Where there is a breakdown in a personal relationship, and the ownership of an asset changes, there is a CGT relief measure that applies.
Q. I am in the process of a divorce settlement. Together with my former spouse we own two investment houses and a business. We have decided to split 50-50, with her taking the investment houses and I keep the business, which she has not being involved in. She is taking the CGT into account for the houses and I’m not sure of the legalities of the CGT for the business and rental houses. All were purchased after 1993.
A. It’s interesting when you do a search on capital gains tax and divorce there is very little listed as being produced by the ATO. One of the few things that the ATO does offer is a list of assets that are CGT exempt. These include:
- an asset acquired before September 20, 1985
- cars, motorcycles and similar vehicles
- compensation received for personal injury
- disposing of a main residence
- a collectable – for example antiques or jewellery costing $500 or less
- a personal use asset acquired for $10,000 or less – for example, items such as boats, furniture, electrical goods and household items used or kept mainly for personal use or enjoyment. Land and buildings are not personal use assets
- disposing of an asset to which the small business 15-year exemption applies
- the exchange of shares and units owned in a company or trust that is taken over, if certain conditions are met, and
- shares in a company or interests in a trust where there has been a demerger and certain conditions have been met.
Although not strictly an exemption, there is capital gains tax relief that applies where the ownership of an asset changes as a result of divorce. The relief is in fact not optional and must be applied where a legally binding agreement has been entered into. This could be an agreement imposed by the family court or one mutually agreed between the parties to the divorce.
Under the rollover relief that must be applied in the case of a divorce agreement there are no capital gains tax implications for the person disposing of an asset. The person who receives the asset as a result of the divorce agreement takes over all of the CGT history related to the asset.
In relation to the divorce settlement with your wife this will mean the rental properties being transferred to her will be regarded as being purchased by her when you purchased them as a couple. There is no capital gains implication for you but she will pay CGT when she sells them if the net sale proceeds exceed the cost paid by you as a couple.
With regard to the business that you will be retaining, there is no capital gain payable by your wife. When the business is sold you may be able to take advantage of the various small business capital gains tax concessions. These include the 15 year asset exemption, the 50 per cent active asset exemption, and the retirement exemption. To be eligible for these concessions you must either have a turnover of less than $2 million or meet the other criteria.
(Source: CGT is as certain as death and taxes, Max Newnham, 28/3/11, SMH Money)
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