Should we include CGT in our asset pool?
Capital gains tax is a tax payable upon the profit from the sale of an investment property. It is imperative that each party understands any potential taxation consequences of their property settlement and obtains advice from an accountant prior to finalising a property settlement.
In some family law matters, an investment property may remain the property of one of the spouses, or the investment property may be transferred from joint names of the spouses to only one of the spouses. In both these instances, the investment property is not sold pursuant to the Order.
In Rosati v Rosati (1998) FLC 92-804, the Court was asked to consider whether the capital gains tax implications needed to be included in the property pool and therefore reducing the amount for distribution between the parties.
The Court found that when considering the effect of potential capital gains tax, the following general principles apply:
- Each case varies depending on whether the asset is being realised in the foreseeable future, the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to that asset.
- If the Court orders the sale of an asset or is satisfied that a sale of it 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, generally allowance is made for the capital gains tax payable upon such a sale.
- If none of the circumstances referred to in (2) applies to a particular asset, but the Court is satisfied that there is a significant risk that the asset will have to be sold in the short to mid-term, then the Court, whilst not making allowance for the capital gains tax 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 varies according to the degree of the risk and the length of the period within which the sale may occur.
- There may be special circumstances in a particular case which, despite the absence of any certainty or even likelihood of a sale of an asset in the foreseeable future, make it appropriate to take the incidence of capital gains tax into account in valuing that asset. In such a case, it may be appropriate to take the capital gains tax into account at its full rate, or at some discounted rate, having regard to the degree of risk of a sale occurring and/or the length of time which is likely to elapse before that occurs.
It remains a matter of discretion for the presiding Judge whether to consider the capital gains tax as a liability, it is therefore crucial that all evidence about a parties financial circumstances and intentions in relation to the dealings with the property is put before the Court for consideration.
Contact Michael Lynch Family Lawyers on (07) 3221 4300 or [email protected] for a fixed-fee no obligation initial consultation.
