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Navigating the Tax Implications in Divorce 

Tax Implications in Divorce

Divorce is a life-altering event that is often difficult and confusing.   And there is a myriad of family, legal, tax and financial aspects of a divorce The allocation of tax debts, money and assets within the divorcing couple is a significant consideration and emotionally charged.   And the tax impact of that asset split from your Perth tax accountant is essential. 

Regardless of the size of the assets being divided, the tax consequences can be substantial.  The primary factor determining these tax outcomes is how the property settlement or transfer affects the capital gains or losses of the individuals involved.   

Understanding these intricacies with tax advice from your Perth tax accountant becomes paramount, as it can empower divorcing couples to make informed decisions regarding their assets.  Furthermore, the collaboration of legal and tax professionals is often necessary to navigate the labyrinth of tax laws, exemptions, and reliefs effectively. 

The Role of Capital Gains Tax (CGT) in Divorce  

Capital Gains Tax (CGT) plays a central role in determining the net capital gain or loss when assets are sold, transferred, or disposed of.  This taxation element is a key player in shaping the financial consequences of divorce, especially when it comes to real estate, shareholdings, and other types of property.   

Understanding the nuances of CGT from your Perth tax accountant is essential for divorcing couples as they navigate the complexities of asset division.  This article explores the multifaceted aspects of CGT, along with exemptions and relief mechanisms, and underscores the significance of collaborating with legal and financial professionals during family law property settlements. 

The Core of Tax Implications: CGT Capital Gains Tax (CGT) is at the heart of the tax implications in divorce and property division.  Whether a couple deals with substantial assets or more modest holdings, CGT remains a pivotal factor.  The crux of the matter is how property settlements impact the capital gains or losses experienced by the individuals involved.  The financial gains or losses are the linchpin for determining the overall tax obligations arising from the division of assets.  Understanding how these gains or losses are calculated and how they apply to the specific circumstances of a divorce is paramount. 

Diverse Impact of Capital Gains and Losses: The tax consequences of divorce can vary significantly based on whether capital gains or losses are realised.  Gains which result from the sale or transfer of assets at a higher value than their acquisition cost are subject to taxation.  On the other hand, capital losses, which occur when assets are sold or transferred at a lower value, can potentially offset further gains.  This impact highlights the importance of expert guidance in managing the financial aspects of divorce effectively. 

Assessing Asset Values: A Complex Task Assigning values to various assets during divorce proceedings is far from a straightforward task.  Real estate, investments, businesses, and personal property have unique valuation methods, and these valuations can have far-reaching tax implications.  Determining the fair market value of these assets is crucial to ensure that the property division is equitable and complies with taxation laws. 

Understanding Exemptions: Certain assets are exempt from Capital Gains Tax (CGT) and hold a special status within the tax framework.  These exemptions include assets acquired before September 20, 1985, cars, collectables valued at less than $500, personal assets valued at less than $10,000, assets used for income production (e.g., personal computers used for work), the family home (the main residence of the parties), and the sale of a small business or business asset.  Understanding which assets fall under these exemptions minimises tax liability during property division. 

The Family Home and Divorce: The sale of the family home is ordinarily exempt from capital gains tax through the main residence exemption.   However, the tax exemption does not have to be in the home that the divorcing couple previously lived at. 

Making sure that the divorcing couple clearly articulates in the court orders which family home will be nominated as the main residence for capital gains tax is important to ensure tax issues later when a person believes they have a tax-free asset that is not the case.   

Complex Capital Gain Events: The Income Tax Assessment Act 1997 (ITAA) identifies 50 potential events that can lead to tax implications in divorce and family law property settlements.  These events encompass various scenarios related to asset transfer, sale, or disposal.  The wide range of capital gain events underscores the complexity of navigating tax obligations during divorce.  Engaging with legal and Perth tax accountants is essential to ensure that all relevant events are appropriately addressed. 

Marriage or Relationship Breakdown Rollover Relief: The primary tax relief mechanism offered to divorcing couples is the marriage or relationship breakdown rollover relief.  This relief applies when property transfers result from formal court orders, binding financial agreements, or court awards.  It offers a unique opportunity for couples to disregard capital gains or losses arising from the property transfer, provided that the conditions for relief are met. 

Additionally, this rollover relief might extend to assets transferred from a couple’s former company or trust, adding further layers of complexity. 

In many instances we have helped couples divorce without using the matrimonial tax relief.   There are many other tax relief opportunities in the tax act and at times getting tax advice from your Perth tax accountant to use these other provisions has helped reset higher cost bases than simply using the matrimonial tax relief.   

Deemed Dividends  

Certain events can lead to a person being deemed to have received a taxable dividend.  These events include the transfer of assets, the transfer of cash, and debt forgiveness, especially when it involves a private company or private company loans In such cases, the person who receives the financial benefit is expected to be taxed at the full marginal tax rate. 

For example, suppose a former spouse owns a company and pays the other party funds from the company as part of an existing contract.  In that case, the Australian Taxation Office (under the ITAA) will deem the amount received as a dividend.  This will then be added to the recipient’s existing taxable income, potentially resulting in a higher income tax liability.  It’s noteworthy that some trusts controlled by the divorcing couple may also encounter similar dividend consequences.   

These complexities underscore the importance of involving tax professionals in divorce proceedings, particularly when company assets are part of the equation. 

Goods and Services Tax (GST)   

The transfer of assets like private houses or cars under a family law property settlement, the person receiving the property typically does not need to pay GST.  These assets are considered personal rather than enterprise assets and are exempt from GST. 

However, a distinct scenario arises when company-held assets are formally transferred during a divorce.  In such cases, the company may be required to pay GST on the transfer, especially if GST on that asset was claimed as a GST input tax credit.    

It’s essential to consider this aspect, as it may introduce additional tax obligations into the divorce equation. 

Legal Costs and Their Tax Treatment  

Legal costs incurred during divorce proceedings have a unique status within the taxation framework.  While they are an integral part of the overall expenses associated with property division and commercial operation, legal costs differ in their tax treatment compared to other assets.   

If the legal costs relate to matrimonial advisory, they are typically not deductible.   This includes both legal costs for child access, the asset split across the family home or just a fair asset split.   However legal costs of arranging for the settlement of an investment property sold on the market or the stamp duty advice and coaching the transfer through State Revenue can be part of the capital gains tax calculation or it might be tax deductible against your income (just like tax advice from your Perth tax accountant). 

Stamp Duty 

Stamp duty is typically not payable when real property is transferred from one spouse to another, provided that the transfer is pursuant to a court order or financial agreement as defined in the Family Law Act 1975.  This exemption can help alleviate the financial burden during property division. 

Legal advice on this topic is important.   

Superannuation Division in Divorce 

Since 2002, superannuation funds, whether in the accumulation phase or pension phase, have been legally classified as “property” in the context of divorce proceedings.  This classification means that in the event of a marital split, the total balance of your superannuation savings becomes part of the overall matrimonial asset pool, subject to potential division. 

The process of splitting superannuation assets can be accomplished through mutual agreement between the parties involved or may be subject to resolution through Family Law Court proceedings.  When dealing with a superannuation split, there are three key considerations to take into account: 

  1. Determining the Split Amount: The amount to be divided can be established either as a percentage of the superannuation balance or as an agreed-upon fixed figure.  The decision may depend on the circumstances and the preferences of the individuals involved. 
  2. Timing of the Split: The split can take immediate effect or be flagged to occur at a specific future date.  Flagging is often used when the superannuation interest cannot be readily divided now or when its valuation is contingent on a future event.  For example, this may apply if there is a commercial property in the couple’s self-managed superannuation fund that cannot be immediately liquidated. 
  3. Component Split: It’s important to note that you cannot select which components of your superannuation are split.  The split is determined based on the proportional composition of tax-free and taxable components in your super fund.  For instance, if your superannuation comprises $250,000 in tax-free components and $250,000 in taxable components, and it is agreed that $300,000 will be transferred to the receiving spouse, the $300,000 will consist of $150,000 in tax-free and $150,000 in taxable components, maintaining the 50/50 ratio. 

The tax-free components within your super fund can have specific benefits, such as the ability to draw an income stream before reaching the age of 60 or advantageous tax treatment in cases of distribution to non-dependents in the event of your passing.  Typically the members statements attached to the SMSF financial reports prepared by your Perth tax accountant will outlines the amount of the taxable and non-taxable portions of your super fund.  

Moreover, the split of superannuation assets occurs in proportion to the preservation status of each party.  In the example mentioned above, if the member initiating the split has unrestricted access to their entire superannuation balance, such as being in retirement, and the receiving spouse does not yet have access to their superannuation, the funds allocated to the receiving spouse become immediately accessible to them once transferred. 

Offshore assets 

If the divorcing couple owns assets in another tax jurisdiction the sale or transfer of those assets might create a tax event in that jurisdiction.   And if the transfer is tax-free in Australia but taxable offshore then you will not enjoy any Australian tax relief from that offshore tax paid. 

Getting offshore tax advice from your Perth tax accountant about the overseas tax jurisdiction about the proposed split is important.   Using a Perth tax accountant like Westcourt with a worldwide network like GGI Global is important to enjoy a single piece of tax advice with your matrimonial settlement.   

Conclusion 

Getting divorced is never a simple process.  And the money moved within a divorce settlement is always significant to both parties subject to the divorce.  At Westcourt we have a single focus – helping families in business.  And sometimes families get divorced – so we are naturally placed to review your divorce documents and proceedings and give independent tax advice and second opinions on proposed transactions.  Given our depth of tax knowledge, single focus, international spread and commitment to independent advice we are a natural choice for anybody seeking advice on the best tax outcome in a divorce – so why not call us today? 

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