Tax Implications on the relationship broken down

Nowadays, more and more people prefer to stay in a defacto relationship with their partners instead of getting married. As a result, starting from 2009, parties with eligible defacto relationship which has broken down are allowed to apply to the Family Court or the Federal Circuit Court to have financial matters determined in the same way as married couples. It is the best if you and your party have drafted a before relationship agreement so that when your relationship break down, what you need to do is just simply follow what is on the agreement. However, most of the people don’t really have this kind of agreement. If this is the case, then the following issues might be things that you need to consider when your relationship break down.

Capital Gain Tax – Transfer of Martial Assets

As a general rule, CGT applies to all changes of ownership of assets on or after 20 September 1985. Common CGT assets include properties, motor vehicles, interest and shares in companies and trust. However, if you transfer an asset to your spouse as a result of the breakdown of your marriage or relationship,  then there is an automatic rollover in certain cases. As a result, the capital gain or loss arise from the transfer is disregarded. In addition, the transferee spouse will make the capital gain or loss when they subsequently dispose the asset.

it is noted that, as per Ellison v Sandini Pty Ltd (2018), the CGT rollover relief is only applicable when the transfer occurred from a spouse or entity to another spouse. It is not available when the transfer is from a spouse or entity to another entity.

Division 7A

It is not uncommon that people transfer part of the assets from their company to their former spouse. The issue related here is whether the transfer of assets from the company is to a shareholder or an associate of the shareholder.

If the transfer of assets is directly to a shareholder with prices outlined by law, then it will be considered as ordinary dividend under Section 44.

However, if the transfer of assets is to an associate, then it will be considered as deemed dividend under Division 7A 109C. The only exception is when the asset is transferred to an associate as a result of the Family Court order, which in this case it will falls into Division 7A 109J.

Property or financial resources

During the settlement period, the Family Court can only deal with the property that exists at the time of hearing. In order words, the court does not have the power to order a settlement of a future income that does not yet belong to one of the parties, although a financial resource may influence the Courts decision on how to distribute the marital assets. Examples of financial resource can include (but not limited to) pension entitlements, long service leave entitlement if in the form of cash, an interest in a deceased estate, tax losses and family discretionary trusts.

A financial resource must be disclosed by the parties to a property settlement and a failure to disclose the resource might result in penalties.

Superannuation

In the past, super was considered as asset that is untouchable to the court. But since 2001, we can spread super as a martial asset according to the percentage of interest or a base amount. if you have both defined superannuation and SMSF, then both the balance of the account and the control of the funds will affect the spread.

Besides, very often that the SMSF will not have sufficient amount to pay off the non-member spouse immediately and will therefore involve a sale of asset.  If this is the case, you need to make sure the calculation of base amount has included CGT and sale cost.

Another issue that should not be overlook is the structure of the SMSF. If you are under an individual trustee SMSF structure and both you and your former spouse are the trustee, then you need to make sure when one leave, another person is add as an individual trustee.

Child Support

If you have a child / children with your former spouse and they are under 18, then the amount of child support is thing that you may need to consider as well. Usually the amount of child support is based on a formula. There are grounds that the calculation of the formula could be change, basically centre around the fact that the formula does not fairly reflect what should happen. For example, whether the child is educated in the way that is agreed by parents (if the child used to go to private school, then the amount of child support should be enough to continuous the same circumstance), whether there is any financial resource that is not capture by formula and whether the child have any current health issue.

If there is any unexpected issues happened after the certain rate or amount is agreed, the person with the kid is responsible for the payment. As a result, more and more people prefer to do a binding child support agreement that captures all of these other things. One of the most transparent and easiest way to manage this issue is to a create a joint account that both people put money into.

Last but not least, you should also pay attention to the length of time required for the whole process. Due to different reasons, such as court schedule, time to gather all information and tactics used by lawyers, the whole process could take 3-5 years and cost much more than you expect. Therefore, it is always good to seek advices and communicate with other party first to see if a satisfy solution or agreement could be reached.

Reference:

https://www.ato.gov.au/Forms/Guide-to-capital-gains-tax-2019/?page=81

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

https://www.ato.gov.au/Business/Private-company-benefits—Division-7A-dividends/In-detail/Division-7A—Marriage-or-relationship-breakdown/

https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Super-and-relationship-breakdowns/

https://www.ato.gov.au/General/Dispute-or-object-to-an-ATO-decision/In-detail/Information-for-your-objection/Capital-gains/Marriage-or-relationship-breakdown/

Disclaimer

This content is intended for general information in summary form on tax and legal matters at the time of first publication and is not intended to provide, and should not be relied upon in place of appropriate professional advice.  Please consult your tax, legal and accounting advisors before acting or relying on any content provided.