When it comes to dividing assets in family law matters, the sale of commercial property can have significant tax implications that can significantly impact the final financial outcome for all parties involved.
Whether it's a divorce, separation, or a dispute over jointly held assets, the tax implications of selling commercial property must be fully understood to ensure a fair and equitable division. These tax considerations can affect not just the settlement amounts, but also the actual proceeds received after sale, potentially reducing what either party walks away with.
Capital Gain Tax
One of the most significant taxes to keep in mind is Capital Gains Tax (CGT). Essentially, CGT is the tax levied on the profit made between the original purchase price and the sale price of the commercial property. In family law settlements, CGT may apply if the property is sold as part of the asset division process. While the transaction may appear to be merely a transfer between parties, any sale at market value can trigger CGT—unless specific exemptions or concessions apply.
CGT Exemptions & Concessions
Some relief may be available in the form of Small Business CGT Concessions, provided the commercial property was actively used in a small business. These include:
- Retirement Exemption: This may allow individuals aged 55 or over to disregard some or all of the capital gain when selling a business asset.
- 15-Year Exemption: If the asset has been held for at least 15 years and the owner is retiring, the entire gain may be tax-free.
- Rollover Relief: Allows for deferral of CGT if sale proceeds are reinvested in another qualifying business asset.
These concessions can make a big difference, but only apply if the commercial property is actively used in a small business and meets eligibility conditions.
That said, not all commercial property sales are so straightforward. In a typical family law case, CGT will apply to the sale of the property based on the difference between what you paid for it and what you sell it for. So, if the property has gone up in value, you could face a hefty tax bill unless you can take advantage of any available exemptions.
Goods and Services Tax
Goods and Services Tax (GST) may also apply to the sale of commercial property, depending on how the property is sold. If the property is sold as a going concern—essentially, as part of an ongoing business operation—it might qualify for a GST exemption, provided both buyer and seller are registered for GST and meet other criteria.
However, suppose the property is sold without meeting these conditions, such as simply as a standalone real estate asset. In that case, GST is likely to apply, adding 10% to the sale price and reducing the overall return to the seller.
Debts and Mortgages – Impact on Settlement
Commercial properties are often encumbered by loans or mortgages—the presence of this debt must be considered when determining how sale proceeds will be divided. In family law contexts, typically, the proceeds of a sale are first used to clear any outstanding debts, and only the remaining funds are split between the parties according to the family law agreement. It’s important for valuers and legal professionals to be clear about the net value of the property after liabilities.
Ownership Structures
In many cases, the commercial property might not be owned by the individual parties directly, but by a family trust or company. The sale can bring about even more tax complexity if that's the case. For example:
- Family Trusts: Selling property held in a family trust can trigger CGT at the trust level, with capital gains then distributed to beneficiaries, who could face personal tax obligations.
- Companies: Where a company owns the property, selling it may lead to corporate taxes, and then any dividends distributed to shareholders from the sale could attract further tax
The structure of ownership must be carefully assessed when determining the most tax-effective way to handle the sale in a family law context.
Strategic Advice is Key
Navigating all the tax implications of selling commercial property in a family law matter requires a good understanding of both family law and tax law. Working with tax advisers, accountants, family lawyers, and property valuers can help ensure:
- The true value of the asset is understood.
- Tax implications are factored into settlement negotiations.
- Opportunities for concessions or exemptions are maximised.
- Parties avoid unexpected tax bills that reduce the final division.
While it might seem like a lot to manage, proper planning, accurate valuations and expert advice can help minimise the impact of taxes and ensure that the division of assets is as fair as possible for both parties.