Where an asset that is not exempt from the payment of CGT is transferred from one party to a marriage or de facto relationship to another party, as a result of the breakdown of a relationship, Section 126 of the ITAA provides for CGT rollover relief.
What is Capital Gains Tax?
Capital Gains Tax (“CGT”) is a tax payable under Income Tax Assessment Act 1977 (ITAA) on the disposal of an asset purchased after 20 September 1985. The CGT payable is on the net capital gain made by the transferor/vendor of the asset from the time that it was acquired until the time it was transferred or sold. It is calculated based upon the marginal tax rate of the transferor/vendor. Certain assets such as a person’s primary residence are exempt from the payment of Capital Gains Tax.
CCT Rollover Relief
Where an asset that is not exempt from the payment of CGT is transferred from one party to a marriage or de facto relationship to another party, as a result of the breakdown of a relationship, Section 126 of the ITAA provides for CGT rollover relief. The transfer of the asset from one spouse to the other spouse must be as a result of a Court Order or Financial Agreement in order for the rollover relief to apply. CGT is not payable by the party receiving the asset at the time of the transfer however it will be payable when that party subsequently sells or transfers the asset.
The cost base of the asset in question is transferred to the party receiving it so that, if that party ultimately sells or transfers the asset, they will be liable for the payment of CGT based on the net capital gain from the date of purchase of the asset, not the date that it was transferred to them under the Order or Agreement.
Rosati v Rosati
The 1998 Full Court of the Family Court Case of Rosati v Rosati held that:
If the Court orders the sale of an asset or it is satisfied that the sale is inevitable or would probably occur in the near future, the CGT liability should be taken into account when determining the value of that asset.
If the Court is satisfied that there is a significant risk that the asset will have to be sold in the short to medium term, the Court may take that risk into account under Section 75(2) of the Family Law Act.
Taffner v Taffer
In the 2021 case of Taffner v Taffner the husband appealed against orders made by the primary judge. He claimed that the primary judge made an order that he retain a real property without taking into account the CGT burden that the retention of the property placed upon him. He asserted that the overall division of assets resulted in the wife receiving 65.87%, when taking into account the CGT liability and not 60.63% as assessed by the primary judge, who did not take the CGT liability into account.
The property to be retained by the husband had to be sold after the Final Property Orders were made as the husband was not able to refinance the mortgage encumbering the property, as was provided for by the Orders. In this case the appeal was allowed in relation to the issue of the treatment of the CGT liability incurred by the husband upon the sale of his property, to provide for a re-exercise of discretion to take into account the CGT.
Please telephone one of our experienced family lawyers on (03) 8393 0144 if you would like to discuss the treatment of CGT in family law property settlements further.