Beyond the numbers with Grant Thornton: Listen now
As tax advisers, we work closely with our clients and their legal teams, and there are three main areas where our advice is sought:
There are other ways in which we can assist our clients, for example as a Single Expert Witness where taxation matters are required to be independently reported to the Court. Other areas of our business may also be able to assist – for example where a business valuation is required, or our forensics team may need to review activity or transactions of a particular nature if there is a dispute.
Whilst taxation is generally a key consideration for clients in these circumstances, it should be noted that it may not always be the ‘lowest’ tax result that is decided amongst the parties, as other factors that the Court needs to take into consideration regarding whether the asset split is ‘just and equitable’ will also need to be factored in.
All client circumstances and how their assets are structured are unique, so there is no simple ‘one size fits all’ approach to coming to a decision on how to divide the assets. There are a number of tax issues to consider, and in this article, we will outline some general considerations, but we highly recommend seeking specific advice to your circumstances.
In most circumstances where an asset is disposed of from one party to another, even if those parties are associated or related, a capital gains tax event may arise. For parties looking to divide their assets due to a relationship breakdown where the legal title may change under a Court Order to execute the asset division, this transfer of assets may be subject to capital gains tax.
Subdivision 126-A of the Income Tax Assessment Act (1997) grants capital gains tax ‘rollover relief’ where a CGT asset is transferred (or a CGT asset is created) to a former spouse as a result of the breakdown of a relationship, and Subdivision 126-B extends this to assets transferred to a receiving spouse by a company or a trust.
Note that the transfer needs to be ‘pursuant to a Court Order’ – so care needs to be taken to ensure the transfer has been approved by the Family Court prior to transfer. In circumstances where the parties do not go via the Family Court and ‘do it themselves’, these transfers will not be eligible for rollover relief.
Furthermore, it is important to note that not all CGT events are covered by this rollover relief, and that the recipient needs to be the former spouse; the transferee cannot be an entity such as a company or trust.
When assets are transferred, transfer duty will also generally apply. Transfer duty is a State-based tax and each state in Australia will have its own legislation and rates, so care should be taken to ensure you have considered the appropriate rules in the relevant state. Generally, if the transfer occurs due to a relationship breakdown and pursuant to a Court Order, then nominal or exemptions from duty may apply.
Control of entities and their assets will also require consideration. Assets in a company or trust may be transferred, or the control of the entire company or trust may be transferred, depending on the circumstances. Where companies (and trusts in some circumstances) have unrelated parties who have a proportion of control, then whether the entire entity’s assets can be brought into the asset pool may be questioned. Generally, however if a spouse has a majority controlling interest in an entity, the value and assets of that entity are brought into the asset pool for consideration in the division of assets. If, say, only 50% of an entity is owned or controlled, potentially 50% of the entity’s assets can be brought into the pool. This can of course have ramifications for parties who are in business with a person going through a relationship breakdown, as their interests in an entity can be at risk.
Taxation issues specific to a company include:
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):
Generally, GST does not apply on a transaction that is the subject of a property distribution (see GST Ruling GSTR 2003/6). Whilst the transfer of an item from one spouse to another may constitute a supply, there is generally no consideration for that supply.
However, you may find there is an adjustment event if for instance a business entity has made a GST claim because an item was purchased for a creditable purpose, and that item is then being transferred to a recipient spouse. In this case, a return of input tax credits may be required.
There are a number of taxation considerations when parties are negotiating a financial settlement and our team is able to assist you on all aspects of your property division, whether the issue relates to taxation, valuation, forensics, or expert witness requirements. Please get in touch if you would like to discuss your circumstances further.
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