A property settlement is not only about who gets what. Each asset carries tax consequences, and if they are not considered when the deal is done, one party can end up paying far more than they expected. We work with accountants on settlements for exactly this reason.
These are the tax issues we see most often, and how to make sure they are dealt with.
Key takeaway: If a tax issue is not raised during negotiations, it will not be factored into the split. Raise it before you agree, not after.
Capital gains tax on investment properties
Capital gains tax (CGT) is the issue that gets forgotten most often, especially when one person keeps an investment property. When property is transferred between spouses or de facto partners under court orders or a binding financial agreement, a rollover usually applies. No CGT is paid at the time of the transfer, but the person receiving the property takes on the original cost base. The tax has been deferred, not removed.
That means the person who keeps the investment property will pay the CGT when they eventually sell it, including on the growth that happened during the relationship. Two people can walk away with assets of the same value on paper, but one of them is carrying a tax bill the other is not.
So it is worth considering whether that future CGT should be taken into account in the split now. Courts have taken different approaches to this, depending on how likely and how soon a sale is. What is certain is that if it is not discussed, it will not be included.
Key takeaway: Keeping the investment property can look like a good deal until you factor in the CGT you will pay when you sell it.
Division 7A and family companies
Where a family company or business is involved, Division 7A of the tax law can apply. If money or assets come out of a private company to a shareholder or their associate as part of a settlement, the Tax Office may treat it as a dividend and tax it, unless it is structured properly, for example as a complying loan. Existing loans between the company and either party also need to be dealt with.
This is an area where we work closely with the parties’ accountants, because the way a settlement is documented can change the tax outcome significantly.
Need advice on your situation? Our family lawyers can help with your property settlement. Book a consultation to talk it through.
Superannuation splitting orders
Superannuation is property in a settlement and can be split between the parties. The split itself is not taxed at the time, but the orders must be drafted carefully. Super funds will reject orders that do not use the right wording or that the fund cannot carry out, and before orders are made, the fund trustee must be given notice of them.
We have noticed an increase recently in how particular super fund trustees are about the wording of splitting orders. Getting it right the first time avoids delays and orders being sent back. See our guide to superannuation division options for more.
Stamp duty on transfers between partners
In Victoria, there is a stamp duty exemption when property is transferred between spouses or partners because their relationship has broken down. To claim it, you need evidence of why the transfer is happening, usually the court orders or the binding financial agreement. Transferring the property before those documents are in place can mean losing the exemption.
Practical steps
- Get tax advice on each asset before you agree on a split
- Ask your accountant to estimate the future CGT on any investment property or shares
- Identify any loans to or from a family company
- Have super splitting orders drafted and checked with the fund
- Do not transfer property until your orders or agreement are in place
