Capital gain tax considerations

Capital gain tax or CGT involves the calculation of a net capital gain (or loss) on the sale, transfer or disposal of a piece of property to another party. This can include real estate, shareholdings, leases or other types of assets. Items exempt from CGT include:

• Principal place of residence.
• Assets acquired before 20 September 1985.
• Cars and motor vehicles.
• Collectables worth less than $500.
• Some personal assets are less than $10,000.
• Sale of a small business asset if specific tests are met.

The Australian Taxation Office offers divorcing couples some tax relief through a marriage or relationship breakdown rollover, which means that capital gains (or losses) are disregarded in this particular instance.

The marriage or relationship breakdown rollover relief will only apply when a property transfer (from one spouse to another) results from a formal court order, binding financial agreement or court award.

This rollover ensures the transferor spouse disregards a capital gain or loss that would otherwise arise. In effect, the one who receives the asset (the transferee spouse) will make the capital gain or loss when they dispose of the asset. The asset’s cost base is transferred to you if you are the transferee spouse.

Timing of the CGT event

It is essential to know when specific marriage or relationship breakdown rollover rules changes apply to CGT events after 12 December 2006. If an asset was transferred under a contract, the CGT event happened when the contract was entered into.

A binding financial agreement may be a contract. The time a contract is entered depends on the terms and conditions of the agreement and the relevant legislation being satisfied so that the agreement can take effect. In the case of a binding financial agreement, a separation declaration has to be made under section 90DA of the Family Law Act 1975 before the agreement can take effect.

A binding agreement used by a marriage or relationship breakdown couple may be a contract. The time a contract is entered depends on the terms and conditions of the agreement and the satisfaction of the relevant legislation so that the agreement can take effect.

If there is no contract, the CGT event happens when the asset’s ownership change occurs.

Transfers made according to a court order or arbitral award are not made under a contract. Therefore, no CGT event occurs until the asset is transferred under the order or award. Binding financial agreements can be entered into before, during or after marriage or relationship. Arbitral awards allow property and financial matters of separating couples to be settled using arbitration. These arrangements allow separating couples to settle their affairs without going through court processes, which are often costly and protracted.

Calculation of CGT

To calculate your capital gain or loss when a later CGT event happens, the first element of your cost base and reduced cost base are the same as the cost base and reduced cost base of your spouse (or the company or trustee) at the time of the transfer. Your cost base and reduced cost base also include any costs incurred by you or the previous owner (your spouse, the company or trustee) in transferring the particular asset on the breakdown of your marriage or relationship, such as conveyancing costs and stamp duty. General legal costs relating to the breakdown or incurred in seeking a property settlement and payments made under a Family Court order representing the increase in value of the CGT asset are not included.

Consequences of the rollover

You transfer the asset

If you transferred the asset, the consequences of the rollover are:

• you disregard any capital gain or capital loss for assets acquired before 20 September 1985
• for assets acquired on or after 20 September 1985, the marriage or relationship breakdown rollover ensures you disregard any capital gain or loss you make from the CGT event involving you and the transferee spouse.

The asset is transferred to you

Assets acquired before 20 September 1985 – Suppose a CGT asset, including a share of a jointly owned asset, was transferred to you because of the breakdown of your marriage or relationship and was acquired by the transferor before 20 September 1985. In that case, you are also taken to have acquired the asset before that date. You disregard any capital gain or loss you make when you dispose of the asset later.

However, suppose you made a significant capital improvement to that asset after 20 September 1985. In that case, you may be subject to CGT when you dispose of it, or another CGT event happens to that asset.

Assets acquired on or after 20 September 1985 – The rules differ if the transferor acquired the asset on or after 20 September 1985. In this case, if you received the CGT asset (or a share of a jointly owned asset) and there was a marriage or relationship breakdown rollover, you are taken to have acquired the asset (or share of the asset) at the time it was transferred from your spouse (or the company or trustee).

Cash settlements

Changes to the law ensure that no CGT liability arises about ending spouses’ rights that directly relate to their marriage or relationship breakdown, including if they receive cash as part of a breakdown settlement. No CGT liability arises if the spouses are separated when the rights end, and there is no reasonable likelihood of cohabitation being resumed. 

How superannuation is viewed in a divorce

The Family Law Act 1975 views superannuation as property that should be split during a divorce. This differs from other assets as superannuation is usually held within a trust, meaning it won’t be converted into a cash asset.

How the court divides superannuation depends on whether the fund is self-managed or regulated by the Australia Prudential Regulation Authority (APRA).

If the fund is self-managed, the parties involved have to abide by their fund deeds. Different super funds have different rules. Some will allow an immediate division of assets, while other funds require that the parties involved wait until retirement or preservation age before they can access superannuation.

Individuals who were party to a marriage can apply to the court for superannuation orders up to 12 months after the divorce orders are issued. Parties who are separated and seeking or waiting for divorce orders to be made by the court may apply for superannuation at any time during the process.

For de facto relationships, parties can seek superannuation orders within 24 months from the date of separation. To be eligible, the party must have been in a de facto relationship for two years. If a child is involved, the two-year rule does not apply. Even if you are outside these periods, the court may grant leave to one of the parties to obtain superannuation orders if they are experiencing significant hardship and have a strong claim.

The amount of superannuation to be split

Generally, agreement is reached between the parties without going to the family court, but matters the court takes into account include:

• The length of the relationship (marriage or De Facto)
• Valuation of the Superannuation of each party
• Financial contributions of each party during the partnership
• Domestic (and other) contributions made during the partnership
• The welfare of children or dependents
• Differences in income between the parties
• The financial responsibilities of each party

While the division of the entire asset pool is seldom 50/50, superannuation may sometimes be the exception to that rule. If the parties’ relationship commenced before accumulating much superannuation, the superannuation may be distributed between the parties in a manner that leaves each party with a similar amount.

Of course, variations in superannuation division will occur, but it will depend on the abovementioned factors and the negotiations between the parties involved, their legal representatives, and the court.

Tax traps arising from family breakdowns

CGT issues

The transfer will usually occur for no monetary or non-monetary consideration, meaning that the market value substitution rules will have application. The application of the market value substitution rules implies that:

• The beneficial owner will be taken to have received the property’s market value.
• The acquiring party will obtain a market value cost base.

However, various exemptions, concessions, and CGT rollovers are possible.

Main residence exemption

Most of us know that capital gain from a dwelling is disregarded to the extent that the dwelling is the primary residence of the individual taxpayer throughout ownership. There are specific rules that deal with absences, which may need to be considered, including:

• Spouses living permanently, separately, and apart cannot have different primary residences.
• The principal residence analysis can be applied separately if multiple residences are owned independently.
• To avoid future disputes, an assessment of any elections necessary to obtain from the transferee spouse must occur at the relevant time and be mutually understood by both parties.