The monies received form the disposal of an asset in the event of division of matrimonial pool attract Capital Gains Tax known as CGT. This refers to the increase in value of the property after deducting the asset’s cost base which is the initial cost of acquiring the asset at the time of purchase. CGT is governed by Income Tax Assessment Act 1997 (Cth) and is payable on the disposal of assets acquired on or after 20 September 1985. The scope of CGT applies to sale of real estate, goodwill of a business in which the owner has made a capital gain at the time of the sale, sale of shares, units and similar Investments, Foreign currency, Contractual rights, personal use assets such as boats, furniture, electrical goods and house hold item(s) each acquired for AUD 10,000 or more, collectables such as paintings, sculptures, drawings, jewellery, stamps, coins or medallions each acquired for AUD 500 or more.
There are, however, some exemptions applicable to personal assets including but not limited to the main residence, the car provided it is designed to carry a load of less than one tonne and fewer than nine passengers or the motorcycle, personal use items acquired each for less than AUD 10,000, collectable item(s) for less than AUD 500 each, compensation or damages received for any wrong or injury suffered in the course of occupation, winning or losses from gambling, a game or competition with prizes and most importantly the superannuation of the parties.
CGT is required be factored in the family law proceedings and attention needs to be paid at the stage of court making an order for the sale of an asset or if the parties are otherwise convinced and satisfied that a sale of the asset(s) is inevitable or if the asset was acquired exclusively as an investment property with the objective to eventually gain profit at the time of sale. Any negligence in this respect might haunt the parties later in time. The cases in which there is a significant risk for an asset’s sale in short or mid-term, the court may not make allowance or provision for the CGT may take that risk into account as a determining factor.
The question if CGT should be accounted for in valuing the particular asset covered within the scope of the definition varies on different factors including the method of valuation, the likelihood of asset being realised in the foreseeable future, the circumstances of asset acquisition, intentions of the parties in respect of the asset. The CGT rollover applies only when the marriage or relationship ended on or after 20 September 1985; and the ownership of the CGT asset, or a share in a jointly owned CGT asset is transferred between the spouses or from a company or trust to one of the parties and the transfer of ownership is because of a Court Order, formal agreement, or award. The rollover is mandatory, and the parties have no discretion in this respect.
In a full court matter where the husband was a property developer and indicated his desire to retain a parcel of the real estate in the long-term future with a view to being developed. The court expressed that where the husband had refused an offer of AUD 2 million for the property, it could not be reasonably asserted that it would be just and equitable for the wife to have to share the burden of a potential future liability for CGT in relation to that property.
Foreign resident capital gains apply to the vendors disposing the real property under contracts entered from 1 July 2016. The purchasers are required to withhold 12.5% of the purchase price and pay it to Australian Tax Office where the value of the property is AUD 750,000 or more. To avoid paying the 12.5% value of the property, the party transferring the asset must obtain a clearance certificate and provide it to the other party prior to transfer of the property in their name.
The question of CGT application is always intriguing in nature and require proper attention and advise both from legal and tax aspects of the asset importantly when such an issue in case of a dispute, is decided on case-to-case basis.