Tax Implications
When considering a proposed family law property settlement, it is important to consider the tax implications that may arise. This means taking into account not only immediate tax consequences, but also longer-term consequences.
Some tax implications that can potentially occur in family law property settlements, include:
Division 7A Tax:
The transfer of property from a private company to a spouse personally will attract the operation of Division 7A as outlined in Part III of the Income Tax Assessment Act (Cth). As part of an adjustment of property made under Section 79 of the Family Law Act 1975 (Cth), where a private company controlled by one spouse is required to transfer property to the other spouse, the property received will be treated as a deemed dividend. Therefore, the recipient of the property from the company will be taxed at the marginal rate and will not receive any credit for the tax already paid by the company.
Division 7A does not apply in the situation where the spouse’s company transfers property to the other spouse’s company.
GST in relation to a family law settlement:
In some circumstances, the division of property between parties under the Family Law Act 1975 (Cth) can trigger potential GST (Goods and Services Tax) liabilities. The transfer of assets between individual, company or trust to a spouse personally will generally not attract GST given the private nature of the transaction. However, a transfer of a GST registered partnership asset to a spouse is considered a taxable supply and therefore GST is payable on that transaction. To be determined as a taxable supply, the supply must be made in the course or furtherance of an enterprise. For example, if a spouse receives the motor vehicle of the partnership/entity, then GST will be payable on that transaction by the partnership/entity. In these circumstances, an adjustment may be required to reverse some of the input tax credit.
GST may also be applicable in a family law context when a property settlement requires the sale of a business or commercial property.
Capital Gains Tax Rollover Relief:
Assets that are transferred because of the breakdown of a relationship/marriage are subject to rollover relief. By virtue of Section 104-10(2) of the Income Tax Assessment Act (Cth), rollover relief applies to transactions pursuant to:
1. Orders of the Court;
2. Financial agreements; and
3. Arbitral awards under the Family Law Act 1975 (Cth).
The effect of rollover relief is that:
Where there would otherwise be a Capital Gains Tax (CGT) liability on the disposal of an asset (e.g. if the asset is a post-CGT asset), this liability is deferred until a subsequent disposal of the same asset/s); and
If the asset disposed of is a pre-CGT asset (acquired prior to 20 September 1985), any substituted asset received is also treated as a pre-CGT asset.
In the context of a marriage breakdown, the most significant CGT rollovers are:
Where there is a disposal of an asset by a taxpayer to his/her spouse or former spouse or by a company or a trustee to a spouse or former spouse pursuant to certain court orders or agreements; and
Where an interest in a small superannuation fund is subject to a payment split.
Other:
Tax implications that can arise through separation are almost endless.
Additional tax implications that also may be of concern are:
1. Ordinary Income Tax;
2. Stamp Duty; and
3. Land Tax.
There are various revenue exemptions or concessions that can potentially apply to family law property arrangements and if used carefully these can produce significant savings. Therefore, it is always suggested to seek expert tax advice at an early stage and before proposing or accepting an offer of settlement.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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