Who is Responsible for CGT upon Separation?

Who is Responsible for CGT upon Separation?

Now that you and your partner have decided to separate, what will happen to the property you jointly own? Who pays the capital gains tax (CGT) if one of you sells the property after your divorce? This may be a difficult question, but we will attempt to simplify it for you.

This article will explain everything you need to know about CGT, including what it is, how to qualify for it, and how it applies to your situation.

Key Ideas:

There is no transfer of capital gains tax between spouses due to the existence of a CGT rollover event.

You might buy something that requires you to pay a lot of capital gains tax when you sell it.

Your investment property will continue to be subject to capital gains tax after your divorce is finalised.

What Is CGT, and Why Is It Significant?

Let’s begin by defining what CGT is and why understanding it is essential. CGT, or Capital Gains Tax, is the tax imposed on the profit made from selling an asset for more than its original cost. It is a tax obligation.

When you sell an asset, you either realise a capital gain (gain on sale) or incur a capital loss (loss on sale). All capital gains are subject to taxation, so you will be required to pay taxes on the proceeds from the sale of your assets.

The amount of capital gains tax depends on a number of variables, including the length of time you’ve owned the asset, your marginal tax rate, and whether or not you’ve incurred capital losses.

Understanding CGT Rollover and Who Is Liable for CGT When Separating

Now that you are familiar with CGT, you may be wondering how it relates to divorce or separation.

When a marriage or common-law relationship ends, an asset may be eligible for a capital gains tax rollover if ownership of the asset changes hands from one spouse to the other.

The rollover of capital gains tax means that the person giving the asset to their former partner doesn’t count the capital gain (or loss) that they would have had otherwise or puts it off until a later date.

If, after your divorce, you are left with shares, an investment property, or a business that you intend to sell at a later date, you must consider the CGT implications and potential ATO debt.

When the recipient spouse disposes of the asset in the future, they will record the capital gain or loss.

Therefore, the capital gains tax is transferred to the recipient spouse.

Additionally, the recipient spouse receives the asset’s cost base.

The initial price paid for the asset and all other costs related to buying, keeping, and selling the asset are all part of the cost base.

The rollover generally applies when one spouse’s interest in a jointly owned asset is transferred to the other spouse, as well as when the transfer of ownership is the result of a court order, binding financial contract, or other formal agreement.

The parties are unable to choose whether the rollover applies to their circumstances. But if the transfer of their asset (or assets) meets the criteria for a rollover, the rollover is required.

During the relationship breakdown rollover, the tax implications of a change in ownership are deferred. This means that the spouse who receives the asset will not incur tax liability unless the asset is sold. The relationship breakdown rollover is only applicable if the divorce or separation is supported by a court order.

During a divorce or separation, the Family Court of Australia will consider numerous factors and employ a number of criteria to determine who will receive marital property. If you’re fighting for your right to get the property, you must also consider the responsibility of paying the CGT in the future.

Calculating the CGT for a Rollover Asset

If you receive an investment property as part of your marriage property settlement, you will be responsible for CGT when you sell the property in the future.

The base cost of the CGT asset will be the cost when the asset was originally purchased, not when the rollover event occurred.

It is important to note that the debt is not considered a real debt in the marriage property settlement unless the property is sold in the near future.

It’s also worth noting that the capital gains tax only applies to properties purchased after September 20, 1985. This means that if your spouse purchased the property before that date, you would not be subject to CGT in the future.

Get the Legal Help You Require

When separating, couples must consider numerous factors, including property division and CGT liability. The family residence is frequently the most important asset to consider.

Understanding a party’s intentions regarding their property will aid in making capital gains tax CGT decisions.

You can contact AIMS Australia, Tax accountants in Melbourne for any CGT-related queries, as they specialise in preparing  CGT tax returns, Investment property tax returns, Cryptocurrency tax returns, Business tax returns, Company tax returns, Partnership tax returns and expat tax returns. 


Hayder Shkara

Principal of Justice Family Lawyers and Director of Melbourne Family Lawyers, Hayder specialises in complex parenting and property family law matters. He is based in Sydney and holds a Bachelor of Law and Bachelor of Communications from UTS. 

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