Tax on family law settlements

When parties divide their assets in a family law property settlement, tax issues are often ignored, although they can make a huge difference to how much of the shared assets a party ends up keeping.

We recently acted for a wife who separated from her husband after many years of marriage. The husband had worked out a “fair” division of property, which mainly consisted of home units, listed shares and cash. Under the proposal, the wife received most of the shares, and he received most of the other assets.

 

When assets such as shares are sold, they are generally subject to capital gains tax (“CGT”). However, a transfer under the Family Law Act does not incur CGT. So, there was no CGT to be paid on the transfer of the shares into the wife’s name.

 

However, when she would eventually sell the shares, she would have to pay CGT, based on the increase in price between the date they were originally purchased, and her sale price. Many of the shares had been purchased years ago, at prices far below their present values. On the other hand, the real estate, which the husband was to receive, had not increased in value nearly as much. Also, the cash which the husband was to take is not subject to CGT.

 

In effect, the husband’s proposal was for the wife to receive far less effective value than she thought. This led to a substantial negotiation to achieve a fair settlement.

For more information, please contact Family Law specialists Fiona Hoad  or Layla Doumit.

 

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