It can not be denied that separation and divorce are difficult paths, even if the decision would produce a better long-term result for both parties. More often than not, it is unrealistic to expect the parties involved to be able to think in a clear and rational way about the practical problems of divorce, when emotions rise and especially when they are at home. there are valuable assets such as real estate.
If you make a mistake in separating these assets, you may inadvertently invite an attack that could cost you more than grief and stress.
The main trigger for potential tax problems related to divorce is the process of division of matrimonial property under which the assets of the former couple are split between them in order to separate their estate and their affairs from each other .
This process often requires the transfer of assets or interests in assets from one person to another, which would normally trigger an assignment for earnings tax purposes. in capital [CGT]. For this purpose, it should be noted that assets held by a separate entity (for example, a corporation, trust, etc.) that are controlled by the couple but are not in the couple's hands are also fair game. They are most likely included in the portfolio of divisible marital property, which may need to be transferred.
Although tax law provides for potential relief in these circumstances, it would not be very useful if you:
• are unable to negotiate a position that would allow you to use tax relief
• fails to take advantage of relief, or
• fail to properly execute the division of property to qualify for the relief
Below, I share some of the problems and tips that can help you avoid these common mistakes, while keeping in mind that tailored advice is essential because everyone's circumstances are different.
The house of your family
If appropriate structuring advice was obtained and followed on the initial acquisition of the family home, the property would often be held by the person at lower risk (for example, an inactive spouse or common-law partner). The couple can also be co-owner of the house, equally or equally.
If the house or an interest in the house, assuming that it was purchased after September 20, 1985 and that it is the family's main residence, be transferred to one As a result of the divorce, the principal residence exemption will generally apply therefore any capital gain or capital loss resulting from the transfer will not be taken into account.
Under certain circumstances, the principal residence exemption may not fully apply to the transfer. For example, if the property was originally acquired by the couple as an investment property and it was subsequently converted into ownership, then a distributed capital gain may occur. ;apply. In these circumstances, it may be necessary to apply the "tipping over marriage breakdown" to disregard the realized capital gain.
Assuming that the assignee is an individual and the assignee subsequently sells the property, whether the subsequent sale would result in a capital gains tax in his hands would depend on the manner in which the property had been used after the breakdown of the marriage.
If the transfer beneficiary continues to live in the property until it is sold and does not have any other home elsewhere, the principal residence exemption will continue to apply and the property will not be exposed to any CGT upon subsequent sale.
In addition, if the transferee began renting the property after the divorce but does not have another home elsewhere, the temporary absence rule may apply. The property can therefore continue to benefit from tax-free treatment for a period of up to six years before being exposed to the CGT.
On the other hand, if the assignee began renting the property after the divorce and is the owner of another tax-exempt house elsewhere, then it will cease to be a residence principal exempt from tax.
Assuming that the property has never been rented before the divorce, a special rule will apply, so that the assignee will be deemed to have acquired at its market value at its first rental to rent; this market value will become the base price of the property for the purpose of calculating future appreciation on the property upon its sale.
It is important to note that special rules apply if a couple owns two dwellings at the same time. Before they separate definitively, they can choose one of the properties as a tax-free principal residence or designate both properties as their principal residence but claim a partial exemption from the principal residence for each property.
However, once the couple has started living permanently separated in each of the properties, they can begin to apply the principal residence exemption on the property in which they reside, since it is essentially treated as an unrelated person once he is separated.
While the above rules seem relatively simple, if the divorcing couple owned multiple properties or used their home for other purposes before the divorce, the tax treatment could become considerably more complex.
Other assets of the CGT
Under the normal rules of the CGT, if an entity transfers to another entity a valuable asset, such as an investment property originally acquired after 20 September 1985, the transfer will normally generate a CGT event. resulting from the sale of the asset.
If no consideration is paid on the transfer, or if the consideration is greater or less than the market value of the transferred asset and / or the parties do not deal at arm's length with each other, the the market value substitution rule will apply if the selling entity sold the asset at market value for the purposes of the CGT. The transfer may also give rise to a stamp duty based on the market value of the asset.
However, if a property is transferred without consideration as a result of a division of matrimonial property, provided that certain conditions are met, the entity that transfers the asset may claim a " rollover in case of marriage breakdown ", which applies to non-compliance capital gain or capital loss that would otherwise crystallize in the hands of the transferring entity.
If the rollover applies, the transferee spouse who acquires the asset will be deemed to have acquired the asset at the cost price of the asset, which previously belonged to the 39, ceding entity.
It is important to note that one of the essential conditions for the rollover of the CGT to be applied is that the asset must be transferred under an agreement or agreement. a formal settlement – for example, under a court order, a maintenance contract, a binding financial agreement, and so on.
If the transfer took place as a result of a private agreement between the parties that has never been formalized under any of the prescribed conditions, the rollover will not be available, which will could give rise to unexpected unwanted tax consequences. It is therefore necessary to seek the advice of a professional to avoid such costly mistakes.
Traps to Separate Couples: CGT
The capital gains tax is an area in which many couples separate because complex rules and laws govern the amount of tax payable. In general, the following points should be taken into account:
If an asset is transferred by a transferor entity to a transferee spouse as part of the marriage breakdown, and the latter transfers the asset at a later date, the subsequent right of sale for the benefit of the 50% reduction in the property tax will depend on the holding of the assignee's spouse the asset for at least 12 months prior to the sale.
A special acquisition rule applies to determine whether the receiving spouse has retained the asset for at least 12 months in these circumstances – the 12-month period is counted from the time the ceding entity acquired the asset at the time of the final sale of the assets by the transferee spouse. Therefore, the correct application of this special rule can generate substantial savings for the CGT.
Although the turnover of the CGT in case of marriage breakdown is not too difficult to apply, a technical trap may surprise. The CGT rollover can only apply if the transferee of the asset is one of the divorced spouses or common-law spouses as an individual.
This is true whether the transferor is an individual or another type of entity (eg a family trust, a corporation, etc.).
If an asset is inadvertently transferred to an entity that is not one of the assignee's spouses (for example, the new discretionary trust of the receiving spouse), the CGT transfer will not apply and CGT may become payable by the ceding entity.
Although this issue can be resolved by ensuring that the relevant asset is transferred to the transferee spouse in a personal capacity, any subsequent transfer (or sale of) of the asset by the transferee spouse to a related entity in order to achieve other objectives (eg CGT may trigger the CGT on increasing the value of the asset.
This will apply to the difference in value between what the originating entity originally paid for it and the market value of the asset when it is finally transferred by the transferee spouse to their related entity.
It should also be noted that the postponement of the marriage of the CGT in the event of marriage breakdown may apply to an asset originally acquired by the transferring entity before 20 September 1985 (ie it is an "asset prior to the CGT") and was transferred to the transferee spouse under the agreement. CGT Bearing
In these circumstances, the assignee spouse will be deemed to have acquired the asset by September 20, 1985 as well; any subsequent sale of the assets by the transferee spouse will not give rise to any CGT.
Eddie Chung
is partner, tax and consulting at BDO Queensland
