Tax and Family Law: Navigating Complex Issues

Taxation and family law are two areas of law that can intersect in complex ways, making it essential to seek legal advice from experienced lawyers and accountants. 

In this article, we’ll take an overview of some of the common issues that can arise in family law.

Capital Gains Tax (CGT)

The first key area of concern for many people is Capital Gains Tax (CGT). This tax is typically applied to the sale of assets that have increased in value since they were purchased. 

In the context of family law, CGT can be a major factor in determining the division of property between spouses.

When a couple separates, they must divide their assets, including any property they own. If one party sells their share of the property, they may be subject to CGT. This tax can be significant, especially if the property has increased in value over time.

The Family Home and Tax

The family home is often the most significant asset that a couple owns. When a marriage breaks down, the family home is a commonly retained asset by one spouse. 

To transfer their interest in the home, the other spouse may need to give up their ownership rights. The family home is an advantageous asset to retain as it is exempt from tax on any net profit made from its sale in the future, provided that it has been used for the entirety of the combined ownership period by the spouses themselves.

If one party retains the home, they may be subject to CGT when they eventually sell it. This can be a significant financial burden, especially if the property has increased in value since the divorce.

Buying or Selling Real Estate

If you’re going through a divorce, you may need to buy or sell real estate as part of the property settlement. When doing so, it’s essential to consider the tax implications of these transactions. 

For example, if you sell an investment property, you may be subject to CGT. 

Similarly, if you buy a new property, you may be eligible for certain tax deductions.

Transferring Property

In some cases, one party may transfer property to the other as part of a divorce settlement. 

This can be a tax-effective way of dividing assets, but it’s essential to do so correctly. If the transfer is not done in the right way, you may be subject to CGT or other taxes.

Tax Liabilities in the Property Pool

When dividing assets in a divorce, it’s essential to consider any tax liabilities that may arise. For example, if one party retains an investment property, they may be subject to ongoing tax liabilities. 

Similarly, if one party retains shares in a company, they may be liable for any tax payable on dividends.

What guides whether the Court will take CGT into consideration?

In the case of Rosati & Rosati, the Full Court of the Family Court of Australia established some relevant principles for determining whether CGT should be taken into account. These principles include:

1. Whether the tax liability is likely to arise in the near future;
2. Whether the tax liability is certain or uncertain;
3. Whether there is any liquidity available to pay the tax liability;
4. Whether there is any other property that could be used to satisfy the tax liability; and
5. Whether there are any other factors that make it inappropriate to take the tax liability into account.

These principles are relevant when determining how to divide the property pool between parties in a divorce settlement and whether to take into account any potential CGT liabilities associated with the assets being divided.

FAQs

Investment Properties after a Divorce Settlement

Investment properties are usually considered part of the property pool that is subject to division in a divorce settlement. 

It is not uncommon for disagreements to arise over whether the estimated tax liability from a future property sale should be shared by both parties or solely by the acquiring party.

What about “Roll Over Relief”?

Roll over relief is a tax provision that allows you to defer capital gains tax when you sell an asset and use the proceeds to acquire a replacement asset. 

In the context of tax and family law, it can be useful when transferring property between spouses or as part of a divorce settlement. 

However, it’s important to seek legal and tax advice to ensure that you meet the requirements for this relief.

What about Jewellery?

Yes, jewellery can be considered part of the property pool in a divorce settlement, especially if it has significant value. 

It’s important to provide an accurate valuation of these assets.

Foreign Resident Capital Gains Withholding Tax

This tax applies when a foreign resident sells Australian property that is subject to capital gains tax. The buyer is required to withhold 12.5% of the purchase price and remit it to the Australian Taxation Office. It’s important to seek legal and tax advice if you are involved in a property sale that involves a foreign resident.

Superannuation

When a relationship breaks down, specific regulations come into play regarding the division of superannuation between spouses. In cases where a spouse’s entitlement in a superannuation fund is transferred to the other spouse, either through a court order or binding financial agreement, the transfer is not subject to capital gains tax.

In the event of an in-specie transfer of an asset between self-managed superannuation funds, the transfer is eligible for roll-over relief.

Conclusion

During a family law matter, the size of the combined asset pool can be considerable. The related taxable pool can be similarly large. It is therefore vital to take these factors into account, and to understand the timeline of when taxation events may occur.