Tax and CGT Implications of a Marriage Breakdown

Tax and CGT Implications of a Marriage Breakdown: A Case Study

Marriage breakdowns often raise difficult emotional and financial questions. Among them, the taxation and capital gains tax (CGT) consequences of dividing assets can be both complex and critical to understand. Below is an analysis based on the case of Mr. and Mrs. Smith, who separated after nearly 20 years of marriage, and the implications arising from the division of their property, trust assets, company interests, and superannuation.

1. Real Properties and CGT Rollover Relief

The Smiths’ properties were proposed to be split as follows:

• House M (main residence): to the wife.

• House G (investment property): to the husband.

Key Issues

• Normally, transferring ownership of a property triggers a CGT event.

• However, Subdivision 126-A ITAA 1997 provides a marriage breakdown rollover, which defers CGT where assets are transferred under a court order, binding financial agreement, or similar instrument.

• If the rollover applies, the transferring spouse disregards any capital gain or loss, and the recipient inherits the original cost base of the property.

2. Family Trust Assets

The family trust held:

• A business

• A commercial property

• House B (to be transferred to the wife)

CGT & Duty

• Rollover relief may also apply to assets transferred from a trust to a spouse/former spouse (s 126-15 ITAA 1997), provided conditions are met.

• If the rollover applies, CGT is disregarded at the time of transfer. The wife inherits the cost base.

• Stamp duty exemptions can apply under family law agreements, but this is ultimately a legal issue requiring legal advice.

3. Companies

The couple also held shares and directorships in various private companies.

• Resigning as a director has no CGT impact.

• Disposing of shares may trigger CGT Event A1, unless the shares are transferred to the former spouse under the marriage breakdown rollover.

4. Self-Managed Superannuation Fund (SMSF)

The Smiths maintained a joint SMSF owning property subject to a loan. They intend to remain as co-members.

Analysis

• There is no legislative barrier preventing ex-spouses from remaining in the same SMSF.

• No tax arises unless assets are sold.

• Lenders may review the loan if fund membership changes. In this case, both members remain, but it is prudent to confirm with the lender.

Three further questions to consider:

1. How does the main residence exemption interact with periods of joint ownership and post-separation rollover transfers?

2. What asset protection strategies should be considered when significant business and property assets are retained in trusts post-divorce?

3. How might future Division 7A loan arrangements or related-party dealings in the companies be affected by the changed family structure.