Under the Income Tax Assessment Act 1997, Capital Gains Tax (CGT) roll over relief is available where an asset is transferred under a Court order under Part VIII of the Family Law Act or under a Financial Agreement that is binding under Part VIIIA of the Family Law Act. This enables the parties to a relationship to have the benefit of CGT roll over relief where the asset is transferred between them, or from a trustee or a company to a “spouse”, which since 9 December 2008 now includes same sex spouses.
Roll-over relief means that the CGT liability is deferred until the transferee eventually disposes of the asset and the transferee is taken to have acquired the asset when the transferor did. Consequently, when the transferee eventually sells the asset:
1. If the asset was initially acquired pre 20 September 1985 then it will be CGT free, or
2. If it was acquired by the transferor after 20 September 1985 then it will attract CGT and the calculation of the CGT liability takes into account the transferor’s initial cost base and any reduced cost base when the transferee acquired it.
Clients in Family Law matters need accounting and financial planning advice regarding any potential CGT liability and concessions and cost bases. We want our clients to be aware of CGT implications and obtain advice whether the CGT liability may be minimised or incurred when we are drafting their property settlement and before any Financial Agreement is entered into or Court orders made. It is important that the transfer of an asset is because of a Court order or Financial Agreement and not simply later acknowledged by an order of the Court or subsequent Financial Agreement as this may jeopardise CGT roll over relief.
CGT may be taken into account by the Court but not necessarily in all cases. So when is CGT considered? In the case of Rosati decided in 1998, the following principles were laid down in relation to the treatment of CGT.
First, whether CGT should be taken into account varies in accordance with each case. Factors that would influence whether or not it would be taken into account include the likelihood of the relevant asset being sold in the foreseeable future, how the asset was acquired during the relationship and what each party’s evidence is in relation to that asset.
Consequently, if the parties during the course of the relationship invested in an asset acquired after 20 September 1985 and their evidence was that the asset would need to be sold because neither could afford to buy out the other’s share of that asset, just as the parties would share in any profit in that asset, the Court would order that they also share any liability which could include the Capital Gains Tax liability.
Other circumstances include whether sale of the asset is inevitable. Where for example an asset was bought purely as an investment, it may be apparent that it was intended to be sold in the foreseeable future. In such a case, the Court may make an allowance for any CGT payable upon its sale when determining the value of the asset in the proceedings before it.
CGT may also be considered not so much in determining the value of the asset but in terms of any adjustment on each party’s entitlement where the Court forms the view that it is inevitable that the asset might be sold in the short to mid term, such that the potential CGT liability is a foreseeable risk for one of the parties. This might be the case where, for example, the mother wishes to retain the property so that she and the children can remain in the home but it is foreseeable that she may be unable to maintain mortgage repayments over a longer period of time and that the property would ultimately be sold once spousal support and child support ends in the near future.
In addition, in a case in which there is no likelihood of the asset being sold in the foreseeable future there may nevertheless be circumstances that make it appropriate for the Court to take into account the potential CGT liabilities.
When the matter is before the Court, evidence is required from accounting and financial planners about each party’s tax position, how CGT would be calculated as well as evidence about any discounting of tax, particularly if the asset may not be sold for some time. If parties are negotiating we also need accounting and financial planning advice as to what the likely CGT liability shall be so that we can deal with this liability in reaching agreement regarding the value of the asset pool and in apportioning assets and liabilities between the parties.
Please contact a member of our Family Law team if you would like further information.