When a relationship breaks down there is often a need to transfer assets between the spouses in order to finalise a property settlement.

The property settlement may be pursuant to Court orders or a binding financial agreement between the parties.

Any property settlement needs to be carefully structured to ensure the tax implications of any asset transfers have been appropriately considered.

The most common tax relief that is relied upon in these circumstances is Subdivision 126-A of the Tax Act 1997, which provides a CGT roll-over where a CGT event is triggered as a result of a marriage or relationship breakdown.

The roll-over in Subdivision 126-A applies automatically when the relevant requirements are satisfied and does not require any election or choice by the parties to apply it.

The roll-over is available in relation to:

• the disposal of assets – where the disposal triggers CGT event A1 or B1; and
• the creation of new assets – pursuant to CGT event D1, D2, D3 or F1.

The basic conditions are set out in sections 126-5 and 126-15 Tax Act 1997.  Those conditions are:

• a CGT event happens between an individual and their spouse (under section 126-5) or a company or trustee and an individual (under 126-15);
• the CGT event arises because of one of a number of family law agreements, including:
  • a Court order under the Family Law Act 1975 (Cth) (Family Law Act);
  • a maintenance agreement under the Family Law Act;
  • a financial agreement under the Family Law Act; or
  • certain other awards or agreements under the Family Law Act;
  • the relevant CGT event is CGT event A1, B1, D1, D2, D3 or F1;

The roll-over clearly applies where the transferor and transferee are both individuals, being one individual and their former spouse.

Similarly, roll-over is available in relation to the transfer of assets from an entity (such as a trust or company) controlled by one individual, to that individual’s spouse in their personal capacity.

There are numerous situations however where the parties would prefer to avoid having the assets transferred into their personal names and would prefer the asset to be held by a related entity, such as a discretionary trust.

For instance:

• if the transferee is on the top marginal tax rate, they would usually prefer to have any investment assets held in a trust environment, where they may have the ability to split income with other family members on lower tax brackets;
• where the transferee is involved in a high-risk occupation or business endeavour, receiving an asset in their personal name may give rise to asset protection concerns; and
• similarly, where the transferee is concerned about a potential challenge against their estate in the future, they may prefer to have the asset owned in a protected environment which is not part of their estate.

Unfortunately, the generally accepted position is that the roll-over in Subdivision 126-A is only available in relation to the transfer of assets to an individual spouse and not to an entity (such as a trust or company) that they control.

For further information, please contact Patrick Ellwood on 0400 503 111 or patrick@cloverlaw.com.au.

• clover law
• matrimonial breakdown
• Tax Law
• Tax relief requirements