Nexia Tax Alliance team help a number of other professionals help their clients by providing specialist tax advice when they need it. As practitioners in family law, you well know the complexities that can arise when negotiating the division of assets upon a relationship breakdown. A key factor is the latent tax liability residing within the value of certain assets. If this is not factored into the negotiating, your client could end up short-changed.
Tax impacts decisions
Your client needs to make decisions in relation to the division of assets. However, your client can only make fully-informed decisions if tax is taken into account.
A recent case law precedent has determined there may be circumstances which despite the lack of certainty of the sale of an asset in the near future, make it appropriate to take the imposition of Capital Gains Tax (‘CGT’) into account in valuing that asset. As such, the anticipated timeframe for the disposal of an asset is very relevant when the Family Court is considering a property settlement. Generally there are 3 scenarios in which the CGT liability may or may not need to be taken into account:
- If the sale of the asset is inevitable or likely to occur in the near future, or if the asset as acquired solely as an investment with a view to ultimate sale for profit, then allowance should be made for any CGT payable upon such a sale in determining the value of the asset for the purpose of the proceedings.
- If there is no intention to sell the asset, then no CGT liability will need to be taken into account.
- If there is a risk of sale occurring in the future, but there is uncertainty in regards to the timing of the sale, then an apportioned CGT liability should be taken into account when valuing the asset.
This is illustrated by the following example:
A property settlement is being negotiated in relation to the following assets:
| Value ($) | |
|---|---|
| Family Home | 1,000,000 |
| Investment Property | 1,000,000 |
| Cash | 100,00 |
| Total | 2,100,000 |
An equal property division may be agreed whereby one spouse keeps the family home, the other takes the investment property, and $50,000 cash each. However, whilst the family home may be exempt from capital gains tax (CGT), the investment property is not. If the future CGT liability is not taken into account, the other spouse may well feel aggrieved when he or she sells the property.
Let’s say the investment property was purchased for $600,000. The notional CGT liability embedded in this asset could be as follows:
| Value ($) | |
|---|---|
| Value | 1,000,000 |
| Cost | (600,000) |
| Notional capital gain | 400,000 |
| Less 50% discount | (200,000) |
| Net capital gain | 200,000 |
| Tax at 49% | 98,000 |
A rollover is available to defer any CGT liability that would arise upon transferring property under a relationship breakdown. Accordingly, whilst the $98,000 CGT liability might not arise now, it may well when the investment property is eventually sold (even if it becomes that spouse’s home). This is not to say that the investment property value should be discounted by the $98,000 - a number of factors will determine the ultimate tax impact and there is also the time value of money. Rather, the purpose is to put a tangible figure on the table as a basis to negotiate any adjustment:
| Value ($) | ||
|---|---|---|
| Spouse 1 | Spouse 2 | |
| Family Home | 1,000,000 | |
| Investment Property | 1,000,000 | |
| Adjustment for future CGT liability | (0-98,000) | |
| Cash | ? | ? |
| Total | ? | ? |
Whilst this example neatly illustrates the importance of factoring in tax liabilities attaching to assets, most real life scenarios are more complicated. Measuring the tax factor may well require examining complex taxation laws, including determining whether certain concessions would be available.
The tax issues and concessions include the following:
- CGT small business relief concessions for business assets
- Marriage rollovers that defer a CGT liability
- The rules that preserve or limit the tax exempt status of the family home
- Various consequences of transferring money or other assets out of companies or trusts
- Other restructures of assets
- Transfer duty implications
- Goods & Services Tax implications.
We can help you not only through providing taxation advice, but also by crafting practical solutions that are easily understood and implemented.
Meet with us for free
It is understandable that a client may be reluctant to commit to an engagement if they are not used to paying for specialist tax advice. Accordingly, we are more than happy to have a brief meeting with you and your client, free of charge. This allows your client to fully explain their circumstances and we can discuss the relevant tax issues.
Even if your client decides not to proceed any further, all it has cost is a small amount of their time. But this still enhances your client relationship because recommending they see a tax specialist demonstrates that you are looking after their best interests.
Nexia Tax Alliance – working with other firms
Your clients will typically already have an accounting firm. The Nexia Tax Alliance comprises a network of accounting firms who can tap into our tax expertise when their clients need it. Accordingly, we work together with you, your client and their existing accountant to achieve the best outcomes for all - we are the trusted advisor.
45-minute training presentation
We would be happy to deliver a practical training presentation to your staff. The purpose of this is to create awareness of the following when negotiating a property settlement:
- When CGT roll-over concessions are available
- Potential tax exposures
- Related-party loans, Division 7A loans and unpaid present entitlements, and their place in determining the asset pool
- Double-tax traps
This session is delivered in a practical manner that will help your staff see and understand these issues more clearly within your clients’ affairs.
Please feel free to contact me (David Montani) any time to discuss a client situation and how we can help. We also extend our invitation to deliver our training presentation to your team.
The material contained in this publication is in the nature of general comment only, and neither purports, nor is intended, to be advice on any particular matter. Readers should not act or rely upon any matter or information contained in or implied by this publication without taking appropriate professional advice which relates specifically to their particular circumstances. The publishers, authors, consultants and editors expressly disclaim all and any liability to any person (whether a reader of this publication or not) who acts or fails to act as a consequence of reliance upon the whole or any part of this publication.
