If you separate, we can provide advice regarding tax effective outcomes regarding property transfers such as Capital Gains Tax, transfer of business and tax effective payments of spousal maintenance and child support.
Property and CGT
It isn’t automatic that Capital Gains Tax (“CGT”) is taken into account in family law matters. If you separate and you are considering retaining assets that if sold would result in CGT liability or if you are selling an asset at the time of property settlement that would result in a CGT liability you need specialised family law advice. Whether CGT should be accounted for depends on the particulars of the case, including:
- The likelihood of the asset being sold in the foreseeable future;
- The circumstances of its acquisition; and
- The parties intentions in relation to the asset.
Where the sale is court ordered, or a court is satisfied that a sale is inevitable, or probable in the near future, or if the asset is one which was purchased primarily as an investment, then, usually, an accounting should be made for CGT valuing the asset.
The main residence is exempt from CGT in most instances. However, upon separation the jointly owned property usually becomes the main residence of only one of the parties. CGT can become applicable to one half of that property in long separations before the house is transferred.
It is extremely important that you have a specialised family lawyer who can identify these taxation issues and tax consequences and work with you and your accountant to achieve the most tax effective and beneficial outcome for you from your property settlement.
Property and Stamp Duty: Transfers of typically dutiable assets such as real estate and motor vehicles are almost always exempt from duty where they occur between spouses as a result of a breakdown of their relationship. This is either because State/Territory stamp duty legislation allows such transfers between spouses regardless of the situation (as is the case in Victoria) or there is an exemption specifically for family breakdowns. The main residence is exempt from CGT in most instances. After separation, however, the jointly owned property becomes the main residence of only one of the parties. That is, CGT can become applicable to one half of that property.
Property and CGT: A property purchased prior to 19 September 1985 can be transferred to the other spouse free of any CGT. It retains its exempt status in the hands of the other spouse if the requirements for rollover relief are satisfied. Inter-spouse transfers of assets subject to CGT (eg investment properties, shares and equities) attract rollover relief if they are consequential to a family breakdown. However, to qualify, the transfer must be pursuant to a Family Court. Financial agreements, under sections 90B, 90C and 90D, are not considered “orders” of the court and they do NOT attract rollover relief. To obtain rollover relief, ensure that the agreement reached converted to a court order.
The rollover provisions defer CGT, and prevent the transfer triggering a CGT event, but do not avoid it. Rollover relief has the effect that the transferring spouse does not incur a CGT liability then… The spouse taking over the asset acquires the same CGT cost base as the other spouse had. CGT is incurred as and when the asset is realised. When calculating the nett worth of a settlement to a client, the potential later CGT should be considered. Sometimes rollover relief should be consciously avoided to deliberately trigger a capital gain. Examples include to use existing losses, where a main GCT exempt residence is to be used to generate income . Here, a high cost base may be desirable. Advisors should carefully check the particular circumstances of each case to see whether any tax planning opportunities are present.
Investment are typically in the name of the higher earner, to make the most of negative gearing. Since the capital gain on the disposed asset is taxed at the marginal rate of the owner, and that the transfer to the other spouse is usually not an expensive exercise, there is opportunity for tax minimisation. A transfer from a high-income spouse would probably be free of stamp duty and, should attract rollover relief from CGT. The property could be sold, and the proceeds apportioned between the parties, taking into account the tax saved. Of course, any tax planning must be undertaken with anti-avoidance provisions of tax legislation in mind.
Business transfers: Family run businesses are the majority of all businesses in Australia. Whether you are married or in a de facto relationship, divorcing or separating from your spouse is stressful and can have a substantial impact on your business. It creates challenges not only for the spouse(s) running the business, but also for any partners or other shareholders in the business, and for the continuity and value of the business.
All business interests, whether in a partnership, sole trader, company or trust structure, can be treated by the court as “property” as defined by the Family Law Act and must have a value attributed to them.
It is important to understand that the business structure and the control of the business entity will have significant influence on how the business is dealt with during a separation. So, keep up-to-date and accurate records.
Sole trader businesses: In the vast majority of circumstances, a sole trader like a tradesperson or professional consultant is a “personal exertion” style of business, with few employees, if any. Clearly such a business will remain with the sole trader who has the skill and training, and a value needs to be attributed to the business. Ordinarily the value of the business hinges almost entirely on the personal reputation of that individual. Usually a modest value would be applied to such a business interest as a “value to the owner”. If there are multiple employees, the value of business will be determined by the usual valuation processes.
Company owned businesses: If there are no third parties involved in the “family company”, will be considered essentially property of the spouses. If the business is owned by a company which has third party shareholders, because the business is an asset of that company, it is necessary to determine the value of the shares in the company.
Either way, the business will still need to be valued, but the value of the shares will also depend on the balance sheet of the company. Often a common entry on the balance sheet is a director’s loan account. Whether it is a credit or debit, that loan will also need to be considered in the valuation of the shares and the determination of repayment arrangements.
An important factor is the control of the company, If the separating spouse shareholder has a minority shareholding with a third party, then that minority shareholding will probably have a lesser value..
If spouses are office holders of a company they remain required to comply with the Corporations Act and their duties and obligations as an office holder, to act in the best interests of the company and the members as a whole, even though they are going through a separation.
Trusts – Discretionary trusts and unit trusts: In a trust arrangement the first question is, who has control of trust? Much also depends on the type of trust.
The Family Law Court has, and does often cut through the corporate or trust veil to the actual control of the assets by a spouse and pays far less attention to the legal niceties that a taxation or insolvency lawyer may. Family law and trust law diverge.
In a discretionary trust (also often called a “discretionary family trust”), it is necessary to consider the trust deeds, the identity of the appointor of the trust and the history of use of the trust.
If the trust is a unit trust, it may be treated similarly to an ordinary asset. and the units in the trust which need to have a value attributed to them. Much will depend on the content of the trust deed and the powers contained within that document, or any subsequent unitholders deed.
When things are going smoothly, spouses often don’t pay much attention to the trust deeds, loan agreements and registers, but once separation occurs, they are important in disclosure, and along with the financial records will likely be scrutinised.
Usually one of the separating spouses will seek to retain the company or business and will therefore have a continuing financial resource at their disposal. The court will take this into account when considering the “future needs” of the parties before adjusting assets between them.