The purpose of this blog is to cover how to avoid tax in a property settlement.
It is common for separated couples to want to avoid the hassle and cost of involving lawyers, leading them to reach an informal agreement to divide their property.
One of the hidden dangers in only having an informal agreement however is that one or both spouses may be required to pay tax on the property that they retain. These taxes could be thousands of dollars (and in many cases avoidable!!).
The two main taxes that we see in family law property settlements are:
- Capital Gains Tax (CGT)– tax payable on the net profit made on the sale or transfer of property; and
- Stamp Duty – tax that will apply when you buy, sell or transfer property.
To avoid paying unnecessary taxes, separated couples must formalise their agreement in either a Consent Order or a Financial Agreement under the Family Law Act 1975.
Now that you’re aware these taxes exist and how to avoid them, let’s talk about some examples…
The Family Home
It is common for one spouse to retain the family home in a family law property settlement. This often requires the other spouse to transfer their interest in the home to that spouse.
Generally, a property settlement which involves the transfer of the family home from one person to the other will not attract CGT. This is because the CGT legislation contains a main residence exemption.
However, if the family home was:
- the main residence for only part of the ownership period; or
- used for the purposes of producing income,
the exemption from CGT may not be able to be claimed.
Stamp duty is triggered and payable by the person who is retaining their former spouses interest in the property if a transfer occurs without an Order or Financial Agreement.
Please refer to the Transfer Duty Estimator to work out an estimate of how much stamp duty may be payable.
Separated couples often own investment properties. A sale or transfer of a property purchased after 20 September 1985 without an Order or Financial Agreement will trigger CGT.
Special rules however apply to the transfer of real property (other than the family home) from one spouse to the other when the transfer is pursuant to an Order or Financial Agreement. CGT will be automatically deferred until the property is sold (if ever) in the future. What that means is that the spouse who retains the property will only be liable to pay the CGT if they subsequently sell the property. This is called ‘roll over relief’.
Understandably, there can often be disputes about whether an estimate of the amount of CGT payable on the future sale of an investment property should be a cost shared by both parties rather than just by the party who is retaining that property. It would depend on the nature of that investment as to what approach should be followed, and legal advice should be sought.
CGT does not apply to motor vehicles. They will however still attract stamp duty on the transfer unless the separated couple have an Order or Financial Agreement.
Other Personal Assets
CGT may be payable on the sale or transfer of:
- collectables such as artwork, jewellery or antiques acquired for $500 or more; and
- personal-use assets such as a boat acquired for more than $10,000.
The special rules regarding `roll over relief’ in a family law property settlement also apply to the transfer of the above assets if the transfer is pursuant to an Order or Financial Agreement.
Again, the stamp duty will apply on the transfer without an Order or Financial Agreement.
Take Away Message
Separated couples can avoid paying tax by formalising their agreement in either a Consent Order or a Financial Agreement.
This post has only dealt with assets owned in the personal names of the separated couple.
By Tegan Martens
Director & Principal Family Lawyer
The information contained on this site is for general guidance only. No person should act or refrain from acting on the basis of such information. You should seek appropriate professional advice based upon your particular circumstances.