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Property Settlement – Capital Gains Tax

How is Capital Gains Tax relevant to Property Settlement in Family Law?

Many of our clients own investment assets, such as properties and share portfolios. It is vital that they understand how Capital Gains Tax is relevant for their property settlement negotiations.

There are usually 2 scenarios:

  1. the investment asset is to be sold; or
  2. 1 spouse is retaining the investment asset.

If the asset is to be sold, important considerations include:

  • who is the legal/registered owner of the asset? Is it one spouse, both spouses jointly or is it owned by an entity?
  • when is the CGT payable?
  • who will be responsible for the capital gains tax?
  • do you need to specify in your settlement documentation who is to be responsible for the CGT and/or how will it be paid?

If the asset is to be retained by one spouse, important considerations include:

  • was the investment asset acquired solely for investment purposes, with the intention to eventually sell it for profit?
  • will the investment asset be sold in the near future?
  • has the CGT liability already been factored into the valuation of the investment asset?
  • has an accountant provided workings for the CGT calculation?
  • should the full CGT liability or a portion of it be factored into the negotiation, to reflect that one party is retaining an asset pregnant with CGT?

Before you sign your Court Orders or Financial Agreement, take note of the following:

  • CGT rollover relief will apply automatically apply when an investment asset is transferred to a spouse personally, provided that it occurs pursuant to a Court Order or a Financial Agreement.
  • if the transfer occurs without Court Orders or a Financial Agreement, then the rollover relief will not apply.
  • if the investment asset is transferred to a company or trust you control (as opposed to a spouse, personally), rollover relief will not apply.
  • the person receiving the asset must be one of the spouses in order for the rollover relief to apply (i.e. you cannot transfer the property to a child without triggering a CGT event)
  • the spouse retaining the investment asset will be liable to pay the CGT when the asset is eventually sold.

How CGT is treated in your settlement negotiations can make a significant difference in your outcome.

CGT is a complex issue, and the information above is general in nature (it is not legal advice). You should seek specialist legal and accounting advice before you commence your property settlement negotiations.