With rising rates of relationship breakdown, it is a common occurrence that the transfer of ownership of various assets and property types take place as the separating parties seek to settle their affairs.
In general, the transfer of property triggers a Capital Gains Tax (CGT) event, but that does not necessarily mean that CGT is payable. There are various exemptions and concessions that may be applicable, such as the Main Residence Exemption for example.
In addition to those CGT items, there are further specific conditions and criteria that may apply when it comes to property that is transferred during the process of relationship separation and divorce.
CGT Implications when Divorce or Separation
When two people separate or divorce, provided that the necessary conditions are met, the assets transferred between them may qualify for the CGT marriage or relationship breakdown rollover.
The CGT marriage or relationship breakdown rollover means that for the transferor (the person, company or trustee of a trust that transfers an asset to their spouse) any capital gain or loss that is made when the property is transferred, is disregarded.
For the transferee (the spouse who receives the asset):
- The property and relevant cost base are transferred to you.
- You will be deemed to make a capital gain or loss when you dispose of the property.
- If you already had a legal interest in the property, you must calculate your capital gain or loss separately to the interest transferred from your spouse.
- If the transferred property was acquired by your spouse (or a company or trustee) before 20 September 1985, CGT doesn’t apply. However, if they made a major capital improvement to the dwelling on or after 20 September 1985 the improvements are a separate asset and you may be subject to CGT.
Criteria & Application of the CGT Relationship Breakdown Rollover
It is important to note that the CGT marriage or relationship breakdown rollover may only be applicable to property transfers that result from a formal agreement or directive such as a court order, a binding financial or formal agreement or an award. If the rollover applies to an asset, you must use it.
The CGT marriage or relationship breakdown rollover does not apply to property that is divided under a private or informal arrangement. This includes anything outside of a court order or binding financial or formal agreement.
When it comes to CGT treatment for properties where the rollover does not apply, the transferor (the person, company or trustee of a trust who transfers an asset to their spouse):
- Your interest in the property is transferred to your spouse. You must consider any capital gain or loss made when working out your net capital gain (or net capital losses carried forward to future years) on your tax return for that year.
- Where the dealings are not arm’s length, you are taken to have received the market value of the property for CGT purposes.
For the transferee (the spouse who receives the asset transfer):
- The property is transferred to you and you’re taken to have acquired it at the time of transfer.
- You will make a capital gain or loss when you dispose of the property.
- Where the dealings are not arm’s length, you are taken to have acquired the property at market value for CGT purposes.
- If you already had a legal interest in the property, you must calculate your capital gain or loss separately to the interest transferred from your spouse.
Note: An arm’s length dealing is where each party acts independently and without influence or control over the other. It is dependent on the nature of your relationship and the bargaining between you.
To determine the property’s market value at the time of transfer, you should obtain a professional market valuation.
CGT and Handling the Family Home upon Relationship Breakdown
When you sell a property that was transferred to you under the CGT marriage or relationship breakdown rollover, you may be eligible for the main residence exemption from capital gains tax (CGT).
In order to determine eligibility for a full or partial exemption you will need to consider how you and your former spouse used the property during your combined period of ownership.
You are entitled to the full main residence exemption if the property is on less than 2 hectares of land and:
- for property that transferred after 12 December 2006:
- before the transfer, your spouse used the property as their main residence
- while you owned part or all of the property, you used it as your main residence
- the property was not used for rent or business
- for property that transferred on or before 12 December 2006:
- after the transfer, it was your main residence and was not used for rent or business.
If you do not meet these conditions, you may still be entitled to a partial main residence exemption.
Record Keeping for Capital Gains Tax
In order to be able to correctly calculate and substantiate your capital gain or loss, it is important that you keep detailed and accurate records relating to your ownership and all costs of acquiring, holding and disposing of property including:
- contract of purchase and sale
- stamp duty
- major renovations.
If you don’t already have a copy, make sure you have records from your former spouse for any properties that are being transferred between you. You should have copies of records that show:
- how and when they acquired the dwelling (or the interest in a dwelling)
- its cost base when they transferred it to you
- the extent (if any) that it was used to produce income during their ownership period (for example, the periods when it was rented out or available for rent) and the portion of the dwelling used for that purpose
- the number of days (if any) it was their main residence during their ownership period.
You must hold records for at least 5 years after the sale of the property, or the year you declare a capital gain.
If you make a capital loss, once you’ve offset the loss against a capital gain, keep records for another 2 years.
Get Individually Tailored Expert Capital Gains Tax Help
Inherently, CGT can be a complex matter to navigate with many conditions, eligibility criteria and exemptions to consider and no “one size fits all” approach.
Similarly, relationship separation and divorce can be extremely complex on a number of different levels too.
And so together, handling CGT and relationship breakdowns can certainly be very challenging, and likely stressful. It is important to seek independent, professional advice when it comes to property transfer, CGT and relationship breakdowns to ensure that you are taking the most appropriate steps towards an optimal outcome for your individual situation.
You shouldn’t necessarily wait until the relationship has declined to the point of separation to seek help and go into “damage control” mode. Seeking advice in regards to assets, property ownership and CGT implications at any and every stage of life, and regardless of relationship status, can certainly help to reduce problems in the event that relationship breakdown does occur.
The team of tax accountants and tax lawyers at The Quinn Group can provide comprehensive, capital gains tax advice tailored for your individual situation. Submit an online enquiry or call us on + 61 2 9223 9166 to arrange an appointment to discuss your capital gains tax needs.
