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In addition to the assets and liabilities of the relationship, financial and non-financial contributions, other considerations such as future needs, income earning capacity as well as maintenance concerns will be taken into account when determining a property settlement.
This article is designed to address the tax consequences of certain divorce related actions, such as spousal maintenance and property division. This area is very complex and nuanced, and while we will provide a broad framework for the tax implications related to divorce, should you need specific information or have questions about your situation, please consult your lawyer or a tax specialist. In fact, we advise that you consult a tax adviser even in straightforward cases, just so you will not experience any unexpected tax consequences.
Maintenance payments are exempt from the receiver’s income tax if the payments are made to a person who is or has been a spouse of the one paying maintenance, to or for the benefit of a child of the payer, or to or for the benefit of a child of the other party to the marriage. This exemption extends to maintenance received by a de facto spouse, as well. The general rule is that there is no tax assessed on maintenance received.
The exemption will only apply to payments attributable to the maintenance payer – and not in situations where the payer makes the payments to divest himself or herself of an income-producing asset, or to divert ordinary income that would otherwise be taxable. Essentially, the exemption will not apply if the payer is not acting improperly.
With regard to deductions, the maintenance payer may not deduct maintenance payments from his salary or wages; spousal maintenance may not be claimed as a tax deduction.
The tax that is sure to rear its head in the property division area is the capital gains tax. Capital gains taxes are triggered upon the happening of a capital gain event, which can be a gain or a loss of assets. There are more than 50 events enumerated in the Income Tax Assessment Act (ITAA), and they range from the disposal of a capital gains tax asset to the grant of an option or lease.
Certain assets and transactions are exempt from capital gains tax, including vehicles (that carry less than 1 tone and hold less than nine passengers), trading stock, and the disposal of a life insurance policy by the original beneficial owner of the policy. The right to payment from a superannuation fund or other approved deposit fund is also excluded from capital gains tax.
Capital gains and losses related to the dissolution of a marriage or de facto relationship are exempt from capital gains tax.
The law also provides for certain roll-over relief for transfers between spouses. For instance, if your former spouse transfers an asset with capital gains tax attributes, the roll-over relief allows you to take it as the transferor had it (with the same capital gains tax attributes). Additionally, if an asset was a personal use asset to the transferor, it will be considered a personal use asset to the transferee as well, and special rules apply to calculating capital gains for these assets.
There are specially carved out rules with regard to dwellings and capital gains taxes. Particularly if the main residence is used for business purposes as well – in this case a special exemption to capital gains tax will apply.
Superannuation, specifically the splitting of superannuation, carries it’s own tax implications. For instance, if one surrenders their rights to payment out of this type of fund, the capital gains tax provisions will not apply. Additionally, when dealing with splitting certain tax concessions like roll-over relief can apply. Moreover, certain public sector funds will even have untaxed elements or other schemes not subject to tax.
With the lengthy list of exemptions and complexity of capital gains tax law, sometimes it is necessary to make decisions as to how you and your spouse plan to treat certain capital gains tax assets. For instance, you will have to decide which dwelling will be considered the main residence, or you may chose to nominate multiple dwellings as the main residence. These choices you make will certainly have tax implications and thus should be decided prior to any transfer. Typically parties agree to these choices by signing a statement prior to transferring the property, but bear in mind that once a choice has been made, it is binding and cannot be changed or altered later.
Legal costs can also result in tax implications. They are considered in part of a capital gains calculation as incidental costs related to disposal or acquisition of a capital gains asset. These costs should be considered separately from the asset, and should be treated differently. Additionally, money spent on legal or tax advice might be deductible under the ITAA.
The court is given broad discretion with regard to property orders and has the power to alter property interests as it sees fit. However, the court is to consider the implications of capital gains taxes that will arise if a party is forced to dispose of property by order of the court.
Certain exemptions and concessions under capital gain tax law may be available if a property order causes a capital gains tax event to occur. For instance, an order requiring the transfer of property may trigger the marriage breakdown roll-over relief provisions.
As you can imagine the tax implications that can arise through divorce are boundless. The law is very complex; this article is merely intended to give you an idea of the implications and consequences so you may be prepared to address these issues with regard to your specific situation.
If an asset has been purchased post separation using assets of the marriage, then there is a strong basis for claiming that both parties have contributed to the asset.
However, in a situation where one spouse acquires property several years after separation from income generated post separation, then it would be difficult to substantiate a claim.
Where a business asset is sold after separation and the asset was built up during the course of the relationship then it can be possible to claim the proceeds as an asset of the relationship.
If a claim is brought to the Court for determination, it is important to remember that the Court looks at the financial position of the parties at the time of hearing. This can be several years after separation.
The Court will also consider other issues such as future needs, income earning capacity and maintenance concerns when determining a property settlement.
Property divisions are based on the contributions made by each party to the relationship.
In a short relationship, each party will tend to leave the relationship with what they brought to the relationship.
In a long relationship, the ongoing contributions made throughout the relationship are seen to decrease the significance any financial contributions made at the beginning of the relationship by an individual party. The continuing financial and non-financial contributions made by both parties to the relationship tend to erode the ability for any particular asset to continue being owned exclusively by one party or the other.
If your relationship led to you spending time out of the paid workforce and you were contributing to the relationship by caring for children or performing domestic tasks, then you have no need to feel disadvantaged. A property settlement takes into account both financial and non-financial contributions made by each party in the relationship.
The Family Law Act recognises that many relationships operate so that one party takes time out of the paid workforce in order to perform domestic tasks or care for children. These contributions are for the most part considered equal to the financial contributions.
Sometimes both parties continue in the paid workforce, but one party may perform the majority of the domestic tasks. This contribution will also be considered in property settlements.
If you cannot reach agreement with your former partner then an application for property settlement must be filed. There are ongoing opportunities to settle proceedings before a decision is made by the Court. Where a settlement is not reached then the Court will make a decision as to how the property of the couple should be divided after a hearing. If the property is complex then the Family Court will hear the matter.
Parties are often able to reach an agreement about a property settlement with the help of their lawyers. Where parties reach an agreement they can apply to the Court for Consent Orders which is a relatively simple and inexpensive process. When Consent Orders are made the parties gain the benefit of knowing their agreement is binding and enforceable.
Financial agreements can be classified into three categories:
1. Binding Financial Agreement (commonly referred to as a pre-nuptial agreement (entered into before or during the relationship) – s 90B,
2. Binding Financial Agreement during marriage – s 90C and
3. Binding Financial Agreement after divorce – s 90D.
If you have to an agreement without obtaining independent legal advice, remember that you should find out what your legal entitlements are before you sign anything.
Gaining knowledge on your legal entitlements will help you to make an informed decision before you enter into a binding agreement.
A qualified lawyer can draft the agreement for you. This will ensure that the agreement covers all legal issues, particular those you may not be aware of. A properly drafted agreement will help to ensure the agreement is binding.
Depending on the length of the relationship, how the parties have organised their finances and their circumstances, a property settlement can be quite simple or involve complex negotiations.
Both financial and non-financial contributions are taken into account when deciding a property settlement. It is important to understand that the Family Law Act takes into account various items and factors that you may not be aware of. These include compensation payments for personal injury, ill health or disability of each party, superannuation, future needs, the future earning capacity of each party, the health of any children and the financial resources of each party such as expected future inheritances.
It is important to find out what your legal entitlements are before you sign anything.
If you are negotiating an agreement yourself, gaining knowledge on your legal entitlements will help you to make an informed decision.
There are several options for resolving property or financial disputes.
If you and your partner can reach agreement on how your assets and liabilities should be shared you can choose to formalise this agreement. Either a binding financial agreement or consent orders can record the agreement.
Where you and your partner cannot reach agreement on how your assets and liabilities should be shared, an application can be made for the Court to hear your matter. This process is costly and time consuming.
We will always try to resolve your property/financial issues by way of agreement and we will only proceed to a Court hearing as a last option.
Mediation procedures are very effective in dispute resolution and are used to assist parties to reach financial settlements. Mediation is a in a dignified, timely and cost-effective process which can achieve a co-operative result for both parties.
No, you do not have to wait to be divorced.
You can apply for Orders concerning your property or children as soon as you separate.
But, when your divorce is granted, you will then have only 12 months to seek property settlement Orders. After this time you need to apply to the Court for special permission to issue proceedings.