Tax Implications of Divorce Settlements
Family breakdown sometimes results in asset transfers that may create taxation issues for spouses and entities related to them.
Exemptions and rollover relief is available in specific circumstances, but people who find themselves in this situation need to take specific legal and accountancy advice on when and in what circumstances they may be eligible.
As a general rule, capital gains tax (CGT) applies to all changes of ownership of assets on or after 20 September 1985. However, if you transfer an asset to your former spouse as a result of the breakdown of your marriage or relationship, there is automatic rollover in certain cases.
Common CGT assets that may be disposed of or transferred to a former spouse include motor vehicles, collectables (such as jewellery, artworks and antiques), shares, investment or commercial properties, assets owned by companies or trusts, superannuation interests and rights or entitlements to receive income as a beneficiary of a trust.
Generally motor vehicles (designed to carry a load of less than one tonne and fewer than nine passengers) and collectables (if the cost base is less than $500) are exempt from CGT. Further a capital gain from a dwelling is disregarded or exempt if it was the main residence of the individual taxpayer throughout the ownership period.
Rollover relief applies to situations where the transferor spouse disregards a capital gain or capital loss that would otherwise arise. In effect, the spouse who receives the asset (the transferee spouse) will make the capital gain or capital loss when they subsequently dispose of the asset.
Rollover relief is also available in relation to transfers of CGT assets from a company or trustee to a spouse or former spouse. However expert advice should be taken in relation to whether the transfer of property from a company to an individual will subsequently be deemed as a dividend paid by the company to the individual and whether such transfer may expose an individual to a potential increased tax liability on their taxable income in that financial year.
Generally for the rollover/exemption to apply, the transfer of an asset must comply with Orders or Agreements specified in the Income Tax Assessment Act 1997, most commonly an Order under the Family Law Act 1975.
In some circumstances it may be more advantageous for people to deal with a CGT liability instead of seeking rollover relief, for example where there are capital losses to absorb the CGT liability or there are sufficient funds available to pay the CGT liability and share in the after-tax cash.
If you, your family or friends wish to enquire about a similar circumstance, please email us on our "Ask Us a Question" feature or call (02) 4228 8288 to speak to one of our specialist family lawyers.