Tax Implications of Family Law Property Settlements

Property Taxes in General

Your Primary Residence

When you sell your family home, you do not have to pay capital gains tax unless the land is more than 2 hectares.
You can claim your main residence exemption from capital gains tax and up to 2 hectares of the land where your home has been built.

If your land is used for private purposes only and the area is greater than 2 hectares then you can choose which 2 hectares are exempt.

If any of the land is used to produce income then it is not CGT exempt even if it is less than 2 hectares.

Investment Property

If you sell an investment property, the owners will pay capital gains tax on any gain in value.

If both parties to a relationship share equal ownership of the investment property then they will pay equal amounts of CGT.

If the investment property is owned by a company then the relevant tax rate, currently 30%, will apply.

Property Taxes in Family Law Property Settlements

The Former Matrimonial Home

In many property settlements the matrimonial home is the major asset and the couple cohabitated there until separation.

When property proceedings are finalised, the family home may need to be sold to satisfy property orders. If the funds are available, one party may retain the family home and the other party transfer their interest to that party with a corresponding adjustment to the division of cash monies and superannuation interests.

If the property was rented out such as during an overseas posting then the rental period will be subject to CGT.

If the home was owned by a company or trust and it is to be retained by one party then capital gains tax will be owed for the time that the company or trust owned the property.

Investment Property

After separation, one party usually moves out of the family home and rents or may, if available, live at the parties’ investment property until proceedings are finalised.

In these circumstances the investment property is being used as a home.

Accordingly, if the property has to be sold to allow the property division as ordered by the Court then the tax will be worked out in terms of how long the property was used as a home. The CGT will be reduced in proportion to the amount of time that the party was resident in the investment property in relation to the time the property produced income.

Other Property

If the parties have other assets and are able to transfer ownership of these assets to one party rather than sell them, then liability to pay CGT may be deferred or rolled over until the asset is ultimately sold if the transfer is pursuant to a court order, an arbitration award or a financial agreement between the parties.

Rollover relief is only available when the property is transferred from one party to the other of a marriage or de facto relationship; or from a company or family trust to one of the parties of the relationship; and when the transfer has been effected to satisfy Court Orders in a Family Law Property Settlement or pursuant to the terms of a Financial Agreement.

These rules apply to shares, artwork and similar assets.

There are special rules in relation to unpaid present entitlements of trust beneficiaries and assigning rights to the payment of these sums to one party. Additionally, one party may wish to remove the other party from the trust.

It is essential to speak to your tax accountant to ensure that you are aware of all your assets, their value and any tax implications of a transfer of benefits that may result from a property settlement.

We can then advise the best structure to finalise the division of property after separation.

Superannuation has its own rules. If you have a Self-managed Super Fund (SMSF) the other party will need to resign as director and a financial adjustment made.

Losses and Loans

If your family runs the business through a company, both you and your ex-partner may be directors and shareholders of the company. After separation, one partner may resign as director and transfer their shares to the other without negative tax consequences.

As stated, sale of property may incur a CGT consequence.

Additionally, there may be a loan from the company or one shareholder owes a debt to the company. The debt or loan has provided funds which have not been taxable income. It is common for such funds to have provided a benefit for the family.

Such business loans and debts must be disclosed as part of the Family Law Rules for disclosure.

One party may not even be aware that there is a loan account with the company. The holidays and car were enjoyed by the family without any real awareness of how the company was structured and that a loan had provided this benefit.

In such a situation you will need to consult your accountant as the liabilities and income of the company may have been shared over time and between the parties for legitimate tax purposes. However, to maintain the advantage provided by such an arrangement one party may be disadvantaged.

Valuations and Future Tax Liabilities

The value of the parties’ property and assets is taken at the date of the Hearing. If a valuation report has been finalised in preparation for property settlement then that is the value that will be used when working out the division of the property whether it is court-ordered or by agreement in consent orders.

If there are current tax obligations owed by the parties these will be listed in the balance sheet as liabilities when the property pool is assessed and divided.

Where disputes may arise is whether there should be an estimate of the potential tax payable on the future sale of the property or asset and whether that cost should be shared rather than being the obligation of the party who receives the property as part of the settlement.

Case law reveals that the Courts will consider CGT in relation to the sale of property necessitated by Court Orders as well as the probability of a sale occurring sooner rather than later and the estimated CGT that will arise from the sale.

Legal Advice

If you have separated and need to consider the impact of dividing the assets and property of your relationship, it is important that you seek the advice of both a tax accountant and a family lawyer.

You need to know what potential tax issues may arise when selling or transferring property and also how to ensure that the Family Law property proceedings take this into account when dividing the property between the parties.

We work closely with accountants who understand structuring and the everyday workings of a company. Whether you are trying to maintain a family company’s viability after separation or ensuring that there is full disclosure of all the family’s assets, it is important that you seek legal advice which can be shared with your tax advisor.

Please do not hesitate to contact us for further clarification or assistance.

Please be advised our office will be closed from 5:00pm on 16 December 2022 and reopens at 8:30am on 9 January 2023

This is not legal or tax advice and is for information only. It is important that you speak to your accountant and tax adviser before making any decisions.