Introduction
In Australian family law, parties usually focus on market values, loan balances and who gets what. The overlooked issue is often ‘after-tax value’. Some tax consequences arise immediately. Others sit inside an asset and only surface years later, usually for the person who kept the asset. This article covers five tax issues that regularly slip through, and the practical steps that reduce nasty surprises.
‘CGT rollover’ is not ‘no CGT’
Many people hear that capital gains tax (CGT) does not apply because the transfer happens under a relationship breakdown rollover. The rollover can defer CGT if the transfer occurs under a court order or financial agreement, but it generally does not erase the gain. It typically shifts the original cost base and history to the receiving party, who may pay CGT when they later sell.
The issue is commonly missed because the asset is valued at today’s market value in the property pool, while the latent CGT is ignored; the party who keeps the investment property or shares does not appreciate that they are also keeping the embedded tax liability.
In practice, courts usually only discount an asset for CGT where a sale is likely in the short to medium term, or is effectively inevitable as part of the settlement. Where that is the case, it is sensible to estimate an ‘after-tax value’ for each CGT asset by deducting a reasonable CGT estimate and selling costs from the market value, based on the asset’s cost base, ownership period and likely taxpayer profile. Where no disposal is contemplated, the more realistic focus is on ensuring the parties understand who is retaining the latent CGT exposure and that proper records are transferred, including purchase contracts, improvement costs, depreciation schedules and prior valuations, so the tax consequences can be managed if a sale eventually occurs.
Transfer duty exemptions have conditions
In Queensland, transfer duty may be exempt for transactions that give effect to certain Family Law Act 1975 orders or financial agreements, but the exemption is not automatic in every case, and is highly dependent on the documents and timing.
The issue is often overlooked because parties assume that a transfer made as part of a property settlement will automatically be exempt from duty, or because the transfer is implemented before the formal instrument is in place or without sufficiently clear wording identifying the property and the transferee.
The practical response is to treat duty as a checklist item before anything is signed or transferred. That includes confirming the correct exemption pathway, ensuring the timing is right and checking that the orders or agreement clearly specify the property and the transferee. Where property is located interstate, the relevant state or territory regime should be checked early, as the rules are not uniform across Australia.
Trusts and private companies: Division 7A and hidden tax liabilities
When the balance sheet includes a private company or trust, the parties are not just dividing assets, they are also dividing risk. Division 7A of the Income Tax Assessment Act 1936 can deem certain loans, payments or debt forgiveness by a private company to a shareholder or associate to be tax dividends, creating unexpected tax liabilities after settlement.
This problem commonly arises because loan accounts are treated as just another line item in the pool, or because proposed orders or agreements require a company to pay money, forgive a debt or transfer property without considering the tax consequences of those steps.
A practical safeguard is to identify, at an early stage, whether either party or a related trust has shareholder loans, unpaid present entitlements, proposed debt forgiveness or company-funded payments to one party. Any draft settlement documents requiring company or trust action should be reviewed with tax advice, particularly where Division 7A may be engaged.
Superannuation is not ‘tax free money’
Superannuation splits can appear straightforward because they are often discussed as a single headline figure. In reality, superannuation interests can include different tax outcomes depending on age, preservation status, withdrawal timing and fund type. A dollar inside superannuation is not always economically equivalent to a dollar outside superannuation.
This issue is frequently missed because parties compare face-value numbers across very different tax environments and do not obtain or consider component information or preservation rules when modelling outcomes.
The practical step is to obtain current member statements and, where possible, a breakdown of taxable and tax-free components and preservation status. When superannuation is being traded against non-superannuation assets, the comparison should be made on an accessible, after-tax basis rather than on headline figures alone.
GST and property: commercial assets, going concerns and withholding traps
GST issues most often arise where the asset pool includes commercial property, business assets or development sites that may involve new residential premises. Depending on the circumstances, a transaction may be taxable, input taxed or GST-free, including as a supply of a going concern. In addition, the GST withholding regime at settlement can impose reporting and payment obligations that disrupt settlement if identified late.
These issues are often overlooked because GST is assumed to be a business-only problem or because the transaction is managed like a standard residential property transfer without considering GST status or withholding requirements.
A practical approach is to ask early whether any entity involved is GST registered and whether any asset is a business or commercial supply. Where real property is involved, potential GST withholding obligations should be identified and built into the settlement process. If going concern treatment is contemplated, the statutory conditions should be checked and clearly documented.
A final checklist before you sign
Before finalising any property settlement, it is worth stepping back and asking five questions:
- Which assets carry latent CGT and is a sale likely in the foreseeable future?
- Which transfers rely on duty exemptions and do the documents and timing satisfy the requirements?
- Do any private companies or trusts carry tax risks that could be triggered by the settlement steps?
- Are superannuation values being compared on an after-tax and accessible basis?
- Do any GST or withholding obligations apply to property or business assets?
The consistent theme is simple. Property settlements should be negotiated on net outcomes, not just headline numbers. The earlier that tax issues are identified and understood, the more likely is it that the final deal will remain fair long after the settlement documents are signed.
If you need assistance formalising your property settlement, please contact one of our experienced family lawyers.
