By David Shaw. 10/02/2016
When we think about the certainties in life, we think of death and taxes. What often isn’t thought of is the uncertainty of divorce and separation. It’s an issue none of us like to think about, but in a country where one in three marriages ends in divorce, planning should be considered, if the time ever arrives.
Investing in property with your partner is always a big decision. All too often, consideration is not given to what happens if you both decide to go separate ways. If the time comes where the relationship comes to an end, the tax implications are generally the last thing either person has on their minds. Often the immediate decision is to sell the property to erase all memory of the relationship. This may end up being the eventual decision, but other options should be addressed first.
Should the decision be to sell the property, then a capital gains tax event will arise. Whilst there are discounts and exemptions available, the timing may not be the most beneficial depending on the property market at the time. You can elect for either person to acquire the property from the other without the ‘seller’ having to pay capital gains tax. The marriage or relationship breakdown rollover is available provided there is an order of a court or a court order made by consent under the Family Law Act 1975. Effectively, the cost base of the property is transferred to the ‘purchaser’ ensuring that no capital gains tax is payable at the time of transfer. It is important to note that if you and your partner divide property under a private or informal agreement, not involving a court, the breakdown rollover does not apply. What you may have saved in legal costs could be lost in capital gains tax.
What needs to be remembered however is whether a capital gains tax event occurs when the property is sold in a future year. Let’s say that a couple jointly purchased an investment property before capital gains tax was introduced on 20th
September 1985 and divorce in March of 2012. At the time of divorce the marriage breakdown rollover was implemented where the title of the property was transferred to one of the parties. If the person who owns 100% of the property sells in 2016, capital gains tax will be payable on the share that was transferred to them. The reason is that when the property is transferred the cost of the property at the time of transfer is taken to be the new cost base. It 50% of the property was transferred, then capital gains tax will apply to this percentage. In this example, the 12 month ownership discount will apply.
With the increase in self managed superannuation funds purchasing property, separation and divorce can also throw out long term strategies. Again, rollover relief can apply however there are complexities involved with removing members from the SMSF and having the funds to be able to facilitate the rollover. Ensuring that your SMSF is structured correctly from the time of setup can ensure that thousands are saved if divorce ever eventuates.
Expert legal advice as well as expert tax advice should also be sought when planning for these events. Separation and divorce is an emotionally taxing time, however it doesn’t need to be financially taxing provided the right structures and support systems are in place.
*The advice published on social media mediums by WSC Group is of a general nature and does not constitute specific financial advice. For a detailed financial strategy you should consult with a qualified financial advisor before making any investment decision.
David Shaw is the CEO of WSC Group: Certified Practising Accountants and Business Advisors, and
was voted Property Tax Specialist of the Year in the Your Investment Property 2013 Readers Choice Awards (as well as runner up in 2012, 2014 & 2015).
Disclaimer: while due care is taken, the viewpoints expressed by contributors/sponsors do not necessarily reflect the opinions of Your Investment Property.
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