How does divorce affect taxes?
Separation can lead to some unplanned and significant tax consequences. Irrespective of your financial situation it is important that potential tax implications are considered to ensure the split of assets and liabilities is consistent with the split you have agreed.
Separating couples can broadly be categorised into 2 groups:
- Typical financial structures (most of us)
- More complex financial structures
Typical financial structures usually involve the couples themselves and no other trusts, partnerships or companies. These couples typically have:
- A house with a mortgage, or are renting;
- Superannuation, either one or both;
- Cars, either owned or with loans;
- Household items;
- Credit card debt and/or personal loans.
Capital gains tax divorce
For these separating couples the tax consequences are generally relatively simple. For example, if one party remains in the house and buys the other out of the house, there will be capital gains tax rollover relief (no capital gains tax to pay) for the transfer of the leaving party’s share of the property, and there will also be no stamp duty on transfer.
If superannuation is to be transferred between the parties, there are no tax consequences of this action.
If a car is to be transferred from one party to another as a result of separation, this transfer is exempt from stamp duty.
Household and personal items can be transferred from one party to another, without the fear of any unintended tax consequences.
Other divorce tax deductions
So for most of us, the tax implications of separation are fairly minimal. To obtain these roll over concessions though, your financial settlement must be documented in consent orders, which are lodged and accepted by the Family Court. Despite the appearance of things being fairly straight forward for separating couples with typical financial structures, it is important that you continue to consider the tax consequences of every main decision you make after separation. For example, if the separating couple owned their family home jointly, and one party moved out and bought another property to live in, the party who relocates can only have one property as their principal place of residence (“PPR”) for capital gains tax purposes. If the relocating party chooses their new residence as their PPR then capital gains tax may be payable on their share of the original family home from which they relocated.
Separating couples who have more complex financial arrangements tend to be involved in one or more partnerships, companies and trusts (including family trusts). If you are in this situation, it is critical that you obtain advice from a properly qualified tax accountant to ensure you are fully aware of the potential tax implications of any asset split you are considering. Such advice will enable you to make informed choices, and ensure that costs that will result from your proposed asset split (tax, stamp duty and professional) have been factored into the net value of the assets of the relationship.
Tax exemptions during divorce
There are many exemptions from capital gains tax and stamp duty when it comes to separation, however, there are many scenarios where these exemptions do not apply. It is important to identify and quantify the tax liabilities and consider alternative options. If tax liabilities will arise they can be taken into account when the assets and liabilities are split. To do this you need to know who will incur the liability and how much it will be.
Where companies and trusts exist, it is common for one party to remain with the structure and the other party to depart. It is quite usual for the departing party to insist on an indemnity from all future liabilities as part of the settlement arrangement. This way, the departing party can have comfort that they will not be responsible for any future liabilities that are incurred or arise, after they depart the structure.
Sometimes people obtain assets as part of a financial settlement that are owned by another entity, for example a car owned by a related company. It is important to obtain proper advice to determine the tax implications of such a transfer.
At Divide, no matter how simple or complex your family financial structure is, we can assist you to consider the tax implications for your separation to ensure the assets and liabilities you are splitting are accurate.