Untangling Love and Taxes: key insights on property settlements during separation

Going through a relationship separation is a highly stressful and emotionally charged life experience. An experience that, unfortunately, thousands of individuals encounter each year.

During the chaos of dividing assets, including any property or businesses you acquired during the relationship, one key factor that can often be forgotten is the potential impact of tax implications arising from the settlement or disposal of property assets.

When disposing of property to determine the value of an asset pool, the impact of capital gains tax (CGT) is often overlooked, mainly if the property has been used for investment purposes. CGT is a tax levied on the profit from selling an investment property. The capital gain is calculated as the difference between the purchase price and the sale price, and as this tax can significantly affect the final settlement amount, it is crucial to understand its implications fully.

In Australia's dynamic property market, characterised by a persistent housing shortage and rising rents, it is common for a property's use to shift from owner-occupier to investment or vice versa during the ownership period. These changes in property use can complicate the calculation of CGT.

A property initially purchased as a primary residence but later rented out will have different tax considerations compared to a property consistently held as an investment. Understanding these nuances is essential to avoid unexpected tax liabilities.

To mitigate potential taxable liabilities from selling or disposing of an investment-grade asset in a family law situation, obtaining a professional property valuation at the time of the use transfer is advisable. Alternatively, a retrospective valuation can be used.

These valuations provide an accurate assessment of the property's value at crucial points in its history, ensuring that the capital gain is calculated correctly and fairly. This step is vital to managing the financial aspects of a separation, helping to ensure that both parties are treated equitably.

Taxation issues also arise with stamp duty when an asset is transferred from joint to single ownership in a non-arms-length transaction. This situation typically occurs when one party buys out the other without publicly listing the property for sale.

In such cases, the relevant statutory authority mandates that stamp duty is paid based on the market value of the property portion being transferred. This requirement can surprise many, adding an additional layer of complexity and potential financial burden during an already challenging time.

Unlike other taxes, stamp duty is calculated on the property's market value rather than the sale price. Even if the property is sold at a lower price between the parties, the tax liability remains based on its assessed market value. This can lead to substantial costs that must be factored into the separation agreement.

To minimise these costs, parties sometimes rely on market appraisals or verbal advice to determine what they believe to be an appropriate transfer figure. However, this approach can be fraught with risk. Market appraisals are often less precise than professional valuations and can result in disputes or unexpected liabilities. Verbal advice, while convenient, lacks the formal documentation needed to satisfy statutory authorities, potentially leading to further complications.

It is crucial to obtain professional valuation advice. Registered and certified property valuers provide a comprehensive and accurate assessment of the property's current market value, ensuring the correct stamp duty amount is paid. This ensures compliance with legal requirements and protects the acquiring party from facing an inaccurate taxable liability. Accurate valuations help to streamline the transfer process, reduce disputes, and provide a clear basis for financial settlements, contributing to a smoother resolution of property division in a family law context.

By proactively understanding and addressing these taxation issues, separating parties can avoid unexpected financial burdens and ensure a fairer, more equitable division of assets.

Patrick Monaghan
State Director - Regional Operations Victoria
— Gippsland Property Valuers
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