When a party to a family law proceeding seeks that an investment property form part of their settlement, one may ask, will the Family Court consider the future capital gains tax (CGT) liability payable at some date down the track when the property is eventually sold?
We advise our clients to make sure they know where they stand in relation to tax liabilities and factor that into their thinking before they opt to keep an asset which may have tax implications attached to it.
In the Family Law case of Rosati v Rosati (1998) FAMCA 38, there was a dispute concerning an unrealised CGT liability. In considering the approach to be taken by the Court when making orders pursuant to Section 79 of the Family Law Act 1975 (Cth)(the Act), the Full Court stated the following general principles:
- Whether 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 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.
- If the Court orders the sale of an asset, or is satisfied that sale of it is inevitable, or would probably occur in the near future, or if the asset is one which is acquired solely as an investment and with a view to its ultimately 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.
- If none of the circumstances referred to in item 2 apply, 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 on such a sale in determining the value of the asset, may take that risk into account as a relevant Section 75(2) factor (matters to be considered when deciding property settlement cases).
- There may be special circumstances in a particular case which, despite the absence of any certainty or even likelihood if 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.
It is apparent from the case of Rosati that the inclusion of CGT as a liability greatly depends on a number of circumstances, including importantly, the likelihood of sale in the near future or immediate future or considering whether the asset was acquired solely as an investment with a view to sell and make a profit. Ultimately however, the Court has the discretion as to whether CGT ought to be included as a liability and thereby, matters are often determined on a case by case basis.
If there is an asset of the relationship that is subject to capital gains tax it is important that you receive independent legal advice and taxation advice.
At Caroline Counsel Family Lawyers, we work with experts to help you make the right decisions at the right time about which of your assets you might want to retain. We help you identify what that means for you come settlement time with your former partner or spouse. We believe it is vital that you know what your personal tax liabilities might and to consider your financial position carefully and dispassionately no matter how attached you might once have been to a given asset, house or investment.
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. The contents of this blog are relevant as at 9 September 2020. We recommend you obtain specific advice relevant to you and your family’s situation.
Natasha Rohrig
Lawyer: Caroline Counsel Family Lawyers
