The breakdown of a marriage or de facto relationship is an emotionally stressful time, and it can be made more difficult by having to divide up your property. There are a few things that you can do to make the process a little easier. Preparation is key. Certain divisions of property may attract tax or you may be eligible for certain tax exemptions or deferrals. Understanding the tax status of any proposed transfer of assets will ensure that you can take this into account when negotiating your property settlement. While you will need to get professional advice to fully understand the tax position of your proposed property settlement, we have set out a broad overview of some of the issues that may be relevant when dividing up the most common assets.
Real Estate
A capital gain or loss for taxation purposes is the difference between what an item cost you if you bought it on or after 20 September 1985 and what you sell it for.
Generally, the biggest item to be dealt with in property settlements is real estate. Your family home is usually exempt from CGT (Capital Gains Tax). You may receive a property or an interest in a property in a property settlement that is not your family home. In this case, certain special CGT (Capital Gains Tax) rules may apply.
If you are the person transferring the property in a property settlement, then you may be able to disregard the capital gain that would otherwise be the subject of CGT (Capital Gains Tax). If you are the person receiving the property, you may be considered to have made a capital gain or loss once you sell the property. For the purpose of calculating CGT (Capital Gains Tax), the value of the property may be calculated from when you and/or your partner first bought the property rather than when it was transferred to you as a result of the property settlement. This will also apply if you receive a transfer of property from a company or trustee.
In some instances, you may be fully or partially exempt from CGT (Capital Gains Tax) on any subsequent sale of the property that you received in a property settlement, particularly if the property you received becomes your main residence.
You will need to obtain professional advice to determine whether any exemptions apply. To help your adviser, be sure to keep all records relating to the property including at least the following:
- how much the property cost when it was originally bought by your former spouse; and
- the details of any major improvements made to the property.
Pre CGT (Capital Gains Tax) liability
If the property of the relationship was bought on or before 19 September 1985, then the property will generally keep its pre-CGT (Capital Gains Tax) status once it (or a share of it) is transferred to you as a result of a property settlement. You should be aware, however, that if you make a major capital improvement to the property after 20 September 1985, then the property may be subject to CGT (Capital Gains Tax) when you subsequently sell it. You should keep all records relating to the improvement of the property.
Shareholdings
If shareholdings are the subject of a property settlement and shares are being transferred from one party to another, then the transfer will generally not be subject to CGT (Capital Gains Tax) until the shares are subsequently sold. This will also be the case if there is a Financial Agreement under the Family Law Act 1975 (informally known as a prenuptial agreement) in place and the transfer is the result of that agreement. If the transfer is the result of a private agreement between the former spouses, then the transfer may attract CGT (Capital Gains Tax).
Superannuation
If you divide your superannuation in a property settlement, there are special rules that may apply. This is a complex area of the law and whether or not CGT (Capital Gains Tax) will apply will depend on many factors including the type of superannuation fund and the type of investments the fund makes. To determine the tax status of super funds that have been divided or transferred as a result of a property settlement, you will need expert advice.
Next steps
The only way your interests can be fully protected in a property settlement is if the tax status of all the assets to be divided is clearly understood before the property settlement is finalised. To do this, we recommend that you obtain expert advice as soon as you know that your relationship has irretrievably broken down. Although this is a stressful time, good advice and excellent preparation can make the whole process much smoother for all parties. Owen Hodge Lawyers would be happy to help. Call us today on 1800 770 780 or contact us via [email protected] to schedule a consultation with one of our experienced family lawyers.