Key points:
- In a family law property settlement, two assets with the same market value may not deliver the same financial outcome. Capital gains tax, duty, embedded liabilities, liquidity constraints and future compliance costs can affect the value ultimately retained by each party.
- Transferring property between former spouses can defer CGT rather than make it disappear, meaning one person may take on an embedded tax liability as part of the settlement.
- Getting tax advice before a family law property settlement is finalised can help the parties compare options, avoid unexpected costs and make sure the settlement is sustainable in practice.
A relationship breakdown, whether divorce or de facto relationship breakdown is an emotional time involving a combination of a property settlement, spousal and child maintenance and parenting arrangements. The financial and practical consequences of dividing assets deserve careful consideration. This article explores taxation and other practical implications surrounding property settlements.
The Family Law Act 1975 provides the legal framework for dividing property, but the final financial outcome can also be shaped by several other factors and legislative instruments such as capital gains tax (CGT), Division 7A, superannuation rules, state duties and the structures through which assets are held.
Many couples tend to approach us to assist with the practicalities of property settlement after the proposed property settlement has been agreed upon and documented. Tax advice should be sought early to identify potential issues, understand the after-tax value of assets and, where appropriate, prepare a tax-adjusted balance sheet to support better-informed decisions.
Financial settlements are becoming increasingly complicated, often involving multiple structures, larger asset pools, sophisticated investments, and international assets. Existing taxation liabilities, refunds and carried-forward losses can also have an impact on the outcome.
The best outcomes in our experience are achieved when family lawyers, tax advisers, valuers and financial advisors work together before the settlement is documented. The objective is not simply to minimise tax. It is to ensure each party understands the assets, liabilities, deferred tax exposures and practical obligations they will retain, so the settlement is sustainable in practice as well as fair on paper.
Six issues to consider before finalising a property settlement
1. CGT relationship breakdown rollover
If a home, investment property, listed shares or another asset is transferred between parties as part of a qualifying relationship breakdown, Subdivision 126-A of the Income Tax Assessment Act 1997 can automatically defer the associated capital gain or loss. The transfer is required to occur under an eligible court order, arbitral award or binding agreement.
The rollover generally disregards the transferor’s immediate capital gain or loss. However, it does not eliminate future tax exposure. The recipient inherits the asset’s cost base, acquisition date and CGT history, resulting in the recipient being responsible for the tax on the future capital gain. Accordingly, the settlement should record and consider the deferred tax profile of transferred assets, not simply their current market value.
For example, a family home and an investment property may have been acquired for the same price and may have the same market value. However, the family home may qualify for the main residence exemption, while the investment property may carry a substantial unrealised capital gain. The two properties are therefore not necessarily of equal value on an after-tax basis.
The rollover is also limited. It does not facilitate transfers from one company or trust to another, and separate rules may need to be considered for depreciating assets. Where an asset is likely to be sold soon after settlement, the parties should compare the effects of accepting rollover relief with other commercially supportable alternatives.
| Practical tip: If applying the rollover, it is important to be provided with the historical cost base information. It is also worth considering alternative tax strategies as the CGT rollover may not produce the best long term taxation outcomes |
2. Trusts: navigating transfer of control
If a family’s wealth is held through a trust structure, decisions may be needed about the trustee, appointor, guardian, trustee and beneficiaries, as well as how the trust will operate after parties separate.
Loans, unpaid present entitlements and other balances should also be dealt with carefully. If they are left unresolved, they may keep one financially or legally connected to their former partner long after the broader settlement is complete.
Possible tax issues include CGT on transfers of trust assets or units, family trust election consequences, access to carried-forward losses, pre-CGT status and potential landholder duty. Although a properly authorised amendment will not ordinarily create a new trust, changes implemented outside the deed’s powers can create legal and tax risk.
| Practical tip: Consider any unpaid trust distributions, outstanding loans and existing Family Trust Elections or Interposed Entity Elections. Each may affect your legal and tax position after the settlement. |
3. Company payments and Division 7A
If a private company is being used to fund the settlement or is required to transfer an asset, the tax result may not be straightforward. A payment, loan, debt forgiveness or in-specie transfer to a shareholder, associate or former shareholder may be treated as a Division 7A deemed dividend, even when it is made to meet a family law obligation. There is no equivalent of the CGT rollover relief when it comes to Division 7A.
In some circumstances, a deemed dividend arising from a qualifying family law obligation may be frankable, subject to available franking credits and the usual franking rules. The recipient’s personal tax position and the value of any franking credits should be included in the settlement modelling.
| Practical tip: The recipient’s personal tax cost should be considered in settlement modelling if a dividend (deemed dividend or formally declared) is declared and how this will be funded. |
4. Superannuation balance splitting
Superannuation may feel less immediate than the family home or cash in the bank, but it can be central to your long-term security after separation. The result depends not only on the percentage or dollar split, but also on how it is implemented. This is particularly important for self-managed superannuation funds (SMSFs) holding property, business premises, unlisted investments or other assets with limited liquidity.
A qualifying in-specie transfer from a small superannuation fund to another complying fund may obtain CGT rollover relief. By contrast, if the SMSF sells assets to fund a cash rollover, the sale may crystallise a capital gain within the fund.
The parties should consider asset valuations, the taxable and tax-free components of each interest, fund documentation, borrowing arrangements and whether the proposed split can be implemented without creating liquidity or compliance issues.
| Practical tip: Ask whether the proposed superannuation split can be implemented without forcing the sale of assets or creating unexpected tax consequences. Understanding the underlying assets and costs upfront can help avoid surprises and support a smoother settlement process. |
5. State duty relief across jurisdictions
Transferring property after separation may qualify for state or territory duty relief, but the rules are not the same as the CGT rollover rules. All jurisdictions provide some form of relief for qualifying relationship breakdown transfers, but the scope, documentation and eligible transferees differ. Indirect transfers of land through shares or units require particular attention because landholder duty concessions are more limited than direct transfer duty relief.
In New South Wales, exemptions may be available for qualifying transfers of matrimonial or relationship property and certain landholder acquisitions. However, relief is not necessarily automatic, and the transaction should be expressly covered by the relevant settlement documents and supported by the required evidence.
| Practical tip: Before transferring property, shares or trust interests, confirm that the proposed settlement qualifies for the relevant state or territory concession with the appropriate documentation. A small oversight can result in a significant and unexpected duty cost. |
6. Untangling your asset arrangements
Reaching agreement on the major assets is only part of creating two separate financial lives. A coordinated review of the following arrangements around those assets can help prevent unexpected obligations or gaps in protection:
- Estate planning documents, powers of attorney and enduring guardian appointments;
- Superannuation death benefit nominations and reversionary pension arrangements;
- Life, disability, income protection and trauma insurance;
- Refinancing and release of bank guarantees
- Treatment of shareholder or beneficiary loans;
- Shareholder, unitholder, partnership and succession agreements; and
- Cash-flow, investment and retirement modelling for each party’s future needs.
Conclusion
During a separation, it is natural to focus on the headline value of each asset. However, a fair outcome is about more than an achieving an equal split on paper. Identifying embedded tax liabilities and applicable rollovers or duty relief, will ensure the settlement is documented and implemented as intended, providing greater certainty for both parties.
This article provides general information only and does not constitute tax, legal or financial advice. The availability of tax and duty relief depends on the parties’ circumstances, the assets and entities involved, and the terms of the relevant court orders or agreements.
How we can help
We can work alongside your legal and financial advisors to help you understand the tax position of the assets being divided, compare different settlement options and plan the practical steps needed to put your agreement into effect. Seeking advice early can give you greater clarity at a time when many decisions may feel uncertain.
