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Family Law Property Division - How is Capital Gains Tax accounted for? The Appropriate Approach to Resolution

26/11/2021

In other articles on the Watson & Watson website, we discuss how the Federal Circuit and Family Court of Australia approach property division.  The same approach taken by the Court will be taken by Lawyers who are attempting to resolve property division between their respective clients with a view to documenting a settlement reached by applying for Consent Orders, entering into a Binding Financial Agreement, entry into a Deed of Release under the Succession Act or a Binding Child Support Agreement.

Dividing Assets What Does This Mean?

Lawyers talk about dividing assets between parties.  A competent Lawyer will also discuss with you and advise you in relation to the liabilities and debts which exist.  Some liabilities often are attached to an asset for example, real estate which is subject to a mortgage.  Clients often say “all I want is the house”.  What needs to be considered is that taking an asset may mean also assuming a liability along with the asset.  Careful consideration is required so that each party, husband and wife or partners understand the allocation and division of the assets and liabilities and how this can be achieved to separate the financial benefits and obligations.  Clients understand what debts exist and in particular, what debts are secured against an asset that will come into their ownership on property division.

Watson & Watson Advice

In a recent case, Watson & Watson were retained to advise a husband in relation to property division with his wife.  The parties had separated and the wife moved interstate.  There was a matrimonial home as well as two investment properties.  The wife had no interest in living in either of the investment properties and the husband wished to achieve a property division with his wife by selling the investment properties and using the sale proceeds to achieve an overall equal division of property. 

Can a debt be attached to an asset?

A liability or a debt is an amount owing by one person (or legal entity) to another person (or legal entity).  An everyday example of how a debt can come into existence is when somebody borrows money from a bank or another person.  It is generally understood that in those circumstances, if you borrow money you have to pay the money back. 

What happens if you are not the person borrowing the money and the money borrowed is attached and secured by an asset that you may receive following separation.  The most common example of this is where a bank lends money to someone to fund their purchase of real estate and then secures that borrowing by taking a mortgage over the real estate and possibly other real estate owned by another person, possibly the borrower’s partner or business partner.  In this situation, the debt (mortgage debt) is secured against the real estate until it is repaid.

What should a Lawyer look for?

A competent Lawyer will determine what assets exist and what debts or liabilities exist and how the liabilities are severed and who is obliged to repay the debt for example, so that their client does not receive an asset which is not the value of the anticipated asset, because it is subject to a debt.

In this particular case, Watson & Watson advised that the determination of what amount needed to be paid to the wife to achieve a 50/50 division of property was dependent upon the value of the property and the liabilities.

The properties that the husband intended to sell to enable the 50/50 distribution between the husband and wife were investment properties and were subject to payment of Capital Gains Tax.  The sale of the properties would be a Capital Gains Tax event and would trigger liability to pay Capital Gains Tax on the Capital Gain made on the sale.  This meant that the amount of cash available to the husband to achieve property settlement would be less than he had anticipated, as tax would have to be paid.  Watson & Watson advised the husband of the consequences of the proposed sales.

Can Government taxes and charges attach to real estate?

The answer to this question is “yes”.  State and Federal Government impose taxes and charges which can attach to real estate.  Examples are unpaid rates, land tax and capital gains tax. 

In this article, we discuss the implications of the existence of Capital Gains Tax in property settlement.

Capital Gains Tax – Who has to pay the Tax?

Capital Gains Tax is a tax payable on a capital gain when an asset is sold.  If a person sells an 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 sale of assets if the property is an investment property.  You need to consider whether there is any Capital Gains Tax on the gain and what amount is payable.  Capital Gains Tax is not (usually) payable on the sale of the matrimonial home.  You need to obtain advice from an appropriate adviser in relation to the tax implications of any transaction.

The common situation where Capital Gains Tax is likely (but no always) to be payable, is where an investment property is sold for a price higher than the acquisition price.

Capital Gains Tax and Family Law

The issue of Capital Gains Tax in family law situations is one that must be identified and considered at the very outset 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. 

Rosarti v Rosarti

The leading case is Rosarti v Rosarti.  This case considers the situation where one party who may be retaining an investment property or an asset that might subsequently be sold, and whether the future potential payment of Capital Gains Tax should be taken into account in valuing the asset. 

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. 
  2. In the following circumstances the extent of the Capital Gains Tax will be taken into account:
    2.1  The likelihood of an asset being realised in the foreseeable future and the evidence of the parties as to their intentions in relation to that asset are relevant. 
    2.2 If the Court orders the sale of an asset or is satisfied that a sale is inevitable, or probably could occur in the near future. 
  3. 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 and as such, the Capital Gains Tax will reduce the net value of the asset.
  4. If none of the circumstances referred to in 2 applies to a particular asset, but the 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 Federal Court or Family Court of Australia may take the risk into account as a relevant section 75(2) factor.

Watson & Watson Advice on Capital Gains Tax on Settlement

Watson & Watson advised the husband that as it was proposed to sell the investment property, the Capital Gains Tax which would be payable on the sale of the investment property, would need to be factored into the property settlement.  The Capital Gains Tax should be paid as a priority debt and that only the balance of sale proceeds after payment of the Capital Gains Tax, should be divided between the husband and the wife.  Settlement was achieved on this basis and the Capital Gains Tax payable was divided between the husband and wife and did not fall solely upon the husband.

If you are proposing to enter into financial/property settlement and your property portfolio consists of investment property/ties or a share portfolio, at Watson & Watson our highly experienced Senior Family Law Solicitors can assist and provide you with appropriate advice from the outset to ensure you achieve a fair and equitable asset spilt.  Please contact Richard Watson Senior Family Law Solicitor or his Personal Assistant Shereen Da Gloria to discuss your matter and seek timely advice from the get go.

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

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