HELPFUL LAWYER’S GUIDE TO CAPITAL GAINS TAX (CGT)

(Very basic and does not provide a substitute for proper financial advice!)

What is CGT?

CGT (Capital Gains Tax) is a tax payable upon a “CGT event”. When a CGT event happens, it triggers a calculation of a net capital gain that the taxpayer would be required to include in their taxation return as assessable income.

When is CGT payable?

CGT is payable when a CGT event occurs in relation to a CGT asset (which is any kind of property or a legal or equitable right that is not property). The most common scenarios are upon the disposition (sale or transfer) of a property.

CGT applies to a CGT asset acquired after midnight on 20 September 1985.

What exemptions potentially apply on marriage breakdown?

Usually the transfer of assets between spouses or de facto partners in property settlements would give rise to the application of the CGT regime. The partner who is transferring the asset would be liable to pay the CGT.

The tax law provides that there is an exemption that any capital gain or loss made by a spouse transferring an asset is disregarded on the transfer. However, the transferee then acquires that transferring spouse’s cost base of that asset. Any gains or losses following the property settlement is brought into account at the time the transferee spouse disposes of the property i.e. the CGT is “rolled over” until the date the asset is disposed of.

For this exemption to apply, there must be either of:

  1. a Family Court or Federal Magistrates Court order;
  2. a s87 maintenance agreement; or
  3. a court order under a State, Territory or foreign law relating to de facto marriage breakdowns.

Please note a Binding Financial Agreement is not sufficient to enable rollover relief and the client should be advised accordingly.

If there is one of the above orders, the following must then be satisfied:

  • a CGT event occurs;
  • the disposal/transfer of the asset must be to a spouse or partner (not to a third party or to an entity such as a company or trust, although the transfer can be from a trust or company to an individual spouse).

If these three things are satisfied, CGT relief will automatically apply and any capital gain or loss will be disregarded, and the relief is compulsory.

What if the parties do not want rollover relief?

The rollover relief is automatically applied. There may be circumstances where the parties do not wish to have relief, for example, if the property has depreciated in value and the transferring spouse wishes to claim the capital loss as a set-off against other capital gains in that financial year to minimize taxable income.

To do this the parties will need to make sure the transfer does not take place pursuant to a court order (whether Family, District or Supreme Courts). The parties could do this by instead making a Binding Financial Agreement.

What if the property is held by a company or trust?

The rollover provisions when property is not held by an individual are essentially the same as those for individuals. However, this only applies when the parties are transferring from a trust or company to an individual, not the other way around. If the parties wish to claim rollover relief but wish the property to be held by a trust or company, they should first transfer to the individual, then to the trust or company (?)

Main residence exemption

While the transferee of property the cost base of the CGT asset, and therefore the potential for a capital gain or loss upon disposition of the property later on, there is also the main residence exemption. This is where any capital gain or loss made by an individual from a CGT event in relation to a CGT asset that is their dwelling is disregarded in certain circumstances.

This applies if:

  • the residence is owned by an individual(s), not a company or trust;
  • the dwelling was the main residence throughout the ownership period;
  • the dwelling was not acquired from a trustee of a deceased estate or as a beneficiary of a deceased estate;
  • the dwelling up to 2 hectares of adjacent land.

The exemption may not apply in full if the property has been used for income-producing purposes, a period of absence from the residence (of over 6 years) or the acquisition of a main residence from a deceased estate.

Therefore if the transferee of the property uses the property as a rental or investment property, for income-producing purposes and/or does not live there, they will not be able to claim the main residence exemption upon the eventual sale or transfer of the property.

What about property that is not the main residence?

The transfer of an investment property or holiday home from one spouse to another qualifies the transferor for the rollover relief provided the transfer is by court order.

What about property that is not the main residence?

The transfer of an investment property or holiday home from one spouse to another qualifies the transferor for the rollover relief provided the transfer is by court order.

What is the property is to be sold?

If the property is to be sold then the parties cannot claim the exemption and the ordinary CGT provisions apply, except if the main residence exemption is applicable.

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