Capital Gains Tax liability when a Relationship Breaks down.
When a marriage or a long term de facto relationship breaks down the couple will generally experience one of the most financially and emotionally exhausting periods of their lives.
Often compounding the stress is the prospect of triggering a Capital Gains Tax issue when transferring assets such as investment property or shares from one partner to the other.
The following article from the Australian Tax Office web site shows how you can eliminate your Capital Gains Tax liability by making a binding financial agreement with your spouse, potentially saving many thousands of dollars.
Introduction
You make a capital gain or capital loss when a capital gains tax (CGT) event happens, such as when you sell or give away a CGT asset (or an interest in a CGT asset) to someone else – including a relative.
There are some situations where the capital gain or capital loss is disregarded – for example, if you acquired the asset before 20 September 1985 (pre-CGT) or if an exemption or rollover applies.
This does not discuss assets transferred under court orders, agreements and arbitral awards made in foreign countries.
Marriage breakdown rollover and what it means
If an asset, or an interest in an asset, is transferred by a person to their spouse as a result of the breakdown of their legal or de facto marriage, rollover applies provided certain conditions are met.
The conditions include that the transfer has to happen because of a court order (including a consent order), a binding financial agreement, an arbitral award or a binding agreement or award used by a de facto couple. For transfers that happen because of a binding financial agreement, an arbitral award or a binding agreement or award used by a de facto couple, rollover only applies if the CGT event happens after 12 December 2006.
The effect of a marriage breakdown rollover is that the spouse transferring the asset disregards the capital gain or capital loss that would otherwise arise. The spouse who receives the asset pays any CGT when they subsequently dispose of it. Basically, the spouse is taken to have paid what the person who transferred the asset paid for it.
Taxpayers don’t choose rollover on marriage breakdown. If the transfer meets the necessary conditions, rollover applies automatically.
From the 2009-10 income year the marriage breakdown rollover will be extended to same sex couples.
If the person transferring the asset acquired it before 20 September 1985 (pre-CGT) and rollover applies, the spouse who receives it is taken to have acquired it pre-CGT – which generally means no CGT is payable by them when they sell it.
If the asset transferred was always the main residence of either spouse, it will generally be exempt from CGT when it is sold. If it was the main residence of either spouse for part of the period they owned it, you may be entitled to a part exemption on sale.
The rollover can also apply to assets transferred from a company or trust to a spouse on marriage breakdown.
Additional rollover conditions for agreements that do not require court intervention
For transfers that happen because of a binding financial agreement, or a binding agreement used by a de facto couple, rollover only applies if at the time of the transfer:
- the spouses involved are separated
- there is no reasonable likelihood of cohabitation being resumed, and
- the transfer happened because of reasons directly connected with the breakdown of the marriage or of the de facto marriage.
The transfer may not be directly connected with the breakdown if, for example:
- the spouses had an agreement before the breakdown of their marriage or de facto marriage that the particular property was to be transferred between them for other reasons not directly related to the marriage breakdown, or
- the agreement provided for the transfer of non-specific property, the transfer does not occur for a considerable time (say, more than 12 months) after the agreement and factors are present that suggest the transfer was not directly connected to the marriage breakdown.
If rollover does not apply
If spouses divide assets under a private or informal arrangement (not because of a court order, binding financial agreement, an arbitral award or other specified agreement or award), the rollover does not apply.
This means the spouse transferring the asset must take any capital gain or capital loss they make into account in working out their net capital gain for the year in which the CGT event happened.
Generally, spouses who divide assets under a private or informal arrangement won’t have dealt with each other at arm’s length in connection with the transfer. In such cases, the spouse who transferred the asset is taken to have received the market value of the asset at the time it was transferred and the spouse who received it is taken to have paid the market value.
What to read/do next
- Marriage breakdown rollover – for more information about the consequences of rollover applying, including the treatment of certain assets.
- Marriage breakdown and transferring of assets – for more information about the rollover conditions and the consequences of rollover not applying.
- Extending the marriage breakdown capital gains tax roll-over relief and related amendments– for information about changes made to the law on 12 December 2006.