Dealing with the implications of liability to pay capital gains tax on Assets and how that liability is to be paid as between the Husband and Wife?

21/09/2020

Watson & Watson acted for the husband in a property division case following a separation after a long marriage.  The husband had received significant inheritances during the marriage and had been the primary wage earner.  The wife had been the primary carer for the children who were by the time of the case, adult children.

The matrimonial home was of high value and an investment property in the husband’s name only, also of significant value.  There were no mortgages.  The investment property had been occupied by tenants since its acquisition.  The husband and wife had never lived there.  The value of the property had over the years increased.  It was necessary to sell the investment property so as to allow the wife to receive cash and to allow the husband to retain the former matrimonial home.

The sale of the investment property attracted capital gains tax and an issue arose as to who should pay for that tax.  It was agreed between the parties that they would engage a single expert to calculate/value the amount of capital gains tax to be paid.  After negotiation it was agreed that rather than allow the husband to bear the whole payment of the capital gains tax from his share of the overall property division that the payment of capital gains tax, would be dealt with effectively by making it a priority of payment.  The legal fees and agents commission relating to the sale of the investment property were to be deducted from the sale proceeds.  Then the amount of capital gains tax owing by reason of the sale was paid and the balance after payment of the capital gains tax, was divided between the parties. 

If the issue of payment of Capital Gains Tax had not been considered as part of the settlement, the husband would have been liable to pay the whole of the tax and the wife would have avoided being responsible for the tax. 

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 (including capital costs of improving the asset) and was the amount received on sale of asset.  Capital Gains Tax 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 paid on capital gains.  The capital gain is added to your assessable income and may significantly increase the tax that you need to pay.  If you are 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 (including capital costs of improving the asset).  The difference 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 when or if the tax has to be paid at all can make a huge difference to the outcome. 

The Decision is Rosati v Rosati

The leading case is Rosati v Rosati.  That case deals 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 can be problematic in circumstances where it is not always known whether the property will be sold or if is ultimately sold, when that would take place.

The case of Rosati v Rosati 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 probably to 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 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 Rosati itself the Court treated the CGT liability as a joint liability of the parties to the proceedings.  The treatment of the tax liability is 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 of all property/financial settlements must be taken into account and all property owned by you forms part of your assets pool.  If you have any concerns regarding your property/financial settlement or are seeking advice in relation to any aspect of property/financial settlement, our experienced Senior Family Lawyers can assist you.  Please contact Richard Watson Senior Family Law Solicitor or his Personal Assistant Shereen Da Gloria to discuss your matter and seek timely advice.

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