Divorces often lead to a number of tax implications, particularly when transferring real property from one party to another. If you have a client who is recently divorced or contemplating getting a divorce, then it is important to understand the tax implications this will have.
Accountants and family lawyers often work together to advise clients of their financial rights and obligations. One of the most commonly asked questions is whether a family law property settlement (of any size) will result in tax consequences.
1. Capital Gains Tax:
Where two people are separating or divorcing and transfer assets between them, this will usually qualify for a relationship breakdown rollover. CGT usually applies when the ownership of an asset changes, but where the parties enter into court orders or another formal agreement, the relationship rollover of CGT will usually apply.
The rollover relief can also be applied to assets transferred from a couple’s former company or trust. It is important that accountants pay close attention to Division 7A of the Income Tax Assessment Act 1935 when dealing with complex asset transfers and tax consequences arising from deemed dividends.
With the lengthy list of exemptions and complexity of capital gains tax law, sometimes decisions will need to be made about which dwelling will be considered the main residence, or whether or not an investment property should be sold or retained by one of the parties.
2. Child support:
One area that is not affected by tax implications is child support; this means that any money received from child support payments are not considered as taxable income, and any money paid for child support is not considered an income that is tax deductible.
Child support payments may affect Family Tax Benefits (from the ATO) received by the individual receiving child support.
Family Tax Benefits (FTB) provide a two-part payment available to eligible families to assist with the cost of raising children:
If a parent’s child support payments increase or decrease, this will affect the amount of Family Tax Benefits they will be eligible to receive.
3. Spousal maintenance:
Spousal maintenance is a form of financial support which is paid from a party to a marriage (or de facto relationship) to their former partner/spouse in circumstances where that person is unable to financially support themselves.
Many people do not know or understand what spousal maintenance is, so we have written a complete guide on spousal maintenance which you can access by clicking here.
When considering an application for spousal maintenance the Court will consider the needs and living costs of the applicant, and the capacity for the other party to pay. It is normally used in cases where one person has a low income and the other person has a significantly higher income.
Much like child support, spousal maintenance is also not considered as taxable income, or permitted to be claimed as a tax deduction by the individual paying it. It is important to note that this exemption does not apply to situations where the payer makes the spousal maintenance payments in an attempt to divest him/herself of an income-producing asset, or to dispose of income that would otherwise be taxable.
4. Other considerations:
It is important to note that there are other tax implications surrounding divorce that can arise in relation to stamp duty, deemed dividends, GST and your client’s legal costs. The effects of these are not as considerable as CGT but should also be considered when advising your clients.
When a couple decides to separate it’s in both their best interests to be instructing not only skilled divorce lawyers, but also to have engaged competent accountants who understand some of the legal mechanisms involved in finalising a divorce.
Most of the times, clients will want to know how much they will get in a divorce, and that is when it is best to instruct a competent lawyer.
If you want to book in a free, short confidential chat about a particular matter, please get in touch by clicking here.
Author: Hayder Shkara is the principal of Justice Family Lawyers and Melbourne Family Lawyers. The family lawyers in his team have vast experience in family law, including financial and property settlements, divorce, child custody matters, wills and estates, consent orders and binding financial agreements.
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