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 s 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 s 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.