15 June, 2018 / IN Tax and accounting / by Tony Carter
When you are divorcing, determining the value of the asset pool is a major consideration.

When you are divorcing, determining the value of the asset pool is a major consideration.

But have you considered the potential future tax liability attached to the assets you are receiving?

How will this tax affect the split of the asset pool?

The good news is that for many of the assets you receive under the property settlement the marriage, CGT breakdown rollover relief will be granted.

This is granted where a CGT asset is transferred to a former spouse as a result of the breakdown of a relationship.  The rollover also extends to assets transferred to a receiving spouse by a company or a trust.

The relief does not extend to assets transferred to another entity, i.e. to a company or a trust.  In this case there will be CGT payable by the spouse or entity transferring the asset.

The marriage CGT breakdown rollover is dependent on various conditions being met, with the primary condition being that the asset is transferred under a court order or binding financial agreement.  If assets are transferred between the spouses without meeting this condition, then the rollover relief is not granted and CGT will apply to the transfer of the assets.

Where the conditions have been met the marriage breakdown rollover rules automatically apply and the CGT gain or loss arising from the CGT event is disregarded.

The status of the transferred asset is also preserved under the marriage breakdown rollover:

  • If the asset was a pre CGT asset in the hands of the transferring spouse or entity, the receiving spouse is taken to have received it as a pre CGT asset. As a pre CGT asset, no tax will be payable when the asset is sold.
  • If the asset was a post CGT asset in the hands of the transferring spouse or entity the receiving spouse inherits the cost base of the transferor and the acquisition date.
  • If the spouse’s main residence is transferred then the receiving spouse inherits the acquisition date and main residence status of the property.

The receiving spouse will only pay tax when the assets they receive under the property settlement are sold by them some time in the future.

The most common assets that are subject to a property settlement are houses owned the spouses. These consist of both the family home and rental properties.

It is worth noting that in most circumstances a gain realised on the family home is exempt from taxation under the main residence exemption. This should be taken into account when splitting the assets in a property settlement.

 Example

Mr & Mrs Smith have two assets:

  • Family Home
    • Cost 1/1/2000    $  400,000
    • Value today       $1,000,000
  • Investment property
    • Cost 1/6/2000    $  400,000
    • Value today       $1,000,000

In the property settlement Mrs Smith receives the family home and Mr Smith receives the rental property.

If both of these properties are sold after the family law settlement:

  • Mrs Smith would have NO tax liability through the activation of the main residence exemption
  • Mr Smith will pay tax on 50% of the profit on sale –  being tax payable on $300,000