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Tax considerations when separating
Team Maddern
07/May/2018

Divorce is never easy, and with so many practical and emotional issues to process it’s hardly surprising if tax is not top of mind. But tax can have far-reaching consequences if it’s not considered when marital property is divided, especially now that divorce is on the rise among older couples with more wealth at stake.

In previous generations, divorcing couples may have had a house and car and a joint bank account, but few other assets to split. Today it’s not uncommon to have one or more investment properties, perhaps a share portfolio and a pot of savings in superannuation, each with different tax implications.

Australians divorcing later

Despite falling divorce rates overall, it seems more Australian couples are deciding to go their separate ways later in life. Over the last 20 years, the overall divorce rate has fallen by a third to 1.9 per 1000 population. At the same time, the median age of divorce has been slowly increasing – to 45 for men and 42 for women – but the biggest increase has been among older age groups.i

The divorce rate for men aged 55-59 almost doubled from 5.4 per cent in 1981 to 10.1 per cent in 2016. For women the rate increased from 4.1 per cent to 7.9 per cent over the same period. There was a similar rate of increase among married people age 60-64.i

Divorce isn’t something couples plan for when they marry, so when it happens decisions about who lives where and how assets will be split are often made in the heat of the moment. What might at first appear to be the simplest and fairest solution could turn out to be anything but if tax is overlooked.

Capital gains tax

Take just one example of a separating couple with an investment property. They decide that one of them will move into the investment property until the divorce is finalised. It’s convenient and gives them breathing space while they sort out their finances, but it could also produce unequal capital gains tax (CGT) liabilities down the track.ii

If the couple sells the investment property as part of their financial settlement they are both liable for tax on any capital gain, but the partner who lived there temporarily would receive a reduction in their share on a pro rate basis under the main residence exemption. The partner who remained in the family home would end up with a bigger CGT liability.

There would be a different CGT outcome if the couple decided to transfer ownership of the investment property to one partner under the terms of their final property settlement. The law provides for roll-over relief which means no CGT is payable at the time of the transfer.

Super splitting and tax

Splitting super also has tax implications when relationships break down. Superannuation law allows separating couples to value and split their super in any percentage they choose, although this isn’t mandatory.iii

Separating couples with a self-managed super fund will need to decide whether they should both remain in the fund, transfer one partner’s share into a new fund, or pay it out if they have reached retirement age. Some of the tax issues to consider are covered on the ATO website.iv

The tax-free and taxable components of the receiving partner’s super interest or super payout are calculated immediately before the super split and divided between the partners in the same proportions.

As with investment property, CGT exemptions may apply to the transfer of super assets due to a marriage breakdown. CGT roll-over relief is available for asset transfers between SMSFs and another complying fund.

Seek advice

If you do decide to split your super, the Family Court suggests both partners need independent legal advice. You may also need to have SMSF assets valued.

There’s a lot to consider when you are seeking a divorce so expert advice is crucial. The tax implications of property decisions can be wide-ranging and complex so call us to help work through your options.

https://www.abs.gov.au/AUSSTATS/abs@.nsf/Latestproducts/3310.0Main%20Features122016?opendocument&tabname=Summary&prodno=3310.0&issue=2016&num=&view=

ii https://www.ato.gov.au/General/Capital-gains-tax/Relationship-breakdown/

iii https://www.familycourt.gov.au/wps/wcm/connect/fcoaweb/family-law-matters/property-and-finance/superannuation/

iv https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-paying-tax/Super-and-relationship-breakdowns/?anchor=Membersofselfmanagedsuperfunds#Membersofselfmanagedsuperfunds