Capital Gains Tax – Who has to pay the Tax?

20/07/2020

What is Capital Gains Tax?

Capital Gains Tax is a tax payable on a capital gain.  If a person sells a capital asset such as real estate or shares they will usually make a capital gain or a capital loss.  This is the difference between what it cost you to acquire the asset and what was received on the sale of assets.  Capital Gains Tax (CGT) is not (usually) payable on the sale of the matrimonial home.  Capital Gains Tax gains and losses must be reported in your income tax return and tax will need to be paid on capital gains.  The capital gain is added to your assessable income and may significantly increase the tax that you need to be paid.  If you are a PAYE tax payer then tax on your income from your employment will be withheld.  Tax for capital gains is not withheld.  Most personal assets including the matrimonial home, personal properties and assets such as furniture, will be exempt from Capital Gains Tax.

The most common situation where Capital Gains Tax is likely to be payable is where an investment property is sold for a price higher than the acquisition price.  The difference in price is a capital gain. 

Capital Gains Tax and Family Law

The issue of Capital Gains Tax in family law situations is one that must be identified and considered so that the outcome on property division is a fair and equitable outcome.  The issue of who pays the tax and when or if the tax has to be paid at all, can make a huge difference to the outcome of the property settlement.

The Decision in Rosarti v Rosarti

The leading case is Rosarti v Rosarti.  That case dealt with the situation where one party who may be retaining an investment type property or an asset that might subsequently be sold proposes that the future potential payment of Capital Gains Tax should be taken into account in valuing the asset.  In other words the potential for future payment of tax (Capital Gains Tax) should be deducted from the value.  This presents problems in circumstances where it is not always known whether the property will be sold or if it is ultimately sold, when that would take place.

The case of Rosarti v Rosarti stands with the following principles:

1. Whether the incidence of Capital Gains Tax should be taken into account in valuing a particular asset varies according to the circumstances of the case, including the method of valuation applied to the particular asset, the likelihood or otherwise of that asset being realised in the foreseeable future, the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to that asset.
2. If the Family Court orders the sale of an asset or is satisfied that a sale is inevitable, or will probably occur in the near future, or if the asset is one which was acquired solely as an investment and with a view to its ultimate sale for profit, then generally allowance should be made for any Capital Gains Tax payable upon such a sale in determining the value of that asset for the purposes of the proceedings.
3. If none of the circumstances referred to in (2) applies to a particular asset, but the Family Court is satisfied that there is a significant risk that the asset will have to be sold in the short to mid-term, then the Family Court, whilst not making allowance for the Capital Gains Tax payable on such a sale in determining the value of the asset, may take that risk into account as a relevant s.175(2) factor, the weight to be attributed to the factor varying according to the degree of risk and lengths of the period within which the sale may occur. 
4. There may be special circumstances in a particular case which despite the absence of any certainty or even likelihood of a sale of an asset in the foreseeable future, make it appropriate to take the incidence of Capital Gains Tax into account in valuing that asset.  In such a case, it may be appropriate to take the Capital Gains Tax into account at its full rate or some discounted rate, having a regard to the degree of the sale occurring and/or the length of time it is likely to be before that occurs.

In the case of Rosarti itself, the Family Court treated the CGT liability as a joint liability of the parties to the proceedings.  The treatment of the tax liability as a joint liability ensured that both parties knew who would have to pay the tax and knew therefore the value of the assets that they were to receive. 

The Capital Gains Tax implications on all property settlements must be taken into account. 

If you are proposing to enter into financial/property settlement with your spouse or partner and the assets include investment property or an investment portfolio and you have any concerns as to the tax implications and how this will impact your property settlement, please contact Richard Watson Senior Family Lawyer or Shereen Da Gloria his Personal Assistant to discuss your matter and seek timely advice on this very important aspect of financial/property settlement to ensure you receive an equitable outcome.

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