Capital Gains Tax + Stamp Duty In Family Law Matters
Written by: Adam Wightman l Canny Legal
Family Law matters can be extremely stressful and confusing for those involved, and it can be easy to overlook important issues and opportunities that may otherwise have long-lasting effects on your finances. This is never more relevant than with taxation issues associated with a family law property settlement.
Taxation legislation provides significant concessions in the form of exemptions and roll-over relief for separated spouses (and de facto partners) dealing with real estate and other assets as part of their family law property settlements.
The most common concessions utilised by separated spouses are the capital gains roll-over relief provisions and the stamp duty exceptions. By keenly focusing on how parties deal with their assets as part of a family law settlement, significant financial savings can be achieved (and lost savings avoided) which can mutually benefit both spouses.
Capital Gains Tax
Capital Gains Tax is payable upon the transfer or sale of assets such as:
- Real estate (other than the family home);
- Business assets;
- Shares; and
- Other investments.
The ‘capital gain’ is calculated by taking the sale price or value of the asset and deducting the purchase price of the asset (and the costs of any other capital improvements to the asset). After applying any available discounts, the remaining capital gain is then assessed as income of the transferor for the purposes of determining a taxation liability.
However, the taxation legislation provides a mechanism whereby the capital gains tax liability which would otherwise be required to be paid upon the transfer of an asset from one spouse to the other can be avoided, and instead, it is ‘rolled over’ to the other spouse. The receiving spouse then takes the asset subject to the underlying capital gain, and they will not be required to pay the tax on that capital gain until they eventually sell the asset themselves (if ever).
Therefore, if one spouse is considering retaining an asset, say an investment property which is owned jointly or solely by the other spouse, then it could make sense to transfer this asset between the spouses as part of the settlement, rather than sell the property to a third party. This will ensure that the CGT taxation liability is at least deferred until that property is eventually sold (if ever) by the receiving spouse. It may also be that the receiving spouse then uses that property as their primary residence moving forward, which would ensure that only the capital gain achieved up until the family law transfer would be taxed when the property is eventually sold.
However, the taxation legislation requires that the parties formalise the terms of their family law property settlement by way of a Court Order or a Binding Financial Agreement (explained below) before the transfer, so that they become eligible for this rollover relief.
The Capital Gains Tax rollover relief is available for the transfer of a variety of different types of assets between spouses, and it is also available in certain limited circumstances for the transfer of assets out of a corporate entity to one of the spouses.
Want to know more about Capital Gains Tax in general? Check out this article we previously put together: A Guide To Capital Gains Tax – FAQs.
Stamp Duty
Properties and motor vehicles are generally exempt from Stamp Duty is they are transferred from one spouse to the other as part of a family law property settlement. Some states have a blanket exemption or transfers between spouses, whilst some other states (such as Victoria) require that the transfer is subject to the parties finalising their family law property settlement by way of a Court Order or Binding Financial Agreement.
When negotiating a family law property settlement, parties should be conscious of the financial benefits of retaining a matrimonial real property as part of their settlement entitlements, as opposed to properties being sold and new properties being purchased. By adopting this approach, parties can achieve substantial savings on both stamp duty and real estate agents’ costs and commissions.
Stamp Duty exemptions can also apply when property is transferred from a party to the relationship to a child of either party, or to a trustee of a child of either party. However, again, this requires the careful drafting of settlement terms contained in a formal Court Order to Binding Financial Agreement.
Court Orders + Binding Financial Agreements
As detailed above, it is important that any family law property settlement is finalised by way of a formal written and approved Court Order or Binding Financial Agreement, so as to ensure that all of the available taxation benefits are received.
A family law property settlement Court Order can be obtained by way of agreement between the spouses, which avoids the need for either of them to attend Court. Your family lawyer would draft the settlement agreement document in the form of proposed Orders, together with a supporting document known as an ‘Application for Consent Orders’. Your lawyer would then file these documents with the Court and the agreement would be ‘rubber stamped’ as a legally binding Court Order, provided to the Court considers that it is a ‘just and equitable’ settlement. This method only requires one party to engage a lawyer (and in fact technically neither party must engage a lawyer – however this is certainly not recommended).
Binding Financial Agreement
Where a family law property settlement proposed by the parties falls outside of the range of what a Court may consider to be ‘just and equitable’, then the parties may enter into an ‘our of Court agreement’ known as a Binding Financial Agreement. However, this method requires both parties to engage their own independent lawyers, and for those lawyers to provide specialised advice and sign a certificate annexed to the agreement.
Canny Legal + Your Family Law Lawyer
Get in touch with our team if you or a loved one are separating or considering separation. Our family lawyers can take you through the process of taxation and other benefits that you may receive in finalising a family law property settlement with our team.
