People tend to negotiate a property settlement following a relationship breakdown or divorce with little consideration to capital gains tax (CGT) issues on the disposal of assets. This can often happen when the parties own a family home together with an investment property and they each retain a property.
In summary the critical points to be aware of are:
- CGT is exempt on your residence i.e. the family home or an asset acquired pre 20 September 1985.
- CGT is payable on any increase of the cost base of a property (or asset) only.
- The cost base of an asset or property is the purchase price – which includes expenses such as stamp duty, real estate agent’s fees and legal fees (i.e. for settlement).
- There is a 50% discount in CGT payable once you retain an asset for at least one year.
- CGT is only payable upon the trigger of a CGT event, such as a sale or transfer of the asset.
- An order from the Family Court or a Binding Financial Agreement provides CGT rollover relief so CGT is not payable when the property is transferred to one party by way of final settlement. However, CGT will be payable when the property is eventually sold as the cost base is carried forward when the property is transferred to either spouse.
- If you live in an investment property for a period of time whilst it is a joint investment with your partner, you will receive a CGT discount equivalent to the period of time you lived in it. For example if you owned an investment property for 5 years with your former partner and lived in it for one year prior to the sale then you will receive a one fifth discount on your CGT payable. This is an additional discount to the 50% discount for retaining an asset for at least a year.
- CGT is not payable if the sale price of the asset is less than the cost base. In this situation you will receive a CGT loss that can be applied to future tax years to offset CGT only. You are unable to apply CGT losses to personal income tax payable on your income or salary.
- It is highly recommended you seek independent accounting advice on this issue if you wish to retain an investment property by way of a final settlement to avoid any unexpected tax payable in the future.
- If you intend to bring CGT to account in property proceedings as a liability there needs to be unequivocal evidence that the asset will be disposed of in the short term or else the Family Court may consider the CGT not as a specific amount but in a general way.
If you have any potential CGT issues stemming from a divorce or relationship breakdown, then you should contact one of our family lawyers on 9322 8000 or contactus@carrco.com.au.