Separation anxiety: CGT mistakes to avoid on assets when couples split up

“When a couple separates, it is very easy to look at the balance sheet and assume assets with the same market value are effectively interchangeable,” Tiyce said.

“Financially that is not always the case. A $1 million investment property and $1 million in cash may look equivalent on paper but the property may carry a significant unrealised capital gain and future tax liability.”

As such, couples with investment properties, shares, business interests, and other capital assets need to understand not just what those assets are worth today, but what liabilities they risk taking on by retaining them, Tiyce said.

“It is important to understand that a relationship breakdown does not necessarily mean CGT is immediately payable when assets are transferred between former spouses,” he said.

“In qualifying circumstances, rollover provisions can defer the CGT consequences, however, the underlying tax exposure would remain.”

“The tax position can effectively follow the asset, meaning someone who retains an investment property, shares or a business interest may also be taking on the future CGT exposure associated with that asset.”

He recommended that couples identify these issues well in advance and, where appropriate, consider them alongside advice from an accountant or tax adviser instead of treating them as an “afterthought” once a settlement has already been negotiated.

The first tranche of Labor’s CGT and negative gearing reforms were the subject of controversy due to the widow tax that applies under the reforms, as reported by The Australian.

However, last week, Treasurer Jim Chalmers agreed to expedite legislation to address the widow tax to secure passage of the NDIS reforms.

The bill to remove the widows and spouses tax would provide protection for individuals whose assets have grandfathered access to negative gearing or the 50 per cent CGT (CGT) discount under the provisions in the first tranche of CGT legislation, but would otherwise lose that grandfathering if the asset changed hands from multiple ownership to single ownership through divorce proceedings, relationship breakdown, or the death of a joint owner.

In a press conference last week, Chalmers addressed media reports that Opposition Leader Angus Taylor had pressured Labor into passing legislation to remove the widows tax in exchange for supporting Labor’s NDIS changes.

Chalmers said Labor previously made it clear that it would be addressing some of the issues raised with CGT and negative gearing reforms. Labor released draft legislation to rectify some of these issues earlier this month, with consultation closed on 21 August.

Think about the tax implications

Tiyce also made a critical distinction between an immediate tax liability and a future tax liability, explaining that in qualifying relationship breakdown circumstances, CGT can typically be deferred when assets are transferred between spouses, “but the tax position does not simply disappear”.

He said the recipient may inherit the asset’s existing cost base, and as such, the future capital gain remains relevant when assessing the real financial value of that asset. Tiyce cautioned separating couples against making decisions based purely on the headline value of their assets or the prospect of an upcoming tax change.

“Understanding the potential after-tax position first puts both parties in a much stronger position to make informed decisions about timing, asset division and their long-term financial position,” he said.

Role of accountants

Accountants and tax advisers, Tiyce said, said can help separating couples understand the after-tax value of different settlement options.

“If one party keeps an investment property, while the other receives different assets, for example, it is important to consider the potential tax implications rather than simply their current values. That can give couples and their legal advisers a much clearer picture of what each person is actually walking away with, and whether an apparently equal division of assets is likely to produce an equal financial outcome in the longer term.”