The January and February period each year sees an influx of new cases into the Family Court as couples end their relationship post the Christmas Period.
Parties separating need to find a solution that satisfies both their needs but also navigate a minefield of Tax Issues which if not carefully dealt with can result in one or both parties receiving far less than they originally anticipated.
Capital Gains Tax
Unless exempted, a capital gain or loss may arise where an interest in property (an asset) is transferred from one entity (i.e. an individual, company or trust) to another, or from joint ownership to individual ownership, where that property was actually or was deemed to be acquired post 19 September 1985.
The transfer of assets will often occur for no monetary consideration, therefore the market value substitution rules will determine the consideration on disposal (s 116-30 ITAA 1997)) and on the corresponding acquisition (s 112-20 ITAA 1997).
CGT Rollover relief on marital breakdown
Rollover relief automatically applies under sections 126-5 and 126-15 (i.e. no election is required) to transfers of assets by either a natural person to his or her spouse, or by a company or trustee of a trust to a spouse or former spouse where the disposal is made pursuant to either:
- an order of a court made under the Family Law Act; or
- a maintenance agreement approved by a court under section 87 of the Family Law Act; or
- an order under the law of a State or Territory relating to the breakdown of de-facto relationships; or
- the transfer of assets under a binding financial agreement or arbitral award entered into under the Family Law Act.
Briefly, where the rollover provisions apply:
- the CGT provisions do not apply to the disposal of the asset;
- pre-CGT assets of the transferor are taken to be pre-CGT assets of the transferee; and
- for the purposes of determining the CGT consequences on disposal of post CGT assets of the transferor, the transferee is deemed to have paid consideration for the acquisition of the asset equal to the cost base, or reduced cost base of the asset to the transferor, as appropriate, at the time of the transferee.
Significantly, sections 126-5 and 126-15 of the 1997 Act do not deal with transfers between or into entities, yet it does deal with a transfer from an entity to an individual spouse.
Transfer Duty (WA)
In most circumstances, nominal duty (usually $20) can apply to the transfer of all dutiable property pursuant to a Family Court Order or Binding Financial Agreement (“BFA”).
Section 113 of the Duties Act 2008 provides an exemption for a dutiable transaction to the extent that it is effected by certain matrimonial or de facto relationship instruments. For example, if under a BFA entered into during a marriage, a husband agrees to transfer dutiable property to his wife if the marriage ends, duty is not chargeable in respect of that dutiable transaction contained in the financial agreement.
Specifically, if the parties have entered into a BFA that satisfies all of the requirements of the Family Law Act 1975 and the property is then transferred in accordance with the BFA, nominal duty may apply to the instrument that transfers the property.
This exemption applies to both married couples and those who are in a de facto or domestic relationship.
It is incumbent on family lawyers to ensure they understand and account for tax issues when dealing with family disputes and many will seek the advice of their client’s accountant, so it is important to ensure that all matters relevant are raised and quantified especially where a rollover is not going to be available and tax liabilities incurred in relation to a financial agreement are carefully quantified.
If you have any questions on these tax-related family law matters please contact Chris Schoeman.