- USING FAMILY LAW TO RESTRUCTURE YOUR WEALTH
- By Dan Bottrell
- 21st Century News
- 07/05/2013 Make a Comment
- Contributed by: MrNatural ( 18 articles in 2013 )
The endurance of a property settlement after separation or divorce can be an unpleasant experience, writes Dan Bottrell.
There is scope to ‘make lemonade out of a lemon’ when negotiating property settlement outcomes, and to use the family law environment to restructure wealth while avoiding, or minimising, the hefty tax and revenue consequences. The following opportunities are unique to family law property settlements and, if used thoughtfully, can allow spouses to maximise their property settlement outcomes.
Stamp Duty
While most transfers of real property titles trigger stamp duty fees, the Family Law Act contains an exemption from duty payments on transactions which adhere to a Family Court Order or certain financial agreements (i.e. a binding agreement under the Family Law Act, made after separation or divorce).
This means that an investment property owned by one spouse can be transferred to another spouse by way of property settlement, with a stamp duty exemption.
In some cases, if the terms of the order or agreement clearly provide for it, property can also be transferred from a spouse to a company (trustee of a trust), or vice versa. Note however that the granting of exemptions in cases not involving the spouse can be subject to the discretion of the Commissioner of Duties and must be the subject of specific advice. Rulings as to transactions under Family Law Act Orders and specified financial agreements are usually available from state-based Stamp Duties Authorities.
Transactions must occur after the date on which the order is made or the agreement is executed. Note that stamp duty legislation varies between states, and the transaction you have in mind should be undertaken under specific advice from a specialist family lawyer in your state.
Capital Gains Tax (CGT)
In lengthy marriages it is not uncommon for the property pool to comprise investments acquired many years prior with significant unrealised capital gains. Fear surrounds selling down such assets to create cash sufficient to implement a property settlement, given the tax liability which will be triggered on the disposal and which will immediately erode the asset pool.
However, under orders pursuant to the Family Law Act, or under a financial agreement made in accordance with that Family Law Act, the triggering of such CGT liability is automatically deferred, as roll-over relief under the matrimonial exemptions of the Income Tax Assessment Act 1997.
This means that the title to the asset passes from one party to the other on the basis that the unrealised gain is deferred until the transferee spouse disposes of it at some future point. The transferee spouse is deemed to have acquired the asset when the transferor did, the extent of any gain being calculated based on the transferor’s cost base at the time of the transfer to the transferee, plus incidental costs.
Such roll-over relief is eligible for transactions from spouse to spouse, and where a trustee company or company is the transferor and a spouse is transferee, therefore covering the situation where a real property owned by a Family Trust is being transferred to a spouse by way of property settlement. Transactions involving non-spouse parties (such as the Trustee of a Family Trust) necessitate legal advice as to the joining of that Trustee as a party to the order or agreement.
Roll-over relief also ensures that a pre-CGT asset can be transferred to a spouse while preserving its pre-CGT status.
This relief can potentially be used to address ‘sleeping giant’ tax issues by moving an asset from one spouse to the other (so as to access concessional rates of tax, capital losses etc available to one spouse but not the other) before a disposal occurs, so that the optimum tax outcome can be achieved in respect of any capital gains. Such transactions must, however, always be the subject of specific advice.
Silver Lining
For those who take advice from their specialist lawyers and accountants early in their property settlement, there is potential for a silver lining.
By thinking creatively in terms of options and taking into account the nature and characteristics of the property pool, there is potential to move assets into a position where there are reduced revenue consequences and with deferred and potentially minimised tax consequences.
There is scope to ‘make lemonade out of a lemon’ when negotiating property settlement outcomes, and to use the family law environment to restructure wealth while avoiding, or minimising, the hefty tax and revenue consequences. The following opportunities are unique to family law property settlements and, if used thoughtfully, can allow spouses to maximise their property settlement outcomes.
Stamp Duty
While most transfers of real property titles trigger stamp duty fees, the Family Law Act contains an exemption from duty payments on transactions which adhere to a Family Court Order or certain financial agreements (i.e. a binding agreement under the Family Law Act, made after separation or divorce).
This means that an investment property owned by one spouse can be transferred to another spouse by way of property settlement, with a stamp duty exemption.
In some cases, if the terms of the order or agreement clearly provide for it, property can also be transferred from a spouse to a company (trustee of a trust), or vice versa. Note however that the granting of exemptions in cases not involving the spouse can be subject to the discretion of the Commissioner of Duties and must be the subject of specific advice. Rulings as to transactions under Family Law Act Orders and specified financial agreements are usually available from state-based Stamp Duties Authorities.
Transactions must occur after the date on which the order is made or the agreement is executed. Note that stamp duty legislation varies between states, and the transaction you have in mind should be undertaken under specific advice from a specialist family lawyer in your state.
Capital Gains Tax (CGT)
In lengthy marriages it is not uncommon for the property pool to comprise investments acquired many years prior with significant unrealised capital gains. Fear surrounds selling down such assets to create cash sufficient to implement a property settlement, given the tax liability which will be triggered on the disposal and which will immediately erode the asset pool.
However, under orders pursuant to the Family Law Act, or under a financial agreement made in accordance with that Family Law Act, the triggering of such CGT liability is automatically deferred, as roll-over relief under the matrimonial exemptions of the Income Tax Assessment Act 1997.
This means that the title to the asset passes from one party to the other on the basis that the unrealised gain is deferred until the transferee spouse disposes of it at some future point. The transferee spouse is deemed to have acquired the asset when the transferor did, the extent of any gain being calculated based on the transferor’s cost base at the time of the transfer to the transferee, plus incidental costs.
Such roll-over relief is eligible for transactions from spouse to spouse, and where a trustee company or company is the transferor and a spouse is transferee, therefore covering the situation where a real property owned by a Family Trust is being transferred to a spouse by way of property settlement. Transactions involving non-spouse parties (such as the Trustee of a Family Trust) necessitate legal advice as to the joining of that Trustee as a party to the order or agreement.
Roll-over relief also ensures that a pre-CGT asset can be transferred to a spouse while preserving its pre-CGT status.
This relief can potentially be used to address ‘sleeping giant’ tax issues by moving an asset from one spouse to the other (so as to access concessional rates of tax, capital losses etc available to one spouse but not the other) before a disposal occurs, so that the optimum tax outcome can be achieved in respect of any capital gains. Such transactions must, however, always be the subject of specific advice.
Silver Lining
For those who take advice from their specialist lawyers and accountants early in their property settlement, there is potential for a silver lining.
By thinking creatively in terms of options and taking into account the nature and characteristics of the property pool, there is potential to move assets into a position where there are reduced revenue consequences and with deferred and potentially minimised tax consequences.
Source: https://www.21stcenturynews.com.au/family-law-restructure-wealth/
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