The ABC of CGT in your fam­i­ly law prop­er­ty settlement

Tax costs have an effect on the prop­er­ty pool avail­able for dis­tri­b­u­tion. In prop­er­ty cas­es, the Court may take into account Cap­i­tal Gains Tax (CGT) allowances when deter­min­ing the asset pool. This arti­cle will set out how CGT is usu­al­ly treat­ed by the Court in fam­i­ly law prop­er­ty set­tle­ment proceedings.

What is CGT?

Cap­i­tal gain refers to the pro­ceeds received from the dis­pos­al of an asset, after the deduc­tion of the asset’s cost base (gen­er­al­ly the ini­tial cost of acquir­ing the asset at the time of acqui­si­tion). CGT is gov­erned by the Income Tax Assess­ment Act 1997 (Cth) and is payable on the dis­pos­al of most assets acquired on or after 20 Sep­tem­ber 1985. For exam­ple, unless there is a spe­cif­ic exclu­sion, CGT is payable upon the sale of assets like real estate, shares and the good­will of a busi­ness where the own­er has made a cap­i­tal gain upon sell­ing the asset. CGT exemp­tions apply to some per­son­al assets like your home (main residence). 

CGT rollover relief

Usu­al­ly, CGT is payable after change of own­er­ship of a non-exempt asset. How­ev­er, assets trans­ferred because of the break­down of a rela­tion­ship are sub­ject to rollover relief, which means that the recip­i­ent par­ty can dis­re­gard or defer any cap­i­tal gain which would oth­er­wise arise until the asset is ulti­mate­ly dis­posed of. The cost base of the asset is also trans­ferred to the recip­i­ent par­ty. Rollover relief can apply where:

  • an asset is trans­ferred pur­suant to a Finan­cial Agree­ment or court order; and
  • own­er­ship is trans­ferred from one spouse / par­ty to anoth­er or from a com­pa­ny or trust to a spouse / par­ty to the relationship.

Asset val­ue and CGT liability

In finan­cial fam­i­ly law cas­es, lia­bil­i­ty for CGT may be tak­en into account when deter­min­ing the val­ue of a par­tic­u­lar asset. 

In Rosati, one of the grounds of the hus­band’s appeal was whether the tri­al judge erred in declin­ing to make allowance for CGT which would be payable on sale of the hus­band’s busi­ness. The Full Court stat­ed that:

1. Whether CGT should be tak­en into account in valu­ing a par­tic­u­lar asset varies case by case. Rel­e­vant fac­tors include:

(a) the method of val­u­a­tion applied to the par­tic­u­lar asset;

(b) the like­li­hood or oth­er­wise of that asset being realised in the fore­see­able future;

(c) the cir­cum­stances of the asset’s acqui­si­tion; and 

(d) the evi­dence of the par­ties as to their inten­tions in rela­tion to that asset.

2. If the Court orders the sale of an asset, or is sat­is­fied that a sale of it is inevitable, or would prob­a­bly occur in the near future, or if the asset is one which was acquired sole­ly as an invest­ment and with a view to its ulti­mate sale for prof­it, then, gen­er­al­ly, allowance should be made for any CGT payable upon such a sale in deter­min­ing the val­ue of that asset for the pur­pose of the proceedings.

3. If the Court is sat­is­fied that there is a sig­nif­i­cant risk that the asset will have to be sold in the short or mid term, then the Court, whilst not mak­ing allowance for the CGT payable on such a sale in deter­min­ing the val­ue of the asset, may take that risk into account as a rel­e­vant 75(2) fac­tor, the weight to be attrib­uted to that fac­tor vary­ing accord­ing to the degree of the risk and the length of the peri­od with­in which the sale may occur.

4. There may be spe­cial cir­cum­stances in a par­tic­u­lar case which, despite the absence of any cer­tain­ty or even like­li­hood of a sale of an asset in the fore­see­able future, make it appro­pri­ate to take the inci­dence of cap­i­tal gains tax into account in valu­ing that asset. In such a case, it may be appro­pri­ate to take the cap­i­tal gains tax into account at its full rate, or at some dis­count­ed rate, hav­ing regard to the degree of risk of a sale occur­ring and/​or the length of time which is like­ly to elapse before that occurs.”

In Blake & Blake, the Full Court stat­ed that the Rosati prin­ci­ples are guide­lines for the exer­cise of the prop­er­ty set­tle­ment juris­dic­tion under 79 of the Act, and must be applied as the jus­tice and equi­ty of the case in ques­tion requires.” 

In that case, the hus­band was a prop­er­ty devel­op­er and gave evi­dence as to a desire to retain a par­cel of real estate in the longer term future”. The prop­er­ty had been pur­chased as an invest­ment and with a view to being devel­oped, how­ev­er the Court stat­ed that where the hus­band had refused an offer of $2 mil­lion for the prop­er­ty, it could not … be rea­son­ably assert­ed that it would be just and equi­table for the wife to have to share the bur­den of a poten­tial future lia­bil­i­ty for CGT in rela­tion to that prop­er­ty.

Whether or not CGT will be tak­en into account in deter­min­ing the val­ue of a par­tic­u­lar asset will be decid­ed by the Court on a case by case basis. It is impor­tant that you obtain appro­pri­ate tax and legal advice pri­or to nego­ti­at­ing a set­tle­ment involv­ing assets which may be sub­ject to CGT.