Family Lawyers well know the difficulty of dividing the ‘pie’ of matrimonial assets. However this task can be made much harder if the ‘pie’ is reduced by unnecessary taxes. Or made terrifying if their client receives an unforeseen tax bill 6 months later!
When spouses separate there will often be a transfer of assets between them, or between their related entities (trusts, companies etc). Transfers of assets typically give rise to ‘transactional taxes’. There are tax exemptions that may apply in the Family Law context – but they can have some traps!
The most important ‘transactional’ taxes are Capital Gains Tax (“CGT”), Stamp Duty, and Goods and Services Tax (“GST”). This week I am going to set out some points relating to CGT.
CGT
CGT arises on a ‘CGT Event’. The most common is CGT Event A1 – disposal of a CGT asset. Other common CGT Events in the Family Law context relate to changes to and distributions from trusts, and granting and ending of rights. CGT assets include land, shares, units, goodwill, contractual rights, and personal use assets valued over $10,000.
When a CGT event occurs a taxpayer is usually required to pay tax on the ‘capital gain’. That is, the amount that the asset has increased in value since its purchase. An asset that decreases in value can cause a ‘capital loss’, which can be used to offset capital gains.
CGT Rollover
There are a number of circumstances where you may be allowed to defer or disregard the capital gain resulting from a CGT Event, this is known as a rollover. For example: during separation the court may order that property held by one spouse is to be transferred into the name of the other, in this case the CGT will normally be rolled over – delaying the CGT payable on the asset until the new owner disposes of it (or triggers some other CGT Event).
The ‘Family Law’ CGT Rollover can be triggered by such things as:
- Court Orders under the Family Law Act or State/Territory/Foreign law relating to breakdowns of relationships between spouses;
- Maintenance agreements approved by a court; and
- Financial Agreements relating to section 90G and 90UJ of the Family Law Act.
This rollover can apply to individuals, companies and trusts. But not all CGT Events are captured. Only CGT Events A1 and B1 (types of disposal) and D1, D2, D3 and F1 (relating to creation of rights, options and leases) are eligible for the rollover.
Rollover Traps
Obtaining the Family Law CGT Rollover can be problematic when parties decide to do things that are outside the standard transfer or creation of rights, such as:
- Distributing an asset out of a trust (CGT Event E4 or E5). One reason why a distribution may be chosen rather than a transfer is because a Stamp Duty exemption may be available if the distribution is to an individual (whereas there will be Stamp Duty on an A1 Event transfer from a trust).
- Removing a former spouse as a potential beneficiary of a trust. Fortunately, the ATO no longer thinks that this will resettle a trust (Events E1 or E2) and so the rollover may not be needed, provided that it is done within the powers of the trust. (But note there are Stamp Duty issues).
- Cancellation, surrender or ending an asset (Event C2). Common examples are redeeming or exercising options and other rights and also extinguishment of debts – including loan accounts and ‘UPEs’ (Unpaid Present Entitlements) from trusts.
With careful planning these traps could be avoided and the rollover accessed.
Adrian is the Principal of Cartland Law, a firm that specialises in devising novel solutions to complex tax, commercial and technological legal issues and transactions