Going through a family law separation can be both difficult and emotionally draining. The last thing on your mind would be the tax implications that arise from a separation and this is why it is so important before finalising any financial arrangements that you seek proper legal advice.
The tax implications of a separation and division of assets from a relationship is extremely complex and the advice for it needs to be tailored and specific to your circumstances.
The Family Law Team at Rockwell Bates are highly experienced in not only managing family law property and parenting matters but are also skilled in advising and assisting clients in preparing tax effective BFAs and Consent Orders.
There are various tax implications that need to be considered in family law agreements impacting on the following:
- Maintenance payments
- Property division, settlements and Court orders
- Shares and investments
- Business interests – where the parties operate their own business
- Tax debts
Generally maintenance payments are exempt from income tax if the payments are made to a person for the benefit of a child. The person making the maintenance payments also cannot claim the payments as a tax deduction on their annual tax return.
Capital gains tax (CGT) is the main issue that appears when property divisions and Court orders as well as interests in shares and investments are involved. Various concessions, exemptions and roll-over reliefs may apply to the transfer of the type assets as part of a separation. The binding financial agreement (BFA) or consent orders made by the Court, from a separation needs to be reviewed to ensure that there are no surprises or unexpected tax implications from the division of assets between the parties as part of the separation process.
An additional issue that can appear as a result of property divisions are state taxes such as land tax and duties. Again, there are various concessions and exemption that may apply but the BFA or consent orders needs to be reviewed to ensure that the appropriate or proper exemptions apply and that parties avoid any taxes which they should be exempt from if the documents are correctly worded
Dividing Joint Business Interests
Business interests need to be carefully considered. The transfer of business interests may trigger a CGT liability for the transferring party. Where there are complex structures involved (the use of companies or trusts) a detailed review needs to be undertaken before interests are transferred between the parties, even before being put down in writing as part of the BFA or consent orders.
As surprising as it sounds, tax debts can be shifted between the parties as part of a property settlement. This is a significant risk whereby the wealthier party could be forced to pay the tax debts of their former partner as part of a property settlement, even if these debts relate only to their former partner. Other financial liabilities may also be transferred in a similar manner as well.
Superannuation will be a big one as for many Australians, superannuation will be one of their largest assets. Superannuation can be and usually is divided like any other asset as part of a separation. This area is complex as it depends on whether the superannuation is part of an APRA (Australian Prudential Regulation Authority) regulated fund or is in a SMSF (Self-Managed Superannuation Fund). Detailed advice again needs to be considered when looking at dividing superannuation between the parties as in some circumstances superannuation will need to be valued.
Generally, the tax consequences from splitting super on relationship breakdown could include:
- A super lump sum payment and pension paid to the member spouse and non-member spouse being taxed separately.
- Super lump sum components being calculated for member spouse and non-member spouse entitlements individually.
- Amounts being included in your total super balance, which may affect your ability to contribute to super.
The tax implications due to separation are numerous and often complex and really need to be reviewed, by experts, prior to finalising any family law settlements.