As tax advisers, we work closely with our clients and their legal teams, and there are three main areas where our advice is sought:
- Assistance to understand the asset pool and structures those assets are held in;
- Advice on the tax consequences of a proposed asset division to assist the final decision; or
- Assistance with the execution of the Orders.
There are other ways in which we can assist our clients, for example as a Single Expert Witness where taxation matters are required to be independently reported to the Court. Other areas of our business may also be able to assist – for example where a business valuation is required, or our forensics team may need to review activity or transactions of a particular nature if there is a dispute.
Whilst taxation is generally a key consideration for clients in these circumstances, it should be noted that it may not always be the ‘lowest’ tax result that is decided amongst the parties, as other factors that the Court needs to take into consideration regarding whether the asset split is ‘just and equitable’ will also need to be factored in.
All client circumstances and how their assets are structured are unique, so there is no simple ‘one size fits all’ approach to coming to a decision on how to divide the assets. There are a number of tax issues to consider, and in this article, we will outline some general considerations, but we highly recommend seeking specific advice to your circumstances.
CGT Rollover Relief
In most circumstances where an asset is disposed of from one party to another, even if those parties are associated or related, a capital gains tax event may arise. For parties looking to divide their assets due to a relationship breakdown where the legal title may change under a Court Order to execute the asset division, this transfer of assets may be subject to capital gains tax.
Subdivision 126-A of the Income Tax Assessment Act (1997) grants capital gains tax ‘rollover relief’ where a CGT asset is transferred (or a CGT asset is created) to a former spouse as a result of the breakdown of a relationship, and Subdivision 126-B extends this to assets transferred to a receiving spouse by a company or a trust.
Note that the transfer needs to be ‘pursuant to a Court Order’ – so care needs to be taken to ensure the transfer has been approved by the Family Court prior to transfer. In circumstances where the parties do not go via the Family Court and ‘do it themselves’, these transfers will not be eligible for rollover relief.
Furthermore, it is important to note that not all CGT events are covered by this rollover relief, and that the recipient needs to be the former spouse; the transferee cannot be an entity such as a company or trust.
Transfer Duty
When assets are transferred, transfer duty will also generally apply. Transfer duty is a State-based tax and each state in Australia will have its own legislation and rates, so care should be taken to ensure you have considered the appropriate rules in the relevant state. Generally, if the transfer occurs due to a relationship breakdown and pursuant to a Court Order, then nominal or exemptions from duty may apply.
Assets generally
Cars
- Not a CGT asset however can be eligible for transfer duty relief.
Shares
- Generally covered by rollover relief, although if relevant in the circumstances, CGT Event K6 is not eligible for rollover relief.
- Consideration of the Continuity of Ownership (“COT”) test for a company with prior year tax losses that it may wish to claim a tax deduction for in a future year.
Real estate
- Generally covered by rollover relief.
- Consideration of the impact of the main residence exemption.
Superannuation
- A rollover or superannuation split may be required – we recommend seeking the services of a specialist adviser for superannuation advice.
- Note that a Binding Death Benefit nomination is not automatically revoked on divorce (like a Will).
Personal use and collectible CGT assets
- Rollover relief will generally apply.
- Collectible assets include artwork, jewellery, antiques, coins, medallions, stamps, manuscripts, and books, and if they have a cost base of $500 or less, they are generally disregarded for CGT purposes.
- Personal use assets are those not classified as a collectible and can include items such as boat, caravan, or racehorse. Assets with a cost base of $10,000 are generally disregarded for CGT purposes.
Companies
Control of entities and their assets will also require consideration. Assets in a company or trust may be transferred, or the control of the entire company or trust may be transferred, depending on the circumstances. Where companies (and trusts in some circumstances) have unrelated parties who have a proportion of control, then whether the entire entity’s assets can be brought into the asset pool may be questioned. Generally, however if a spouse has a majority controlling interest in an entity, the value and assets of that entity are brought into the asset pool for consideration in the division of assets. If, say, only 50% of an entity is owned or controlled, potentially 50% of the entity’s assets can be brought into the pool. This can of course have ramifications for parties who are in business with a person going through a relationship breakdown, as their interests in an entity can be at risk.
Taxation issues specific to a company include:
CGT Rollover relief and transfer duty relief
- CGT Rollover relief, and transfer duty relief, as discussed above, may apply.
- A company asset can only transfer to an individual for rollover relief to apply. For example, if shares or real estate is owned and to be transferred to the former spouse, the rollover relief may apply, and the company will not be required to pay capital gains tax. The cost base attributes are transferred to the former spouse.
- An adjustment to the cost base in the shares of that entity may be required if assets in a company are transferred out. This is to ensure the shareholders in the company do not generate capital losses on subsequent share sales.
Division 7A
- If the payment or transfer of an asset is required to facilitate a property settlement, and this results in a debit loan in the company, then the Division 7A rules may apply. The requirements are that the loan is to be repaid over a maximum term (seven years for unsecured loans) and the ATO benchmark interest rate will need to be applied (8.27 per cent in 2024), with minimum repayments required. Without meeting these terms, the amount of the debit loan could be treated entirely as a dividend which will have a tax liability to the shareholder, depending on their marginal tax rate personally.
Officeholders
- Office holders for a company will need to be considered and updated with ASIC if required.
Consideration of the ‘Continuity of Ownership’ test
- Consideration of the ‘Continuity of Ownership’ test where a company has tax losses, as discussed above, may apply.
Trusts
CGT Rollover relief and transfer duty relief
CGT Rollover relief, and transfer duty relief, as discussed above, may apply.
Section 90AC of the Family Law Act 1975 (Cth): Trust Deed Transfer to Former Spouse
Where a transfer is ordered to take place to a former spouse who is not a beneficiary of that trust, Section 90AC of the Family Law Act 1975 (Cth) provides that a Family Court Order will take effect over the terms of the Trust Deed, which might otherwise have prevented the transfer.
Trust roles to review and consider requirements for change
Trust roles to review and consider requirements for change (a separate legal document is usually required to update):
- The trustee (or director of the trustee company and/or shareholder of the trustee company).
- Appointor
- Beneficiary – care should be taken when considering ‘removing’ a former spouse as a beneficiary under the deed to ensure this does not constitute a ‘resettlement’ of the trust and trigger CGT events for all assets in the trust.
- A Court Order might seek a spouse to renounce their interest in a trust and forgo future distributions – this may trigger CGT Event C2 but generally this will not give rise to a capital gain. Note that CGT Event C2 is not eligible for rollover relief.
- The ATO generally does not consider ‘renouncing’ of entitlements is a resettlement, but amending the deed to remove a beneficiary could.
Family Trust Elections and Interposed Entity Elections
- If a trust has made either of these types of elections, the implication of change of control of the trust should be considered.
- In 2007 section 272-90(2A) of the Income Tax Assessment Act (1997) was inserted to provide that a person who was a spouse of either the primary individual, or a member of the primary individual’s family before a breakdown in the relationship, is a member of that family group in relation to the distribution.
- Ensuring the FTEs and IEE’s are reviewed can avoid family trust distributions tax being levied if a distribution is made outside of a family group.
Undrawn Present Entitlements (“UPEs”)
- Where a distribution has been made, and those entitlements have not fully passed to the beneficiary, the trust will show the amount the beneficiary is still entitled to call on, in the accounts of the trust, as an ‘undrawn present entitlement’. This would usually be disclosed as an asset of that person in their assets schedule.
- Where one spouse is no longer going to be receiving distributions, extinguishing that asset may be a goal of the trust and the property settlement, but care needs to be taken in how this is done.
- Discharge of a UPE could trigger CGT Event C2, and the assignment of a UPE could trigger CGT Event A1.
- The transfer of an asset from a trust to the former spouse may reduce a UPE, but consideration of how the asset transfer will practically impact the trust and the resulting or remaining UPE needs to occur.
GST considerations
Generally, GST does not apply on a transaction that is the subject of a property distribution (see GST Ruling GSTR 2003/6). Whilst the transfer of an item from one spouse to another may constitute a supply, there is generally no consideration for that supply.
However, you may find there is an adjustment event if for instance a business entity has made a GST claim because an item was purchased for a creditable purpose, and that item is then being transferred to a recipient spouse. In this case, a return of input tax credits may be required.
There are a number of taxation considerations when parties are negotiating a financial settlement and our team is able to assist you on all aspects of your property division, whether the issue relates to taxation, valuation, forensics, or expert witness requirements. Please get in touch if you would like to discuss your circumstances further.
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