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The Hidden Costs of Separating - Capital Gains Tax

Posted By Tarryn Rea  
04/02/2020
21:00 PM

It is important that you seek independent legal advice from a family law expert before negotiating the division of your assets and liabilities at the end of your relationship or marriage.

Legal advice from a family law expert will ensure that you are aware of any hidden expenses concerning your separation and that you receive a just and equitable division of the property pool.

If you own an investment property or business, you may be liable to pay Capital Gains Tax (“CGT”) upon the sale of the asset. CGT is often overlooked in a property settlement and can leave you with a nasty surprise if you retain the asset associated with the CGT after a property division.

In Rosati & Rosati 1998, the court clarified that a potential capital gains tax liability should not be automatically taken into account in the property settlement. This will depend on the individual circumstances of each case.

With the right expert advice, your family lawyer can determine whether CGT should be factored into the property pool before any property settlement.  

What is a Capital gain tax (CGT)?

In 1985, CGT was introduced in Australia and is applied to any assets that you have acquired since that time unless specifically exempted. According to the Australian Tax Office, a capital gain or capital loss on an asset is the difference between what the asset cost you and what you receive when you dispose of the asset.

You will need to declare capital gains or losses on your annual income tax return. Gains are added to your assessable income, and the tax you need to pay may be increased. Losses can be used to diminish capital gain.

When do you pay tax on the capital gains?

CGT is paid for that year you sell your property, as you submit your tax return. For example, if you sell your property in September when the fiscal year ends you will be liable to pay CGT the following July. It is important to remember that the date of selling relates to the date you signed the sale contract, not the date you chose to settle or move out. CGT does not happen if you sell your principal place of residence or a house in which you have been living for at least six months.

Different methods to legally avoid or reduce CGT

When selling an investment property, there are several ways to avoid CGT. These are all legitimate means to decrease the amount of tax that you are paying and taking advantage of them is within your rights. Some of the examples are provided below:

1. Being an occupier of the residence - When you live in the property right after you have purchased it, you will mark the asset as your primary place of residence (PPOR). Therefore, it is exempt from CGT.

2. one-year discount - Those who owned the property for one year may receive a tax break of 50 per cent on any gain they made on the asset.

3. Six-year rule - If you rent your property for six years or less, you can use this to obtain a full tax exemption on capital gains if you do not treat another property as your principal residence.

When you are transferring an asset to your former spouse as part of a family law property agreement or selling any investment asset, you may not be familiar with the hidden expenses associated with it, such as CGT.

It is pertinent to mention that CGT rules can be complex to understand and tricky to calculate, which may result in paying extra expenses. 

Whenever you are dividing a property pool and an investment property or business is involved, it is important to speak to your accountant and a lawyer with expertise in family law to ensure that you are receiving tailored legal advice to your circumstances.  

Call us today to protect your future and receive legal advice tailored to your circumstances.

1300 414 855

tarryn@gfclaw.com.au