With rising rates of relationship breakdown, Capital Gains Tax implications have never been more important to consider. A vital point of action in a divorce or separation, Capital Gains Tax can apply on assets transferred from one partner to another unless they qualify for a deferral. In this article, we’ll discuss this tax and its implications upon divorce or separation.
Capital Gains Tax and Divorce or Separation
When two people separate or divorce, assets transferred between them usually qualify for something known as ‘the relationship breakdown rollover.’ This means Capital Gains Tax (CGT), which normally applies when ownership of an asset changes, is deferred. CGT will apply to the person who received the asset when they later dispose of it.
Criteria for the Relationship Breakdown Rollover
If an asset is transferred to you because of a relationship breakdown, divorce or separation:
- the rollover applies only if the asset is transferred under a court order or other formal agreement
- when you dispose of a rollover asset, you calculate your CGT as though you had owned it since your former spouse acquired it, including using your former spouse’s cost base for the asset
- if the asset is a property, you may be eligible for the main residence exemption from CGT.
If the rollover applies to an asset, you must use it.
CGT and Handling the Family Home upon Relationship Breakdown
Any financial agreement regarding your family home upon divorce or separation, needs to be formalised by court order, maintenance agreement or binding financial agreement, as we specified above. You should avoid informal private agreements because for capital gains tax (CGT) rollover provisions to apply, the asset must be transferred under a formal agreement or settlement. If not, the property will be treated as sold at market value by the disposing spouse – triggering a capital gain if the market value is greater than cost – and will be acquired at market value by the receiving spouse. In most cases, CGT is not payable when the family home is transferred between divorcing spouses because of the main residence exemption.
Notably, CGT will also apply when the family home was used to generate assessable income, such as running a business or renting out a room. The liability is based on the periods and floor area set aside in the home for running the business.
CGT consequences for the receiving spouse depend on what happens after the divorce. There are typically three scenarios:
- If the receiving spouse carries on living in the house, the main residence exemption continues to apply and it can be sold CGT-free.
- If the house is rented out without another main residence being nominated, a six-year main residence exemption applies.
- If the receiving spouse rents out the property and buys another that is nominated the main residence, the value at the date at which the property is rented will become the CGT cost base.
Holiday homes and investment properties are covered by the rollover relief, meaning CGT is not triggered when assets are divided.
Capital Gains Tax: How we can Help
Our team at The Quinn Group understand the issues and stresses that Capital Gains Tax can pose. As experts in this area, our tax accountants can assist you with all aspects of this complicated tax area, achieving the best result for you.
If you need assistance in regards to Capital Gains Tax, contact our team of experienced tax accountants. You can submit an online enquiry or call us on +61 2 9223 9166 to arrange a teleconference or appointment.