What is the CGT Rollover for Marriage Breakdowns?
Separation and divorce can be a complicated and emotional process, particularly when dividing assets between spouses. It’s not uncommon for divorce agreements to involve the transfer of assets, such as property or shares, from one spouse to the other. When doing so, this transfer is considered a capital gains event and would typically trigger Capital Gains Tax (CGT) liability.
Fortunately, the Australian Tax Office offers several exemptions and concessions in the Income Tax Assessment Act 1997 to reduce CGT liability in certain circumstances. One such exemption is the CGT rollover for marriage breakdowns, which allows for the transfer of assets between separating spouses without incurring CGT liability.
In this article, we will explore the details of the CGT rollover for marriage breakdowns, including who is eligible, what assets are covered, and how to apply for the exemption.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax on the profit made from the sale or disposal of an asset that has increased in value over time. This can include assets such as real estate, stocks, and personal property.
When you sell an asset for more than its original purchase price, the Australian Tax Office (ATO) considers the difference between the sale price and the purchase price as a capital gain and is subject to CGT.
The rate of CGT payable depends on various factors, including the type of asset, the length of time it was held, the individual’s tax bracket and available exemptions.
You may be interested in our Ultimate Guide on Capital Gains Tax for Property Investments.
The Main Residence Exemption
In most cases, you’re only liable to pay capital gains tax on an income-producing asset, such as investment properties. So, the ATO offers property owners who use their properties as their main residence (i.e., owner-occupiers) a main residence exemption.
The main residence CGT exemption is a tax exemption that allows Australian residents to avoid paying capital gains tax on the sale of their primary residence or main home. This exemption applies when the home has been used as the individual’s primary residence for the entire period of ownership.
Under this exemption, any capital gain on the home’s sale is not subject to CGT.
So, generally, if your former marital home was your main residence, then CGT won’t apply to it, regardless of whether you transfer it, dispose of it or sell it.
However, if you and your spouse or de facto partner own an investment property together, the rules apply slightly differently, because it’s an income-producing property and technically subject to capital gains tax.
CGT on Investment Properties
When you sell a non-exempt asset, such as an investment property due to a divorce settlement, any profit you make from the sale may be subject to CGT. If you jointly own the property with your spouse or de facto partner, the ATO will assess you both for CGT on your portion of the profit.
If only one party (you or your partner) owns the property, they will be solely responsible for paying the tax.
If the investment property is overseas, you will likely have to follow the foreign law relating to this transaction. There could also be a tax liability in Australia if you are an Australian tax resident.
Understanding When CGT Rollover Relief Marriage Breakdown is Applicable
If you and your partner come to an agreement to transfer ownership of the investment property (or any other eligible non-exempt asset) rather than selling it, there is a possibility that the CGT rollover relief may be applicable.
The CGT rollover relief is a tax provision that allows taxpayers to defer paying CGT when they transfer an asset if they meet specific requirements.
One of the situations where CGT rollover relief is applicable is when a marriage or de facto relationship breaks down, and one of the partners transfers ownership of an asset to the other as part of a formal agreement. In this case, any capital gain or loss resulting from the CGT event made by the transferor spouse is disregarded, meaning they are not required to pay CGT on the asset transfer to their partner.
Instead, the partner who receives the asset assumes its cost base and will be subject to CGT when they dispose of it in the future. The CGT rollover relief does not eliminate the CGT liability, but only postpones it until the receiving partner disposes of the asset.
Binding Financial Agreement or Court Order Under the Family Law Act
However, for the rollover relief to apply, the asset transfer must occur as a result of a binding financial agreement (BFA) or a court order. If the transfer of assets between spouses doesn’t meet this condition, the ATO will not grant the rollover relief, and CGT will apply to the transfer of the assets.
There are four possible ways through which the parties can reach an agreement regarding family law property settlements after a relationship breakdown for the rollover relief:
- A court order made under the Family Law Act or a similar law in another country, including orders made by consent.
- A financial agreement made under the Family Law Act, or an equivalent written agreement legally binding under a corresponding foreign law.
- An arbitral award made under the Family Law Act or a similar award made under the corresponding law of a state, territory, or foreign jurisdiction.
- A written agreement made under a state, territory, or foreign law relating to relationship breakdowns is equivalent to a binding financial agreement made under the Family Law Act.
If a company or trust transfers an asset on behalf of a spouse, they may be eligible for a CGT rollover. However, the rollover only applies when the transfer of assets is between spouses, companies, or trusts. The relief won’t apply if an asset is transferred to a corporate trustee, even if it’s for the former spouse’s benefit.
Furthermore, to qualify for the rollover, the spouses or former spouses must be separated and have no realistic chance of living together again. Property transfer must be linked to the breakdown of the relationship.
Case Study Example of How the Rollover Relief Applies
After a marriage breakdown, John and Sarah divided their assets as part of their property settlement.
As part of the settlement, the Family Court ordered John to transfer ownership of their investment property to Sarah. John wants to apply CGT rollover relief to this transfer to avoid paying capital gains tax on the property.
John is eligible to apply for CGT rollover relief because the transfer of the property is directly between the spouses, which meets the requirements for the rollover. As a result, John will be able to disregard any capital gain that would have otherwise arisen from the transfer of the property to Sarah.
Sarah assumes the cost base and will pay capital gains tax on the eventual sale of the property.
However, if John had decided to transfer the property to a trust that Sarah controlled instead, he would not be eligible for CGT rollover relief, and a capital gain would have arisen for John based on the difference between the market value of the property at the date of transfer and its cost base.
In this case, the trust would be deemed to have acquired the property for its market value at the date of transfer, and there would be no tax implications for Sarah personally.
The CGT rollover relief is an ATO tax concession available to individuals experiencing a marriage breakdown or other relationship breakdowns. The concession allows taxpayers to defer capital gains tax, potentially easing the financial burden of a difficult time. However, it’s crucial to seek advice from a team of experienced tax advisors, and family lawyers are crucial to ensuring you meet the eligibility requirements for the rollover relief.
Failing to meet the criteria could result in unexpected tax liabilities and legal issues.
If you’re going through a relationship breakdown and need assistance with CGT rollover relief or other property tax matters, contact Property Tax Specialists today for expert advice and support.
We are a team of tax advisors who specialise in property taxation. We can help you assess your eligibility for CGT rollover relief and provide guidance on the most tax-effective way to transfer property during a relationship breakdown.
DISCLAIMER: This information has been prepared without taking into account your objectives, financial situation, or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation, or needs.
Amir Ishak is a Limited Authorised Representative 1269908 of Merit Wealth Pty Ltd, Australian Financial Services Licence 409361, ABN 89 125 557 002