Capital Gains Tax and Property Settlements
Capital Gains Tax is a federal tax payable when a profit is made from the sale, transfer or disposal of an asset. The Income Tax Assessment Act 1997 makes this tax payable on the disposal of assets that are acquired after 20 September 1985. The amount of tax that is payable for a capital gain is the difference between the amount the asset is sold and for what it was originally purchased. The purchase price includes the expenses of the purchase such as stamp duty, legal and agent fees. Capital gains tax is usually payable for the year in which the capital gain was made. It is considered income for that year for the person who made the capital gain. This article deals with capital gains tax and property settlements.
What items attract capital gains tax, and what items are excluded?
Some assets do not attract capital gains tax. A family home or primary residence does not attract capital gains tax. Cars, motorcycles, personal use items such as furniture or electronics that cost less than $10,000 and collectible items such as jewellery or art purchased for less than $500, are also exempt from capital gains tax.
Assets that do attract capital gains tax include investment properties, boats and collectibles worth more than $500.
Implications for capital gains tax where there is a relationship break-down
When a relationship comes to an end, assets from the relationship are often sold. So, which party to the relationship is responsible for paying capital gains tax? There are some specific rules that apply to capital gains tax where a relationship has broken down.
If, after a relationship break-down, an asset is transferred from one party to the other in a property settlement, capital gains tax on that asset may be rolled over. This means that the tax obligation is rolled over to the party to whom the asset is transferred. The person who is transferred the asset will have to pay the tax once they eventually sell or dispose of the asset.
In general, a rollover will apply when two conditions are met:
- An asset is transferred between spouses or from a company or trust to a spouse; and
- The transfer is completed in accordance with a court order or formal agreement such as a binding financial agreement.
Parties who transfer assets in circumstances where a relationship has broken down cannot choose whether the rollover will apply or not. If the conditions for the rollover exist, the rollover will apply.
Consideration of capital gains tax when making a property settlement
If you are entering into a property settlement with a former partner voluntarily, you should consider what the implications of capital gains tax are on any assets that will be transferred in the settlement.
If the Family Court considers what distribution should be made between former partners or spouses, it can take into account capital gains tax implications.
The Family Court considered the implications of capital gains tax in property settlements in the 1988 case of Rosati v Rosati. In that decision, the Family Court determined that the following principles should apply:
- It depends on the circumstances of the case as to whether capital gains tax implications should be taken into account when determining the value of assets. Among other things, the circumstances that can be considered include the way in which the particular asset is valued, the likelihood of its disposal in the future and the intentions of the parties in relation to the asset;
- Generally, capital gains tax implications should be considered in determining the value of an asset in the following circumstances:
- for assets which were acquired as an investment and which were intended to be sold for profit;
- where the court orders the sale of an asset;
- where a sale is most likely to take place in the near future;
- where a sale is inevitable;
- If it is apparent to the court that there is a substantial risk that an asset is going to be sold in the near or mid-term future, but none of the circumstances in (2) apply, the court may take that risk into account in valuing the asset. However, the court, although taking the risk into account, should not take into account the capital gains tax that would be payable if sold.
- The court may take capital gains tax implications into account in determining the value of an asset if there are special circumstances in a particular case even though there is no indication that sale of the asset is likely in the near future. In such circumstances, the degree of risk and length of time likely before any sale may influence what rate of capital gains tax the court should take into account in valuing the asset.
The principles of Rosati & Rosati were considered in the 2014 case of Boyle & Boyle. In that case, the husband was living in a house that the couple had as a holiday home prior to their separation. The husband estimated that he would have to pay about $68,625 of capital gains tax if he were to sell the property. He stated that he had no intention of selling it. The Full Court of the Family Court determined that there were no circumstances that would serve as a basis for capital gains tax to be considered when issuing the order for property settlement.
If you require legal advice or representation in any legal matter, please contact Armstrong Legal.