Picture this - your client has finally started to get his life back on track after a nasty property dispute with his former wife. An audit by the ATO uncovers
the transactions made pursuant to the Family Court Order trigger significant tax consequences for the client. He was not advised of the potential tax
risk during the negotiation. The tax has eaten into his share of his property settlement money and he is now looking for someone to blame. You can
bet the lawyer and accountant will be on the top of his hit list.
Under the Family Law Act 1975 "The Act", the tax implications of property settlement transactions are often ignored by the court when determining what
"property" is under section 79. For example, if there is no intention to sell the property, then a property valued at $1m is considered to be worth
$1m even if a later sale of the same property triggers $800k capital gains tax. Because of the court's approach, lawyers can and do leave the tax
implications out of the equation when negotiating a settlement, which can leave clients with unexpected and unpleasant surprises!
It is therefore important that accountants and lawyers work together to jointly ensure that their clients are made aware of the tax implications to
enable the client to make an informed property settlement decision.
Some traps to be aware of:
The Commissioner in GST Ruling GSTR 2003/6 makes it clear that, given the private nature of the transaction, the binding nature of Orders or Agreements
recognised by the Act, and the lack of commercial flavour in a property settlement, GST is not payable on the supply of assets from any individual,
company or trust to a spouse.
Warning: A transfer of a GST registered partnership asset to a spouse is considered a taxable supply...So if, for example, a motor vehicle used
for business purposes is transferred to a spouse and is subsequently used for personal use, it no longer has a creditable purpose. In those circumstances
an adjustment may be required to reverse some of the input tax credit.
Division 7A and trusts
Careful consideration is required of any transfer of assets from the trustee of a trust to a spouse, if there is an unpaid present entitlement owing
by the trust to a corporate beneficiary. This transfer could be treated as an unfranked dividend under Div 7A.
If the property settlement agreement is formalised by way of a recognised Order or Agreement under the Act, then the dividend can be treated as franked.
Warning: The franking credits may not cover all of the individual's tax liability in respect of the deemed dividend - the tax otherwise payable
could be more than the franking credit. The tax payable should therefore be factored into the property settlement figures.
Recognised Orders and Agreements made in accordance with the Act need to be drafted to ensure that, if applicable, the transfer or payment obligation
is on the company rather than the husband or wife personally to ensure that the deeming provisions don't apply (i.e. the dividend can be franked).
Capital Gains Tax
CGT rollover relief is a well known benefit of obtaining Orders. It is important to remember though that there is not a complete exemption.
Warning: The CGT that would be payable at the point of the triggering event is simply deferred until a later time. The value of the property
to determine the cost base remains the value as at the date of its original purchase - not the value as at the date of the transfer under the property
Did you know - The conveyance costs of transferring the property into the new spouses name can be included in the cost base when assessing the capital
gain in the future?
Heeding these warnings is a good starting point but the complex issues involved require thorough discussions between accountants, lawyers and the mutual
clients before the property agreement is finalised.