When Does Relationship Breakdown CGT Rollover Apply?
The Income Tax Assessment Act 1997 provides specific CGT rollover relief commonly known as the “relationship breakdown rollover relief” that allows the transfer of assets between spouses or de facto partners to occur on a CGT-deferred basis, provided the transfer occurs pursuant to a formal agreement or court order under the Family Law Act 1975.
Does CGT Rollover Remove the Tax Liability?
This means that the person transferring the property will not be liable to pay any CGT on the transfer of the property, and any relevant capital gain will instead be transferred to the receiving party to be assessed on their ultimate sale or transfer of the property.
When Is a Future CGT Liability Included in the Property Pool?
In terms of assessing a balance sheet, when a CGT liability will be included as a debt of the relationship varies according to the circumstances of the case, including the method of valuation applied to the particular asset, the likelihood or otherwise of that asset being sold in the foreseeable future, the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to that asset.
The CGT is more likely to be recognised if the Court orders the sale of an asset, or is satisfied that its sale is inevitable, or would probably occur in the near future, or if the asset is one which was acquired solely as an investment and with a view to its ultimate sale for profit.
If the Court is not satisfied as to the above but is satisfied that there is a significant risk that the asset will have to be sold in the short to mid term, then the Court, whilst not making allowance for the capital gains tax payable on such a sale in determining the value of the asset, may take that risk into account as a relevant factor supporting an adjustment of the division of the property pool in favour of the person who will be liable for the CGT.
This is one of many factors that will be considered by the Court in respect of an adjustment of the property pool due to the parties’ respective current and future circumstances and will be weighed together with the other relevant factors. The weight to be attributed to that factor will vary according to the degree of the risk and the length of the period within which the sale may occur.
What CGT Risks Can Arise in a Property Settlement?
The consequences of failing to properly account for CGT in a property settlement can be significant and long-lasting:
Transfers That Do Not Qualify for CGT Rollover
If a property settlement is structured incorrectly or finalised without a Binding Financial Agreement or Court Orders, the CGT rollover will not apply. The transferring party may face a significantly greater income tax bill than anticipated, calculated on the relevant capital gain at the time of transfer.
Capital Gains and Child Support
Care should also be taken where a party realises a capital gain as part of a property settlement or related asset restructure. Although a capital gain may arise from a one-off transaction rather than ordinary income, the taxable component of the gain may increase that party’s taxable income and, in turn, their adjusted taxable income for child support purposes.
This may inadvertently increase their child support income for the relevant assessment period, even where the gain does not reflect their ongoing earning capacity or available cash flow. The timing of any sale, transfer or restructure should therefore be considered carefully, particularly where child support is being assessed or reviewed.
The Family Home and Main Residence Exemption
The family home is generally exempt from CGT under the main residence exemption. Separation does not, of itself, cause the exemption to be lost.
However, CGT issues can arise where one party moves out, retains an ownership interest in the home, and the property is retained for an extended period before sale or transfer. The position will depend on matters including whether the property continues to be occupied by one party as a main residence, whether the absent party can rely on the absence rule, whether the property is rented or otherwise used to produce income, and whether either party acquires or nominates another main residence.
In some circumstances, delay in finalising a property settlement may reduce the available exemption and expose one or both parties to CGT on an asset they had assumed would be entirely tax-free.
Businesses, Trusts and Self-Managed Superannuation Funds
Business interests, trust assets, and self-managed superannuation funds introduce additional CGT complexity. Without specialist advice, transfers involving these structures can trigger multiple CGT events simultaneously, with cascading tax consequences that may take years to resolve.
It should not be assumed that all CGT liabilities arising from a property division will be eligible for CGT rollover relief, even where the proposed transfer is the subject of Court Orders or a Binding Financial Agreement.
Tax and accounting advice should always be obtained so that there is a correct understanding of when rollover relief is available, the likely extent of any CGT liability, and the broader tax consequences of any proposed transfer, sale or restructure.
