Tax Tip 221: Family Law Property Settlements: Tax Considerations

Here is a brief list of some of the things to consider, in relation to tax, when getting a divorce or ending a de-facto relationship:

· CGT on the transfer of title of property and shares,

· CGT pregnant assets (built up liabilities in assets not yet realised),

· GST,

· Losses,

· Transfer of shares in private companies,

· Transfer of units in private trusts,

· CGT with the Transfer of business,

· Transfer of Partnership assets,

· Duty and transfer,

· Discretionary trusts

- Changing appointors

- Renouncing interests

- UPEs

- Loan Accounts

- Excluding beneficiaries,

· Loans from related Companies - Div7A

· Loans to Companies and Trusts

· Loans from trusts to companies

· Loans from companies to trusts

· Loans from family members

· Loans on investment properties and deductibility of interest


Don’t forget about wills needing to be changed and other legal issues involving estate planning.

 

One of the difficulties in such exercises is obtaining knowledge.

Often one spouse understands this better than the other. And often both leave it to others to understand. eg What is the potential CGT position of each asset now and what happens if.??.....

Too often we see well intentioned couples plan their own dissolution of assets who start selling things. This triggers CGT. There are other options which can defer CGT.

 

a crucial area that involves interaction between the financial planner, lawyer and accountant. a team working together to deal with those very issues

 

Cue random friend/family opinion that's its better to just do things amicably yourself and leave the lawyers and other expensive professionals out of it.

 

Would be great if the tax implications werent so disparate. It can be amicable and a tax effective outcome also achieved but if done the wrong way the tax differences can be massive.

 

Another one to add to the checklist

- Family Trust Elections

 

• Superannuation fund death nominations (often overlooked)
• Reversionary pension nominations (less common as typically only impact those 60+)
• Life insurance beneficiaries
• Specific concerns may occur with a SMSF. Early advice on this is essential. Super could even be at risk.

One of the pieces of advice I offer to tax clients is the importance of ensuring any agreements and choice are ratified and agreed with tax impacts in mind. For this reason it IS important to get legal advice even if you think you dont want lawyers involved. For example most people are unaware of the CGT martial split provisions and the same in super. It may be unnecessary to start selling down assets and triggering significant tax when a marital split may allow the asset to transfer to one of the spouse without any tax or duty impacts. And the value of the asset needs to be adjusted for its value net of accrued tax.

eg That IP worth $1m may also have a potential $100K CGT due. So its value for a martial split may be $900K.

 

• Stamp duty
• Land Tax
• Landholder Duty
• Assignment of related party loans

are a few more

 

Super elements can also be a issue. I had one case where a property settlement that favoured super was a bonus. ie former wife had $0 in super and with a marital split it maxed her (and gave her a tax free income stream) and he had excess benefits and it helped lower his and he was able to then recommence a contribution strategy.

 

- Tax debts of the parties to the relationship also need to be considered
Commissioner of Taxation v Tomaras [2018] HCA 62

- Top up tax on distributions from companies.