Family Law and Taxes
When negotiating a family law settlement you need to ensure you are getting what you negotiated by knowing and understanding the tax costs and implications associated with your settlement.
Common taxation or duty considerations that arise when separated parties adjust their property include:
In Queensland the transfer of property, such as the family home or car, under Court orders is exempt from stamp duty, providing significant benefit to the spouse retaining that asset. However, the spouse being “paid out” or receiving payment in exchange for the transfer will be liable to pay stamp duty when they use the funds they receive to purchase their replacement assets such as a home or car.
Division 7A Income Tax Assessment Act
Any money paid or loaned, by a company to a shareholder or associate (such as a spouse), or a debt owing by a shareholder that is forgiven by a company may be deemed dividends, potentially triggering taxation liabilities for the recipient depending upon the payment structure. Payments that are to be made through a family company or a spouse’s company or, potentially forgiving debts as part of any property settlement, require carefully drafted Court orders.
Capital Gains Tax (CGT)
When selling or transferring an asset that earns income such as an investment property or business, as part of your property settlement, CGT will become a factor when there has been capital growth. If the asset is likely to be sold CGT is usually accounted for as a liability. Alternatively, if a spouse wishes to retain the asset, rollover relief, or the deferral of CGT liability, is available under Court orders. In that case, CGT is not usually adjusted at separation and the spouse receiving the asset will pay the full CGT assessed on any gain eventually realised.
Every family law property negotiation requires an assessment of the tax costs. It is essential that there is a documented agreement as to who will be responsible for payment of the tax and duty costs arising from your agreed property settlement transfers and other dealings.