An important but often overlooked aspect of family law property settlements is the tax and duty consequences of parties retaining or disposing of assets. It is essential that all parties receive financial and tax advice before finalising a property settlement to ensure that everyone walks away with what they intended and to avoid nasty surprises later.

Generally, the biggest tax issues in family law matters are:

• Capital gains tax;
• Stamp duty;
• Income tax consequences – “deemed dividends”; and
• GST.

Capital gains tax (CGT)

CGT is payable on the net capital gain made on the sale, transfer or disposal of property. This includes real estate (other than the family home), shares, leases and different types of rights.

Generally, the following is exempt from CGT:

• Assets acquired before 20 September 1985;
• Collectables less than $500;
• Some personal assets less than $10,000;
• Cars and motor vehicles;
• Sale of a small business or business asset;
• Assets used to produce income; and
• The parties’ main residence.

CGT and the family home

If you keep the main residence (or family home) selling it later, the sale is exempt from CGT on the profits.

CGT and investment properties

If you have and keep an investment property, the transfer from your former partner to you is not subject to CGT. You must have a certain written agreement or Court order to obtain marriage or relationship “rollover relief”. If you later sell the investment property, you will have to pay CGT on any profit.

Rollover relief on assets from a company or trust

Rollover relief can also apply to assets transferred from a company or trust to a party of the marriage or relationship. But be wary of Division 7A of the Income Tax Assessment Act 1936 (ITAA) [see below].

Capital losses

Capital losses (when what you receive from the sale, transfer or disposal of an asset is less than what you paid for it) can be claimed against income.

Calculating CGT obligations

If and exactly how much CGT you will have to pay or how much loss you may incur is a question for your accountant or tax lawyer.

The Family Law Courts can take future CGT liabilities or losses into account if certain factors are present. For example, how the asset was acquired, the intentions of the parties at that time, and whether the asset sale is inevitable or part of a Court Order, may all be considered.

Transfer duty (formerly called stamp duty)

Generally, properties and motor vehicles in New South Wales are not subject to transfer duty if the transfer from one party to the other is pursuant to a Court Order or Financial Agreement under the Family Law Act 1975.

However, where a private company, owned by one party, transfers, say, a car owned by the company to the other party, transfer duty is payable by the party to whom the car is transferred.

Income tax – deemed dividends

In some cases, the ITAA may “deem” a party to have received a taxable dividend which will determine the income tax payable by that party. This could occur with:

1. the transfer of cash;
2. the transfer of an asset; or
3. forgiving a debt owed to a private company by a party to the relationship.

A deemed dividend can occur where a private company:

1. pays a shareholder or an associate of a shareholder; or
2. forgives the debt of a shareholder or an associate of a shareholder.

“Payment” can even include the transfer of property or giving a guarantee and meeting guarantee duties.

An associate of a shareholder includes the relative or partner of, or trust or company controlled by, the shareholder. The party receiving the benefit (not the shareholder) is taxed at their full marginal tax rate.

For example, if your former partner owns a company which pays you money (not as part of a legitimate employment or other contract), the ITAA deems the amount you received as a dividend which is taken into account when calculating your income tax liability.

Trusts can also have deemed dividend consequences.

Exemptions, exclusions and marriage breakdown concessions to the deemed dividend provisions of the ITAA include:

• loans on commercial terms;
• the payment of genuine debts; and
• having the deemed dividend receive the benefit of franking.

A dividend is franked when your income tax calculations take into account the tax already paid by the private company or trust so you are taxed at a lesser rate rather than your full tax rate.

Goods and services tax (GST)

Where a company, owned by one party, transfers a car to the other party, the party receiving the car will not pay GST on the transfer (because it is not made during the course of the business).

However, if the company claimed the GST on the purchase of the car as a credit, it may have to pay GST on the transfer. The company cannot retain the benefit of having claimed GST on its purchase because the car changed its “purpose” from being a company asset to private use. In that case, the transfer changes category of the car from an “enterprise asset” (used or intended to be used in an enterprise that is or should be registered for GST) to a “private asset” (anything that is not an enterprise asset).

What now?

There are many ways that a transfer or retention of assets can lead to tax consequences.

Obtaining taxation advice from an accountant or tax lawyer before entering into a property settlement involving a private company will ensure that you are informed of all tax issues. If you are unsure of the impact of the tax consequences of your or your former partner’s corporate structure or properties on a property settlement, contact us to assist you through the process. Where necessary, we can refer you to an accountant to obtain tax advice.