What is Capital Gains Tax (CGT)?
Capital Gains Tax (CGT) is a tax paid when an asset is sold, disposed of, or transferred. Assets attracting CGT include investment properties, shares or collectables. The ‘capital gain’ is the difference between the price that the asset was originally acquired for and the amount for which it was sold. Capital gains must be reported to the Australian Taxation Office and although assessed separately, form part of the seller’s taxable income for that financial year.
Often when couples separate, assets are transferred between the parties as a part of their final property settlement. When a CGT event occurs because of a separation, CGT rollover relief applies resulting in the transferring spouse not incurring the capital gain that would ordinarily occur if the asset was transferred to another party. If the receiving party disposes of the asset in the future, he or she will be taxed on the capital gain that arises at that time. In other words, the capital gain is rolled over to the party that received the asset due to the separation.
Rollover relief does not apply to the transfer of assets between parties under Binding Financial Agreements that do not directly relate to the breakdown of a relationship, e.g. If an asset is transferred during the course of a marriage/relationship to another party pursuant to a prenuptial agreement.
Valuing assets and CGT
When post-separation asset splits take place, will the CGT implications be considered by Courts when altering the property interests of each party? Is this a legitimate debt which should be factored into the division of the net assets?
The Full Court of the Family Court established general principles in the 1998 case of Rosati when determining CGT implications in valuing assets.
- The circumstances of the case will determine if CGT will be taken into account when determining the value of an asset. The court will consider the “method of valuation applied to a particular asset” and the likelihood of the asset being sold off or not. The Court will also consider the circumstances of the original acquisition and the evidence that the parties can bring regarding their intentions in relation to the asset in question.
- In assessing the value of an asset, CGT will be factored in where:
(a) the Court orders the sale of the asset, or
(b) the Court is “satisfied that a sale of the asset is inevitable”, or
(c) the sale of the asset “would probably occur in the near future” or
(d) the asset is one which was “acquired solely as an investment with a view to it’s ultimate sale for profit”.
- In some special circumstances, even when there is no risk or likelihood of the sale of the asset, the Court may still consider the CGT liability at the full or at a discounted rate, depending on how likely and how soon the asset is to be sold.
The timeframe for the sale of the asset in question is critical and advice from an experienced family lawyer in identifying capital gains tax issues should be obtained when dividing up assets. Working collaboratively with a taxation accountant is also necessary to assess the financial implications which will arise from the disposal of an asset.