With nearly one in three marriages ending in divorce—and numerous de facto relationships breaking down—the capital gains tax (CGT) roll-over provisions for “marriage and relationship breakdowns” have gained increasing significance.
These provisions allow for the roll-over of any capital gain on the transfer of assets between separating parties, ensuring there is no immediate CGT liability.
However, as with all CGT concessions, important conditions must be met.
- The first is that the transfer of the asset must occur in accordance with one of the prescribed methods, such as a court order or a defined financial or maintenance agreement.
A key planning opportunity arises when a party wants to realize a capital loss on an asset they intend to transfer. In such cases, avoiding the CGT roll-over by using a private agreement rather than one of the specified methods may be beneficial.
- Another critical rule is that the roll-over only applies when the asset is transferred directly to the other spouse, and not to a trust, company, or the estate of the spouse. The sole exception may be a transfer to a “child maintenance trust,” which is subject to strict conditions.
It’s important to note that not all assets qualify for the roll-over. For example, trading stock is excluded and would be subject to the normal rules that apply to the disposal of trading stock outside the ordinary course of business.
- Additionally, while the roll-over defers CGT, it does not eliminate it. it just means that it is deferred until the spouse to whom the asset is transferred later sells the asset or it is subject to a CGT event in their hands.
However, in this case they would generally acquire the other party’s “cost base” for the purposes of calculating any capital gain or loss. And they would also generally be entitled to the CGT 50% discount if it was held for the required time.
Special care must also be taken with dwellings, such as rental properties, as the spouse acquiring the property may be liable for CGT on gains accrued while the property was used for other purposes, even if it later becomes their home.
Suffice to say, this type of scenario requires some careful negotiations between the parties before such a transaction is undertaken to make sure everything is “fair” for all the parties.
- There are also special rules that apply when, say, an asset that is held by a family company or trust is transferred out of that company or trust to the other party as part of a settlement agreement.
Again, these rules can be complex and require good advice to ensure that all the issues are managed effectively.
In summary, if you are dealing with a separation, it is essential to seek advice to ensure that the CGT roll-over provisions are used effectively and to avoid any unexpected tax implications.