Many of our clients have a broad range of assets including investment properties and share portfolios. If you have separated from your partner, it is very important for you to understand the tax consequences which may flow from selling an investment including Capital Gains Tax (CGT). As lawyers, we cannot provide financial advice but we work closely with you and your accountant or financial advisor to ensure that all bases are covered when sorting out who keeps what from your assets.
One of the most important things to be aware of when deciding how to divide assets is that CGT is not automatically included as a joint liability (debt) when calculating the net value of an asset pool. This is because there is no automatic inclusion of liabilities which have not yet been incurred (also known as ‘realised’ or ‘crystallised’).
If you and your partner cannot reach agreement about how CGT should be dealt with in your property settlement and your matter proceeds to Court, the Court has broad discretion to determine the assets and liabilities in a way they deem to be just and equitable. However, the Court will usually consider the following evidence:
- Expert evidence quantifying the precise value of the liability (i.e. from an accountant or tax agent); and
- Evidence that the liability would inevitably be incurred in the circumstances (i.e. from a tax lawyer and property valuer).
In the case of Rosati and Rosati  FamCA 38, the Full Court of the Family Court of Australia said, in relation to the effect of potential capital gains tax, which would be payable upon the sale of an asset, that the following principles had been applied in previous decisions:
(1) Whether the incidence of capital gains tax should be taken into account in valuing a particular asset varies according to the circumstances of the case, including the method of valuation applied to the particular asset, the likelihood or otherwise of that asset being realised in the foreseeable future, the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to that asset.
(2) If the Court orders the sale of an asset, or is satisfied that a sale of it is inevitable, or would probably occur in the near future, or if the asset is one which was acquired solely as an investment and with a view to its ultimate sale for profit, then, generally, allowance should be made for any capital gains tax payable upon such a sale in determining the value of that asset for the purpose of the proceedings.
(3) If none of the circumstances referred to in (2) applies to a particular asset, but the Court is satisfied that there is a significant risk that the asset will have to be sold in the short to midterm, then the Court, whilst not making allowance for the capital gains tax payable on such a sale in determining the value of the asset, may take that risk into account as a relevant s 75(2) factor, the weight to be attributed to that factor varying according to the degree of the risk and the length of the period within which the sale may occur.
(4) There may be special circumstances in a particular case which, despite the absence of any certainty or even likelihood of a sale of an asset in the foreseeable future, make it appropriate to take the incidence of capital gains tax into account in valuing that asset. In such a case, it may be appropriate to take the capital gains tax into account at its full rate, or at some discounted rate, having regard to the degree of risk of a sale occurring and/or the length of time which is likely to elapse before that occurs.”
In short, there is considerable uncertainty and risk as to the inclusion of any CGT liability in the value of an asset as a Final Hearing.
In the case of Blake and Blake  FamCA 10, the Full Court of the Family Court of Australia allowed an appeal against a first instance decision where CGT had been taken into account in the value of a series of properties owned by the husband. The husband only intended to immediately sell one of the properties and the Full Court said that only the value of that single property should be considered net of CGT, whereas CGT should not be considered in relation to the other properties.
If you hold concerns about the potential impact CGT may have on your property settlement you should seek the appropriate financial and legal advice. The team at Caroline Counsel Family Lawyers can assist you in identifying potential pitfalls and direct you towards expert providers of taxation advice.
If you would like advice specific to your situation, please contact our office to make an appointment on 9320 3900 or email [email protected].
The information in this blog does not constitute legal advice and cannot be relied upon by you. If you require advice specific to your situation you must contact Caroline Counsel Family Lawyers for legal advice. The contents of this blog are relevant as at 11 May 2018. We recommend you obtain specific advice relevant to you and your family’s situation.
By Caroline Counsel and Alex Finemore