Potential Tax & Duty Issues in Family Law Property Settlements
With many family law property settlements, there may be possible taxation or duty consequences that neither spouse has considered. In this blog we will explore a few common issues that can come up in family law settlements.
Capital Gains Tax (CGT)
CGT is payable on the net capital gain made on the sale, transfer or disposal of property to another person, for properties purchased on or after 20 September 1985.
A common scenario is a couple with two properties of equal value - the matrimonial home and an investment property. They agree to each keep one property, and divide all other assets equally, believing that they are achieving an overall equal division. However, if the investment property was purchased post 1985, then the spouse retaining that property may have a CGT liability if they choose to sell it now or in the future, whereas the spouse remaining in the family home is in a better tax position because if they later sell the home, they may claim the CGT main residence exemption for all or part of the net capital gain.
CGT also applies to other assets, including shares.
As part of a property settlement, one spouse can make changes to the deed of a family trust.
Depending on the nature of the changes made, and the terms of the trust deed, it could trigger a “resettlement” of the trust which, in broad terms, occurs where a change to a trust is so substantial it effectively creates a new trust, possibly triggering duty and CGT consequences.
Certain changes may not trigger a resettlement, for example, removing the other spouse’s name as a beneficiary of a family trust (although CGT and duty may still apply depending on the circumstances).
Companies & Shares
Often couples operate a business through a company with each spouse as a director with an equal shareholding. Typically, as part of a property settlement, one spouse takes over the company/business and the other resigns as director and transfers their shares.
In some cases, the transfer of shares in small companies does not attract taxation or duty consequences. However if, for example, the property settlement involves the company transferring property it owns to one spouse, then adverse income tax consequences are triggered as it is deemed that the company has paid an unfranked dividend to the spouse receiving the company’s property. That spouse will need to include that dividend in their taxable income.
The above case scenarios illustrate the importance of obtaining independent taxation advice before negotiating or finalising a property settlement. If you are dealing with the division of assets following the breakdown of a relationship, please do not hesitate to contact a member of Coleman Greig’s Family Law team, who would be more than happy to assist you today.