Treatment of Capital Gains Tax in Family Law Property Settlements.
There can by many circumstances in which capital gains tax is considered or may be likely or may require contemplation when as part of a property settlement an investment asset is included in the asset pool to be distributed between the parties.
Capital gains tax is not automatically included in a determination of the property distribution and there are factors which will influence a Court in determining whether a capital gains tax liability is appropriate to be included in a determination for property settlement.
Firstly the High Court case of Standford –v- Standford (2012 HCA 52) (Standford) held in making a determination of property interests the Court must be satisfied that it is just and equitable to make an order (pursuant to Section 79(2) of the Family Law Act 1974). Just and equitable has been described as being “a qualitative description of a conclusion reached after examination of a range of potentially competing considerations. It does not admit of exhaustive definition, it is not possible to chart it metes and bounds” (extract from Standford ).
Accordingly reference to the fundamental propositions enunciated by the High Court in Standford must be considered as to whether it is just and equitable to incorporate Capital Gains Tax (CGT) or not incorporate CGT in a property division.
These are firstly to identify ordinary common law and equitable principles having regard to the existing legal and equitable interests of the parties in the property.
Secondly whether it is just and equitable to make an order is not to be answered by assuming that the parties’ rights to all interests in marital property are or should be different from those that then exist.
Thirdly whether it is just and equitable does not turn on the assumption that one or other of the parties to the marriage has the right to any interest according to a consideration of the matters contained within the Family Law Act but rather it should have reference to the matters contained in Sections 79(4) and incorporating consideration of Section 79(2) of the Family Law Act.
Accordingly if the capital gains tax liability is simply a speculative figure where there is no real likelihood of the liability crystallizing then it cannot be just and equitable to make the order as to make an order including capital gains tax would be to create a party’s right to an interest in matrimonial property or a liability which is different from the interest that exists at the time of the consideration of the party’s entitlement.
The Full Court in the matter of Rosati –v- Rosati (198 FAMCA 266) (Rosati) enunciated four principles as to how the Court was to deal with issues relating to capital gains tax. These principles are as follows:
1. Each matter should be considered having regard to the circumstances of the case including the method of valuation applied to the asset, the likelihood or otherwise of the asset being realized in the foreseeable future, the circumstances of the acquisition of the asset and the evidence of the parties as to their intentions relating to the asset;
2. If a Court orders the sale of an asset or the Court is satisfied the sale of the asset is inevitable or would occur in the future or if the asset was acquired solely as an investment with a view to its ultimate sale for profit then an allowance should be made for capital gains tax payable;
3. If the Court is satisfied that there is a significant risk that the asset will be sold in the short to midterm then whilst an allowance may not be made for capital gains tax the Court may take the risk into account as a relevant Section 75(2) factor with the weight to be attributed to the factor varying according to the degree of risk in the period within which the sale might occur;
4. Special circumstances may exist which may make it appropriate to take the instances of capital gains tax into account in valuing the asset whether at its full rate or a discounted rate having regard to the risk of a sale occurring, length of time which has elapsed before that sale occurred and the circumstances of the matter.
These principals have been relied upon post Standford in Mahoub & Mahoub (2013 FAMCA 848).
Accordingly the facts that would be likely to lead to capital gains tax being included would include;
1. That the asset sale is referred to in the Application/Response of a party to be sold;
2. That the asset was purchased and is intended to be sold by one or both of the parties as part of a course of conduct or business that is engaged in by the parties;
3. That a contract exists in respect of the sale of the asset wherein the sale price is identified and a liability amount determined;
4. Depending upon the circumstances of each matter and subject to those circumstances being consistent with the principles in Rosati namely that a sale is imminent or likely, the value is determined with accuracy or alternatively the level of capital gains tax can be estimated to a finite degree.
We note that the circumstances in which capital gains tax is unlikely to be included would be as follows:
1. The liability relates to an asset that which has been held for a period of time and the proceeds from the sale of the asset are not needed by either party. Therefore there is a very low likelihood of the asset being sold and the remaining assets are sufficient to accommodate any adjustment in the relevant party’s favour;
2. The assets in question have only recently being purchased and have no likelihood of being sold in the near future but could be considered to be sold in the future should it be desired but are not necessary to be sold;
3. That the assts are intended as a superannuation or a long term investment where the capital gains tax is not capable of being determined with any accuracy.
We then note that there are circumstances when a particular asset may fall in between the two distinct categories and where they may require sale at some point in the future although the timing of that sale and the likely price in respect of the sale or amount of capital gains tax could not be accurately determined. In those circumstances a reasonable argument could be submitted on the basis that whilst the exact amount of capital gains tax could be calculated having regard to current values having regard to the unlikely sale of the asset or uncertainty as to the sale of the asset that consideration should be given to a degree or percentage of the likely capital gains tax liability having regard to the factors contained within Section 75(2) of the Family Law Act 1975.
Of course detailed early advice is essential to ensure you have the correct evidence available to the Court and structure in place to give you the best possible chance of either preventing the inclusion of a capital gains tax liability or alternatively incorporating a capital gains tax liability in a property pool.
Joseph O’Hare of our office can assist in providing that advice on 3266 8999.
Please note: This Article and all Articles on this Website are designed to provide a brief and simple overview and are not and are not intended to be legal advice. The information contained herein should not be relied upon in any Context or Proceedings without legal advice.