Capital gains tax and property settlement – dot your i’s and cross your t’s
Separation and divorce are already a taxing time, but when it comes to property settlement, don’t forget to include just that – tax considerations.
When negotiating a property settlement with your ex-partner, it is important to consider any potential Capital Gains Tax (CGT) concerns.
CGT refers to the tax payable on the profit – or capital gain – of selling an asset, such as property.
Some assets, including your main place of residence, are exempt from CGT.
CGT is not a separate tax but a part of your income tax, as the capital gain is reported as income on your tax return.
Latent CGT liabilities can also be considered when valuing assets in a property settlement. The latent CGT refers to the amount of tax you will pay on the sale of a house, or other asset, in the future.
In a recent case, (Shnell & Frey), the wife appealed against the property settlement orders. She argued the judge made a mistake by rejecting the CGT on the possible sale of a property she owned.
The wife told the court she intended to sell her investment property in the next two years to purchase another property to live in.
Although unable to provide the exact amount of the latent CGT liability, the wife provided evidence of the CGT payable if the property was sold at the date of the trial, an amount of almost $300,000.
The trial judge made a mistake in failing to find that the sale of the property “would probably occur in the near future”.
The property had always been rented and there was no evidence indicating the wife intended to occupy the property before the sale.
On appeal, the court decided it was appropriate for the latent CGT to be included as a liability of the wife in the property settlement.
“Although it is true that the ultimate selling price might not be known, the value of the property was placed on the balance sheet at the date of the hearing and the latent CGT at that date was known,” the appeal judge said.
The appeal was allowed, and the asset pool was reduced by the wife’s latent CGT liability. The husband was ordered to pay costs.
Tax implications in property settlements and family law matters can be complicated. That’s why it’s vital you get the right advice for you and your situation.
The family law experts here at Michael Lynch Family Lawyers can help you navigate this complex area of law. Contact our office on: 07 3221 4300 or [email protected]
