Background (Divorce, Property, and Capital Gain Tax):
Recently, one of our clients was undergoing a divorce. The couple owned a home and
several investment properties. During their financial settlement, their lawyers advised them
to consult their accountant regarding potential capital gains tax implications if the
properties were sold or transferred. The couple also had joint bank loans.
Challenges:
The transfer of a property (or a part interest in a property) from one individual (e.g.,
Individual A) to another (e.g., Individual B) typically triggers a CGT event for Individual A. It
becomes essential to determine if there’s a capital gain or loss for that individual and
establish the cost base of the property for Individual B. Market value substitution rules
generally apply when there is no transaction consideration, or the parties do not deal with
each other at arm’s length.
- Can they service their loans independently?
- Will they incur capital gains tax if they sell the properties?
- Will they incur capital gains tax if they merely transfer the properties between each
other?
Solutions:
Our Investax property tax specialist provided the following insights to the clients to
empower them to make informed decisions:
When a property is transferred between spouses or ex-spouses, standard tax rules might
not always be applicable. This exemption is termed “rollover relief” under section 126-5
ITAA 1997. This relief can be granted if the property transfer to a spouse or ex-spouse
occurs due to:
- A court order resulting from a relationship breakdown.
- An approved financial support agreement post-relationship.
- A binding financial agreement made under specific laws.
- An award from particular legal disputes.
- A legally recognized written agreement regarding relationship breakdowns that
prevents court alterations unless it’s modified or annulled.
This provision ensures individuals aren’t unduly taxed due to changes in their relationship
status.
In assisting our clients, we collaborated with their mortgage broker to determine their
independent borrowing capacities. They successfully transferred one property each without
incurring CGT due to their court settlement. However, they had to sell one of the
investment properties to a third party since neither could afford to hold it individually. They
will be liable for capital gains tax on this sale, but they qualify for a 50% capital gain discount
since they had owned the property for over 12 months.