What happens to capital gain tax in a Property Settlement?
When you’re in the middle of a relationship breakdown, tax problems might be the last thing on your mind. But CGT can have a serious impact on the value of a property settlement and it’s something everyone should be aware of.
Capital gains is a federal tax payable on money made by the sale, disposal or transfer of most assets that were acquired after September 20, 1985.
Examples of assets that may incur capital gains tax are investment properties, shares, collectables and art.
There are also certain assets that are exempt from capital gains tax, including your main place of residence, your car or motorbike, or collectables worth less than $500.
Capital gain is calculated as the difference between the proceeds received upon sale of the asset and the cost base of the asset. The cost base of the asset is usually the price that you paid for it and certain other costs associated with holding and selling the asset.
If you incur a capital gain, you are required to report this as part of your income tax return. Accordingly, even though capital gains tax is assessed separately, it forms part of your income tax for that financial year.
Capital gains tax rollover relief is a special provision that applies when a capital gains tax event occurs due to the separation of a couple and it applies in all of the formal ways of finalising a property settlement. It means that if an asset is being transferred between two spouses and that asset transfer would normally attract a capital gains tax assessment, if the transfer is being made pursuant to a court order, a consent order or a financial agreement, there is no capital gains tax paid on that transfer, it is nil.
If a court has to determine a property settlement, the court will give thought to the likelihood of any asset transfer or sale and the potential C6T consequence of that. Here are some principles the court will consider in relation to capital gains tax after a couple separates:
- Whether capital gains tax should be taken into account when determining the value of an asset or not will depend on the circumstances of the case. These circumstances are the “method of valuation applied to that particular asset; the likelihood or otherwise of that asset being realised in the foreseeable future; the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to the asset.”
- Allowance should generally be made for any capital gains tax in assessing the value of that asset if “the court orders the sale of that asset; is satisfied that a sale 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”.
- If none of the circumstances referred to above apply, but the court thinks there is a “significant risk that the asset will be sold in the short to mid term” it may take this into account as a ‘future needs’ factor. The weight to be given to this factor will be dependent on how likely the asset is to be sold and when this is likely to occur.
- There may be special circumstances, even if there is no risk or likelihood of the sale of the asset. It may be appropriate for the court to take into account the capital gains tax liability at the full rate or a discounted rate, depending on the risk of sale and the length of time likely to elapse before the sale.
Under the law, capital gains tax rollover relief will not apply to private transfer agreements between two people, or transfers under binding financial agreements between partners that do not directly relate to the breakdown of the relationship.
The parties cannot opt in or choose when the rollover applies. If the circumstances of the transfer meet the criteria, then the rollover relief will apply regardless.
If you need advice about financial agreements, property settlements, or any other aspect of family law, please contact Michael Lynch Family Lawyers on: (07) 3221 4300 or email: [email protected]
