Matrimonial breakdowns and the resultant separation and division of property can be a very difficult and emotional time.
There are also tax traps in the division of property that if not properly thought through, planned and executed, can lead to a significant loss in wealth and exposure to risk going forward.
Before finalising any agreement, great care needs to be taken in understanding the potential income tax –including capital gains tax- implications and liabilities that might apply upon transfer of assets under a matrimonial settlement.
There is some capital gains tax (CGT) “asset rollover” relief available in matrimonial settlements provided assets are transferred in a certain way but it is not always desirable or possible to achieve this for all assets transferred. There are also special rules that apply to transfer of superannuation fund entitlements and rollovers to other funds that can give some but not total relief.
It is increasingly common in any relationship breakdown that involves a significant sum of money that there are various company and trust structures which the parties are involved with, including wealth accumulated in superannuation funds where one spouse may have all or greater entitlements than the other. This is particularly so where one or both of the parties have been involved in carrying on a business or a professional practice.
A central requirement in order to access CGT relationship breakdown rollover relief is that the relevant asset ends up in the hands of one of the parties to the relationship (i.e. the individuals). This presents a danger for that party going forward as the asset(s) in question then forms part of their personal estate for bankruptcy, future relationship and family maintenance/provision purposes.
So in any matrimonial settlement, a holistic view of the following matters needs to be considered:
- the type of assets to be divided and their respective values;
- the current ownership of those assets;
- the potential capital gains tax liability on transfer of the asset if CGT rollover relief is not available or desirable;
- superannuation entitlements of each spouse;
- future exposure to risk and required protection for separating spouses; and
- the nature of income-producing assets to be divided and required ownership structure going forward.
The above is not an exhaustive list of all matters to be considered, but with proper thought and planning before finalising a matrimonial property settlement agreement, you can optimise an outcome that maximises retention of wealth and minimises exposure to risk and tax for the separating spouses going forward.
If you would like to discuss anything in more detail, please contact us on 07 3833 3999.