Capital Gains Tax in Family Property Settlements
The scheme for Capital Gains Tax (“CGT”) is derived from Part 3-1 of the 1997 Income Tax Assessment (1997 Act). In conjunction with the 1936 Income Tax Assessment (1936 Act), these two pieces of legislation are the national basis upon which all income tax matters are dealt with. Despite repeated calls for reform, Australia’s tax system remains complicated. The Tax Institute asserts that this difficulty is a direct consequence of multiple laws, and the overly complex layout of the rules. We try to simplify the concept of Capital Gains Tax in Family Property Settlements.
CGT is a tax on the profit realised on the sale of non-inventory assets such as stocks, bonds, real estate, and property which was purchased after 20 September 1985. A capital gain occurs when the capital proceeds of the disposal of an asset is greater than the asset’s reduced cost base. A taxpayer must record this on their assessable income for that financial year, which may be subject to CGT.
A taxpayer is exempt from CGT if the capital gain is made from a CGT event which happens to their primary residence. Notably, this exemption may not apply if the asset was a main residence during only part of the taxpayer’s ownership period, or if it was used for the purpose of producing assessable income. An example of an asset which is not exempt from CGT is an investment property.
Another exception to the imposition of CGT is known as ‘roll-over relief’. Per section 126-5 of the 1997 Act, whenever the disposal of an asset occurs due to an order made under the Family Law Act 1975 (“Family Law Act”), namely via a Binding Financial Agreement (“BFA”), CGT may automatically ‘roll-over’, whereby the CGT history and cost base of the transferor are passed to the transferee.
CGT and Family Law
Issues concerning CGT may arise in circumstances involving property settlements. In the adjustment of property between parties, a CGT event may arise from the sale, transfer, or disposal of an asset. Issues may arise when separating couples nominate different dwellings as their main residence. The transfer of property to another spouse may only partially apply if the transferor has nominated a different main residence prior to the disposal taking place. By extension, the party acquiring the property (the transferee) may acquire the transferor’s liability for CGT. Consequently, any future disposal of the asset will leave the transferee with an unexpected tax debt, payable at the time of final disposal.
Presently, when calculating the value of assets for property settlement, the court may consider CGT implications of any asset disposals which have occurred. These considerations fall under sections 79 and 90SM of the Family Law Act, regarding the alteration of proprietary interests between parties.
The case of Rosati v Rosati is a leading precedent regarding CGT in the family law context. In this case, the husband was operating a real estate agency, and asserted that he was suffering mental health issues. He wished to sell his business and find alternative employment. The trial judge held that:
- If the Court orders the sale of an asset or it is satisfied that the sale is inevitable or would probably occur in the near future, the CGT liability should be taken into account when determining the value of that asset; and
- if the Court is satisfied that there is a significant risk that the asset will have to be sold in the short to medium term, the Court may take that risk into account under Section 75(2) of the Family Law Act.
The 2021 case of Taffner v Taffner considered the treatment of CGT liability incurred upon the sale of property.
The husband claimed that the primary judge failed to consider the CGT burden of retaining his property, which therefore altered the overall distribution of assets between parties which was intended by the primary judge. Consequently, the excess burden contributed to the husband failing to refinance his mortgage on the property, and the property was subsequently sold. The husband’s appeal allowed for a re-exercise of discretion by the Court to consider the CGT liabilities. The Full Court suggested that the primary judge could have ordered that if the property was to be sold, the wife would pay to the husband a fixed percentage of the CGT incurred. It was noted if the primary judge considered it appropriate that the CGT burden should lie where it falls, this should have been expressly stated and reasoned.
Please leave us an enquiry or telephone one of our experienced family lawyers on (03) 9793 7888 if you would like to discuss the treatment of CGT in your family law property settlement.