CGT).

If there has been an increase in value CGT is payable on the disposal of the asset. For example, transferring a house to a new purchaser – the seller pays CGT.

However, the Income Tax Assessment Act provides some "relief" to separating couples when, say, one spouse transfers their interest in an investment property to the other spouse.

This 'relationship breakdown roll-over relief' means that where a transfer occurs under a Court Order or an Agreement in accordance with the Family Law Act the tax liability is also transferred.

It is not that no tax is payable – just that the CGT liability is "rolled over" to the person receiving the asset. If they later dispose of it they deal with CGT then.

This sounds like a relatively simple concept but a number of issues can arise:

  • Is the asset being transferred subject to CGT?
  • Who legally owns the asset – is it the couple or is it through an interest they have in a company or Trust?
  • Does another tax exemption apply?
  • Does the Court Order and Agreement properly set out the Transfer? Especially relevant if there are third parties involved.
  • What is the potential CGT actually payable?

These are not always simple questions and proper legal and tax advice is vital to ensure unenvisaged consequences do not flow.

Next time: stamp duty ramifications of property division.