If you are negotiating a property settlement with a former partner, it is important that you are alert to the risk of any future taxation consequences of the settlement, so you can make informed decisions accordingly.
Why is capital gains tax relevant for my property settlement?
The first step to determining the outcome of a property settlement is to identify and value all property, liabilities, superannuation and financial resources in which each party has an interest.
A capital gains tax liability may be treated by the Court as a liability to be deducted from the net asset pool as part of your property settlement, in the same way that the Court would treat a secured mortgage.
Capital gains or other taxation liabilities may need to be shared by you and your former partner, if there is an intention to sell an asset which will trigger a capital gains tax event. It may impact only one party, depending on how the relevant real property is held/owned.
The Court will not however have regard to a potential capital gains tax liability that may be incurred by one party at some point in the future, if they have no present intention to dispose of the property.
This means that the Court will usually take into account any current or anticipated capital gains tax liability if there is an intention to sell property, or the property has already been sold but the CGT trigger has not yet occurred. For example, an investment property has been held jointly for a period of 5 years during a marriage. One party intends on retaining that investment property, as part of the property settlement to rely on it as a future income stream. That party will not receive an adjustment for any future capital gains tax liability, despite the fact that the property was jointly owned for a period.
In what circumstances might I need to consider obtaining advice in relation to capital gains tax?
In a family law context, capital gains tax commonly arises when there is a sale of an investment property or shares. You should obtain accounting advice in relation to your eligibility for CGT roll-over relief and any taxation consequences (including stamp duty) associated with your property settlement, and ideally, supplement that with financial advice. We are proud to work with a range of reputable Canberra financial advisors and accountants who we often recommend our clients to, for financial or accounting advice.
How do I ensure that a capital gains tax liability is taken into account as part of my property settlement?
In the same way that the Court requires valuations of real property, the Court must have independent and reliable evidence as to the value (or anticipated value) of a capital gains tax liability. This evidence would need to come from a suitably qualified accountant.
You should obtain family law advice when negotiating and finalising the terms of your property settlement, to ensure that liabilities such as capital gains tax are appropriately taken into account as part of Court Orders or a Binding Financial Agreement. As specialist family lawyers, we see where things go wrong and the importance of doing things properly the first time around!
If you would like to make an appointment to discuss your circumstances with a member of our team, please contact us on (02) 6225 7040, via email at info@rmfamilylaw.com.au or get started online here.