Capital Gains Tax in Property/Financial settlement matters – Who Pays the Tax?

19/12/2018

The sale of an asset as part of a Family Law property settlement; or an Order of the Family Court of Australia or Federal Circuit Court for sale of an asset can trigger a liability to pay Capital Gains Tax (CGT).  It is not the case that the tax is paid by both parties in equal shares.

The owner of the asset sold will be the person who is liable to pay the tax.

There are also costs of selling an asset (realization costs) that will generally have to be borne by the person selling the asset.

Sometimes an asset that is subject to Capital Gains Tax will be retained by one party and later that asset may be sold and that party will have to pay the tax and meet the realization costs.

Property acquired after September 1985 will be subject to Capital Gains Tax.  Generally, that tax will be the tax payable on 50% of the net profit on the sale.

In achieving fairness, the liability of an asset to Capital Gains Tax needs to be taken into account when calculating for settlement or determination by a Court of the division of property between parties.

In 1996 in the case of Carruthers and Carruthers, the Court discussed the adopted practice of making allowance for tax payable and other realisation costs where the asset was likely to be disposed of or Orders that the Court made would cause a disposal.

The Full Family Court in Rosati and Rosati (1998) examined the Carruthers decision. 

That case set out some general principles:

1.        The issue of whether the CGT liability should be taken into account in the valuation of a particular asset will vary in the circumstances of each case and the factors to be identified will include:

  • What Valuation method to apply?
  • The likelihood of the sale of the asset and the parties’ interests in regards to the sale. 
  • How the asset/s was acquired. 

2.        If the Court orders a sale of an asset (or is of the view that the asset will be sold in the near future) and the asset will be subject to Capital Gains Tax on its ultimate sale, the Court will make an allowance for Capital Gains Tax liability.  One example is the sale of an investment property which is not the principal place of residence.

3.        If 1 and 2 above do not apply then a Court can factor in on a section 75(2) adjustment, the potential for Capital Gains Tax liabilities.

4.        There may be special circumstances in a particular case, which requires a Court to apply some different adjusted measure.

Failure to identify and deal with CGT issues can significantly affect the outcome of a property division and result in an unfair outcome.

Watson & Watson identify these issues and retain appropriate experts for Valuation.

If you are unsure as to how CGT can impact upon your property/financial settlement please contact Richard Watson Senior Family Law Solicitor or Shereen Da Gloria his Personal Assistant to discuss your concerns and seek the appropriate advice when CGT is an issue to be considered to ensure that you receive an equitable and fair financial/property settlement.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 02 9221 6011.

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