Going through a property settlement? One of the important things to think about is the tax implications of any decisions you make regarding property and spousal support. Here’s a very brief rundown on some of the things to be aware of—it’s obviously a complex and nuanced area, so it’s always advisable to see a tax specialist for even what seems like a simple situation. That way, you’ve covered your bases and won’t be in for any nasty surprises. Below, you’ll find a range of potential tax consequences—and what you should ask your financial advisor.
[Tax and divorce: the issues to know…continued]
The division of assets and debts in a property settlement means tax comes into play at a number of points. Apart from the biggie that’s on most people’s radar, namely Capital Gains Tax and Stamp Duty exemptions on the family home, there are a myriad of other situations where your choices may have tax consequences.
Important tax changes have occurred in recent years. For instance, coming into effect this April are the Government’s changes to super rules, allowing spouses to access their ex’s superannuation information from the Australian Taxation Office.
And in 2019, there was a High Court ruling that meant the ATO could pursue a spouse for payment of a tax debt incurred by their ex. As such, in certain situations it is now possible for some spouses to include their tax liability in the available property being considered.
But let’s take a look at where some of the other tax consequences are, when you are going through a property settlement.
Transfer or sale of property
Typically the most valuable asset spouses hold, the family home is usually retained by one spouse. If that is the case, potentially the spouse keeping the property can be exempt from paying Stamp Duty in a family law property settlement.
If you are selling a property, there may be Capital Gains Tax payable. There are specific and complex rules around CGT exemptions, such as if the home was owned for a period by a company or trust, or depending on a home and its surrounding area being less than a certain size.
Certain decisions need to be made that will have tax consequences. And it’s important to make the right decision as in many cases, choices are binding so they can’t be changed afterwards.
Other assets (eg. vehicles, trading stock, leases, rights, shares) can also be subject to a tax on sale or transfer. Personal collectables like artworks, jewellery or antiques may also be affected. It may be necessary to decide how to share the tax payable between spouses.
The property settlement might require you to split your super with your spouse. This may have its own tax implications.
The source of the payment will be important. Maintenance payments are exempt from the receiver’s income tax if they were attributable to a payment made by a spouse.
However, if a spouse receives income from an existing trust as maintenance payments instead of directly from the other spouse, tax will be payable on that income.
It may be possible to pay maintenance to a spouse via a single lump sum payment. This is treated as capital so there are no tax consequences on payment, however a receiving spouse could find their entitlements to other Centrelink benefits impacted by any payment of spouse maintenance
Money spent on tax and legal advice can be considered as incidental costs of a CGT disposal, but they should be considered apart from the asset. There will be tax implications of doing so, so speak to your tax advisor.
Do you have a family discretionary trust of which both spouses are beneficiaries? There may be an Unpaid Present Entitlement which people sometimes don’t know about. It needs to be dealt with, for instance by a spouse assigning their right to it.
Do you need to undertake a Trust resettlement? This will usually only occur if there is a termination of a trust in very limited situations.
If you and your spouse have a business and are directors and shareholders of the company, decisions about transferring shares will likely be made, but they typically have no tax consequences.
The danger is when a family company-owned property is transferred to a spouse, as this could result in a significant tax liability for a receiving spouse.Debts to the family company can also be an issue for the spouse who owed the debt as it may eventually become a notional income amount.
For advice on reaching a tax-efficient family law propery settlement, please contact Canberra family lawyer Cristina Huesch or one of our other experienced solicitors here at Alliance Family Law on (02) 6223 2400. We can work together with your accountant/financial advisor and we have a network of trusted specialists if you should need a referral.
Please note our blogs are not legal advice. For information on how to obtain the correct legal advice, please contact Alliance Family Law.