Tax issues on Relationship Breakdowns

• Not a CGT asset however can be eligible for transfer duty relief.

• Generally covered by rollover relief, although if relevant in the circumstances, CGT Event K6 is not eligible for rollover relief.
• Consideration of the Continuity of Ownership (“COT”) test for a company with prior year tax losses that it may wish to claim a tax deduction for in a future year.

• Generally covered by rollover relief.
• Consideration of the impact of the main residence exemption.

• A rollover or superannuation split may be required – we recommend seeking the services of a specialist adviser for superannuation advice.
• Note that a Binding Death Benefit nomination is not automatically revoked on divorce (like a Will).

• Rollover relief will generally apply.
  • Collectible assets include artwork, jewellery, antiques, coins, medallions, stamps, manuscripts, and books, and if they have a cost base of $500 or less, they are generally disregarded for CGT purposes.
  • Personal use assets are those not classified as a collectible and can include items such as boat, caravan, or racehorse. Assets with a cost base of $10,000 are generally disregarded for CGT purposes.

• CGT Rollover relief, and transfer duty relief, as discussed above, may apply.
  • A company asset can only transfer to an individual for rollover relief to apply. For example, if shares or real estate is owned and to be transferred to the former spouse, the rollover relief may apply, and the company will not be required to pay capital gains tax. The cost base attributes are transferred to the former spouse.
  • An adjustment to the cost base in the shares of that entity may be required if assets in a company are transferred out. This is to ensure the shareholders in the company do not generate capital losses on subsequent share sales.

• If the payment or transfer of an asset is required to facilitate a property settlement, and this results in a debit loan in the company, then the Division 7A rules may apply. The requirements are that the loan is to be repaid over a maximum term (seven years for unsecured loans) and the ATO benchmark interest rate will need to be applied (8.27 per cent in 2024), with minimum repayments required. Without meeting these terms, the amount of the debit loan could be treated entirely as a dividend which will have a tax liability to the shareholder, depending on their marginal tax rate personally.

• Office holders for a company will need to be considered and updated with ASIC if required.

• Consideration of the ‘Continuity of Ownership’ test where a company has tax losses, as discussed above, may apply.

CGT Rollover relief, and transfer duty relief, as discussed above, may apply.

Where a transfer is ordered to take place to a former spouse who is not a beneficiary of that trust, Section 90AC of the Family Law Act 1975 (Cth) provides that a Family Court Order will take effect over the terms of the Trust Deed, which might otherwise have prevented the transfer.

Trust roles to review and consider requirements for change (a separate legal document is usually required to update):

• The trustee (or director of the trustee company and/or shareholder of the trustee company).
• Appointor
• Beneficiary – care should be taken when considering ‘removing’ a former spouse as a beneficiary under the deed to ensure this does not constitute a ‘resettlement’ of the trust and trigger CGT events for all assets in the trust.
  • A Court Order might seek a spouse to renounce their interest in a trust and forgo future distributions – this may trigger CGT Event C2 but generally this will not give rise to a capital gain. Note that CGT Event C2 is not eligible for rollover relief.
  • The ATO generally does not consider ‘renouncing’ of entitlements is a resettlement, but amending the deed to remove a beneficiary could.

• If a trust has made either of these types of elections, the implication of change of control of the trust should be considered.
• In 2007 section 272-90(2A) of the Income Tax Assessment Act (1997) was inserted to provide that a person who was a spouse of either the primary individual, or a member of the primary individual’s family before a breakdown in the relationship, is a member of that family group in relation to the distribution.
• Ensuring the FTEs and IEE’s are reviewed can avoid family trust distributions tax being levied if a distribution is made outside of a family group.

• Where a distribution has been made, and those entitlements have not fully passed to the beneficiary, the trust will show the amount the beneficiary is still entitled to call on, in the accounts of the trust, as an ‘undrawn present entitlement’. This would usually be disclosed as an asset of that person in their assets schedule.
• Where one spouse is no longer going to be receiving distributions, extinguishing that asset may be a goal of the trust and the property settlement, but care needs to be taken in how this is done.
• Discharge of a UPE could trigger CGT Event C2, and the assignment of a UPE could trigger CGT Event A1.
• The transfer of an asset from a trust to the former spouse may reduce a UPE, but consideration of how the asset transfer will practically impact the trust and the resulting or remaining UPE needs to occur.