Divorce and separation are difficult life events, bringing not just emotional stress but also financial complications. One of the key issues that arise during a relationship breakdown is how assets are divided between the partners. Among these assets, those that have appreciated in value, like real estate, shares, or investments, may be subject to Capital Gains Tax (CGT) when they are sold or transferred.

However, in Australia, the law provides some relief through what is known as a relationship breakdown rollover. This means that, under certain conditions, you can transfer assets between separating spouses without triggering an immediate CGT liability. This article explains how the CGT rollover works, when it applies, and how it interacts with other aspects of divorce, like superannuation and family businesses.

What is Capital Gains Tax (CGT)?

CGT is a tax on the profit you make when you sell or transfer an asset, such as property or shares, for more than what you paid for it. The gain is considered part of your taxable income and is taxed at your marginal tax rate. For many people, the largest assets subject to CGT are their home (if it’s not exempt), investment properties, or shares.

What is a Relationship Breakdown Rollover?

A relationship breakdown rollover is a special provision in Australian tax law that allows the transfer of assets between spouses during a divorce or separation without immediately paying CGT. Instead, the tax is deferred until the person who receives the asset sells it in the future.

This rollover is meant to ease the financial burden during a relationship breakdown, as paying a large tax bill right away could add to the stress and financial strain of divorce.

When Does the Relationship Breakdown Rollover Apply?

The CGT rollover applies in specific situations:

1. Court Orders and Formal Agreements: The rollover can be applied if the transfer of assets occurs due to a court order, an agreement made under the Family Law Act, or a binding financial agreement (BFA).
2. Eligible Assets: The rollover can only be applied to certain types of assets, like real estate, shares, or units in a managed fund. It generally doesn’t apply to assets that are not subject to CGT, such as your primary residence (if exempt) or depreciating assets like cars.
3. Spouse Transfers: The transfer must occur between spouses or former spouses as a result of a relationship breakdown. This includes de facto couples as well.
4. Asset Held at the Time of Relationship Breakdown: The asset must have been held by one of the spouses at the time of the relationship breakdown for the rollover to be applicable.

If all these conditions are met, the asset can be transferred without triggering CGT. Instead, the spouse who receives the asset takes on the original cost base of the asset, and the CGT is deferred until they sell it.

How Does CGT Rollover Work with Superannuation?

Superannuation is treated differently in divorce, but it’s also a significant financial asset. When superannuation interests are split between spouses as part of a property settlement, the transaction is usually exempt from CGT under Australian law.

For example, if one spouse’s superannuation fund owns an investment property, transferring a portion of that property to the other spouse’s super fund as part of a divorce settlement won’t trigger CGT. The superannuation splitting process requires a court order or a superannuation agreement.

It’s important to note that superannuation cannot be paid out directly unless the receiving spouse is eligible to access their super (for instance, they’ve reached the retirement age). Instead, the amount is rolled over into the receiving spouse’s super fund, and no immediate CGT is triggered.

Managing Family Businesses During a Divorce

Divorce can complicate the management of a family business, especially when both spouses have ownership interests. The relationship breakdown rollover can apply here as well, allowing one spouse to transfer their shares or interest in the business to the other without an immediate CGT bill. On the other hand, payments made by a corporation as settlements may be classified as taxable dividends and could be taxed at the applicable marginal tax rate of the spouse receiving them. It’s crucial to get proper advice to ensure the business continues to run smoothly and that the tax implications are fully understood.

When managing a family business during a divorce, it’s also important to think about the long-term health of the business. Beyond the tax issues, keeping the business operations stable is vital, especially if one or both spouses rely on the business for their income.

Planning Ahead: Protecting Both Parties from Financial Stress

One way to minimize the financial stress of divorce is through careful planning. Couples should consider how assets, including superannuation and business interests, are owned and managed during the marriage. Even before a relationship breaks down, strategies like income splitting or topping up the lower-earning spouse’s super can help balance the financial benefits and tax burdens.

For instance, if one partner earns significantly less, increasing their super contributions can be tax-efficient because super contributions are taxed at a lower rate. Additionally, balancing the income flow between spouses can reduce the overall tax burden on the household.

In the event of a divorce, having a well-planned tax and financial strategy can make the division of assets more straightforward and less contentious.

Conclusion

Divorce and relationship breakdowns bring many challenges, but understanding the tax implications, especially related to CGT, can help ease the financial burden. The relationship breakdown rollover offers a valuable tool for deferring CGT when transferring assets between spouses. However, it’s essential to seek professional advice to navigate the complexities of tax law, superannuation, and business management during such a difficult time.

By planning ahead and staying informed about your financial situation, you can better protect yourself and your assets during a divorce.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Angela Abejo @ Pitt Martin Tax