Tax and Capital Gains Tax in Divorce and Property Settlements

Six Key Takeaways

• Tax does not disappear because of divorce. Family-law orders do not bind the Australian Taxation Office or any state revenue authority.
• Rollover defers; it does not erase. Subdivision 126-A may allow the transferor to disregard a gain — the transferee inherits the cost base and future exposure.
• Two assets with the same market value can have very different after-tax value. Cost-base history, depreciation, prior rollovers and main-residence use all matter.
• Concessions are technical. CGT rollover and state transfer-duty relief depend on the parties, the asset, the instrument and the actual transaction matching the legislation.
• Companies, trusts and SMSFs are not tax-free conduits. Division 7A, deemed dividends, resettlement, in-specie transfer rules and related-party limits all apply.
• Tax advice belongs at the start, not the end. Identify, model and document tax before agreeing values, retention, sale versus transfer or implementation steps.

The Central Idea

Three things are routinely confused. The first is the family-law allocation of assets and liabilities between former spouses under sections 79 or 90SM of the Family Law Act 1975 (Cth). The second is the tax characterisation of each transaction — CGT events, ordinary income, GST, duty, Division 7A, deemed dividends, depreciation balancing adjustments, trust distributions, superannuation consequences. The third is the actual implementation — who signs what, when, in what form, in what order, with what records handed across. Each is governed by different rules. A Consent Order can drive the first; it can support (but not guarantee) the second; and it cannot replace the third. When the three are aligned, qualifying concessions may be available. When they are not, tax can crystallise unexpectedly and concessions can be lost.

Tax Versus Family-Law Allocation

These are separate questions and must be kept separate:

Table of Contents

1. Tax must be considered before settlement is finalised
2. Existing tax debts versus future tax exposure
3. CGT rollover on marriage or relationship breakdown
4. Rollover defers rather than removes tax
5. Transfers under Consent Orders
6. Binding Financial Agreements
7. Informal agreements
8. The family home and main-residence exemption
9. Investment property
10. Transfer duty and stamp duty
11. Sale versus transfer
12. Tax liabilities in the family-law balance sheet
13. Evidence supporting a tax estimate
14. Shares and managed investments
15. Private companies
16. Division 7A
17. Trusts
18. Trust property versus personal property
19. Businesses
20. Partnerships and sole traders
21. Superannuation
22. SMSFs
23. Inheritances and deceased estates
24. Family loans and debt forgiveness
25. Legal fees
26. GST
27. Foreign assets and foreign tax
28. Cryptocurrency and digital assets
29. Capital losses
30. Record keeping after rollover
31. Drafting Consent Orders
32. Drafting BFAs
33. Indemnities and tax-risk allocation
34. Tax returns and amended assessments
35. Seeking specialist advice
36. Practical tax-review workflow
37. Worked hypothetical examples
38. Common mistakes
39. Urgent-advice triggers

1. Tax Must Be Considered Before Settlement Is Finalised

Tax must be identified, modelled and (where appropriate) quantified before parties agree on asset values, who retains each asset, sale versus transfer, cash equalisation payments, business restructuring, trust changes, company-share transfers, property refinance, superannuation splitting, payment of liabilities, indemnities and implementation deadlines.

Two assets with the same gross market value may have materially different after-tax values. A family home with an unbroken main-residence history sits on a very different tax footing from a long-held rental property with a low original cost base, decades of depreciation and a substantial unrealised gain. A parcel of pre-CGT shares in a family company is not the same asset, for tax purposes, as a parcel of recently-acquired listed shares. Cash held in a savings account is post-tax; a deferred consideration receivable from a sale is not. Headline values do not equal after-tax economic value.

2. Existing Tax Debts Versus Future Tax Exposure

Tax exposures must be classified. They include assessed tax debts; unpaid tax-return liabilities; tax instalments on the running balance account; existing capital gains already triggered (for example, by a recent disposal); tax triggered by an agreed sale; latent or embedded CGT on a held asset; contingent exposures depending on disputed facts; tax on transactions that may never occur; company or trust tax liabilities; personal tax liabilities; director-penalty exposures; penalties and general interest charge. Classification and probability matter; the family law treatment of each category is different.

Read this section together with our companion guide on Debts After Separation and Divorce, which addresses creditor analysis, joinder, indemnities and refinance.

3. CGT Rollover on Marriage or Relationship Breakdown

Subdivision 126-A of the Income Tax Assessment Act 1997 (Cth) provides marriage- and relationship-breakdown CGT rollover for certain transfers of CGT assets. In broad terms, where a CGT asset is transferred between qualifying spouses or former spouses (including parties to a qualifying de facto relationship) on relationship breakdown, by an instrument identified in the legislation — typically a court order, a binding financial agreement satisfying the relevant requirements, an arbitral award where applicable, or another specified instrument — the transferor may be required to disregard any capital gain or loss on the transfer. Where the conditions are satisfied, the rollover is generally mandatory rather than elective.

The technical language of the current Act, the categories of qualifying instrument and the parties covered must be verified against current legislation for every matter. The rollover is not engaged by separation alone, by an informal agreement or by a transfer that is not effected under one of the identified instruments. It does not extend to every CGT event affecting every asset. It is not a general “divorce exemption”.

4. Rollover Defers Rather Than Removes Tax

Where rollover applies, the transferor generally disregards the capital gain or loss on the transfer; the transferee inherits the transferor's cost base and other relevant cost-base attributes; and the transferee's acquisition history may incorporate the transferor's acquisition date for certain purposes. The future disposal of the asset by the transferee will then crystallise the gain or loss using the inherited attributes, taxed at the transferee's marginal rate in the relevant year.

The practical effect is that the future tax travels with the asset. A spouse who accepts a long-held investment property at gross equity value, without modelling the inherited cost base and depreciation history, may end up with materially less after-tax wealth than a spouse who takes liquid assets of the same gross value. Rollover should not be described as a permanent exemption — and a cash equalisation should consider latent tax where the evidence justifies it.

5. Transfers Under Consent Orders

Appropriately drafted and made Consent Orders in the Federal Circuit and Family Court of Australia may be a qualifying instrument capable of supporting CGT rollover and certain state transfer-duty concessions for qualifying transfers effected because of the relationship breakdown. Key considerations include the proper making and entry of the orders, the connection between the transfer and the relationship breakdown, and consistency between the order and the transaction actually implemented. Proposed orders are not the same thing as executed transfers, refinanced mortgages, completed share transfers or registered title changes.

Consent Orders cannot approve, warrant or guarantee any tax outcome. The Court determines property rights between the parties; the ATO and the state revenue office independently apply the tax and duty law to the transactions actually carried out.

6. Binding Financial Agreements

Binding Financial Agreements made under Part VIIIA (married parties) or Part VIIIAB (de facto parties) of the Family Law Act 1975 (Cth), if validly made and operative, may be the relevant instrument for some relationship-breakdown CGT and duty concessions. The technical requirements are exacting — proper formal execution, independent legal advice, disclosure, the connection with relationship breakdown, the nature of the agreed transfer, and consistency between the agreement and the transfer actually implemented all matter. Where an agreement is set aside, varied or implemented outside its operative terms, the concession may be lost.

See our dedicated guide on Binding Financial Agreements in Australia.

7. Informal Agreements

Transfers effected by verbal agreement, unsigned drafts, handshake settlements, informal company or trust adjustments and private settlements without tax advice carry real risk. The CGT rollover and state duty concessions depend on a specified instrument being in place at the relevant time, on the transfer being made because of the relationship breakdown, and on the transferor and transferee being persons recognised by the legislation. An informal transfer may not satisfy any of those conditions and may crystallise CGT and duty at full force.

8. The Family Home and Main-Residence Exemption

Subdivision 118-B of the Income Tax Assessment Act 1997 (Cth) sets out the main-residence exemption. Common complications in a family-law context include ownership and occupation history (the property may have been jointly owned for only part of the period); periods when the property was rented (which may engage the income-producing use rules); the absence rules under section 118-145 (the six-year rule and its conditions); multiple dwellings (a couple cannot generally have two main residences except for limited overlap periods); land size and use (greater than 2 hectares of adjacent land is generally not covered); partial business use; property acquired before the relationship; one spouse moving out; delayed sale post-separation; transfer to one spouse followed by a later sale; and deceased-estate or trust ownership complications.

The exemption is not automatic and not always full. Each matter requires a careful ownership and occupation timeline and consideration of any periods that may break or qualify the exemption. Where the home is to be retained by one spouse and sold later, the future tax position depends on what is done with the property between transfer and sale.

9. Investment Property

Investment property is the asset class on which mis-modelling is most expensive. Issues to be addressed include accrued capital gain since acquisition; the general 50% discount where applicable; depreciation deductions on plant and equipment and capital-works deductions under Division 43 and their effect on cost base; rental income and deductible debt; refinance; joint versus sole ownership and the consequences of a transfer; immediate versus future sale; record retention; and any interaction with the main-residence exemption (for example, where the property has previously been a main residence or has been used partly for income).

Gross market value does not show the asset's real economic value. Two investment properties of identical market value can carry very different latent tax burdens.

10. Transfer Duty and Stamp Duty

Transfer (or stamp) duty is imposed under state and territory law. Terminology, rates, instruments, relationship and property scope, and the form of any relationship-breakdown concession differ between jurisdictions. Some jurisdictions provide exemptions or concessions for qualifying transfers between spouses or former spouses where the transfer is effected by court order, BFA or other instrument identified in the legislation; others require specific application steps, statutory declarations or evidentiary material. Foreign purchaser surcharges, landholder duty and corporate reconstruction or restructure regimes can each apply to different transactions.

For Victorian duty, see our dedicated guide on Stamp Duty and Land Transfer Duty in Victoria. Victorian rules should not be assumed to apply uniformly across Australia.

11. Sale Versus Transfer

The choice between an external sale and an internal transfer is one of the most consequential settlement decisions. The two have different tax, duty and economic profiles:

12. Tax Liabilities in the Family-Law Balance Sheet

How a tax exposure is treated depends on its character:

The Court considers probability, timing, amount, evidence, who controls whether the tax event occurs, whether the settlement itself causes the liability and whether discounting, indemnity or reserve is more practical than full deduction. There is no rigid universal rule.

13. Evidence Supporting a Tax Estimate

Unsupported estimates may receive little weight. Evidence commonly required includes purchase contracts; settlement statements; improvement and capital-works invoices; depreciation schedules; tax returns and notices of assessment; cost-base records for shares and managed investments; valuations; company and trust accounts; shareholder and beneficiary loan records; accountant calculations of estimated CGT; proposed sale terms; foreign tax records; legal ownership history; prior rollover documents; and main-residence ownership and occupation history.

14. Shares and Managed Investments

A share portfolio is rarely homogeneous. Issues to be addressed include listed shares; employee shares and share-scheme interests (which have their own taxing-point rules); options; managed funds; ETFs; dividend reinvestment plans (each reinvestment is a separate acquisition parcel); separate acquisition parcels with different cost bases; capital losses; corporate actions such as demergers, capital reductions, buybacks and bonus issues; foreign investments; transfer versus sale; and brokerage and record retention. A portfolio may contain multiple cost bases and unrealised gains or losses; a single “total holding value” figure is inadequate for settlement modelling.

15. Private Companies

Private companies introduce a separate tax-paying taxpayer and an additional layer of decisions. A transfer of shares in the company is legally and tax-wise a different transaction from a transfer of the underlying assets. Common issues include share transfers; asset sales by the company; retained earnings; franking credits and the dividend-imputation system; dividends paid to extract cash; director and shareholder loan accounts; Division 7A; company tax liabilities; goodwill; depreciating assets; small-business CGT concessions where the eligibility tests are satisfied; share buybacks; liquidation; transfer of underlying assets to a shareholder; and extraction of cash for the settlement.

Small-business concessions should never be assumed. They require the maximum net asset value or small business entity test, the active asset test and other conditions to be satisfied at the relevant time and they interact with the rest of the settlement in technical ways.

16. Division 7A

Division 7A of the Income Tax Assessment Act 1936 (Cth) targets payments, loans and forgiveness of debts by private companies to shareholders and their associates. It is one of the most underestimated risks in family-law settlements involving private companies. Family-law transactions that can engage Division 7A include: extracting cash from a company by way of an unfranked distribution; loans from the company to a spouse not structured on complying terms; failure to make the minimum yearly repayment on an existing complying loan; forgiveness of a director or shareholder loan; the company paying personal expenses of a spouse; distributions through interposed entities; restructures that change the identity of the shareholder; and the transfer of company property without proper consideration.

The detailed compliance rules change over time and require specialist tax advice before any restructure. A family-law order or agreement that extinguishes a shareholder loan account without addressing Division 7A can produce a deemed dividend that no one expected.

17. Trusts

Trusts are not tax-free conduits. Issues that recur in family-law settlements include the type of trust (discretionary, fixed, unit, hybrid); capital gains made by the trust and streaming under the current trust-tax rules; trust distributions and unpaid present entitlements; beneficiary loan accounts; changes of trustee and changes of appointor; transfer of trust assets to a beneficiary; transfer of units in a unit trust; trust losses subject to the trust loss rules; corporate beneficiaries and the interaction with Division 7A; and the risk of trust resettlement on a change of beneficial interests or significant variation.

A change in effective control of a trust does not, by itself, transfer beneficial ownership; but associated transactions — transfers, variations, distributions, loans, repayments, forgiveness, restructures — can each crystallise tax, duty or Division 7A consequences. See our dedicated guide on Family Trusts in Divorce and Property Settlements.

18. Trust Property Versus Personal Property

Trust assets are not automatically personal assets of a beneficiary, even where a spouse is the controller. A spouse's interest or control may still be relevant to family-law analysis (as property, financial resource or otherwise), and the substantive position depends on the trust deed, the conduct of the trust and any related structures. The transfer of a spouse's office, units or shares is a different transaction from the transfer of trust assets themselves. Trustee duties and third-party rights must be respected; tax outcomes depend on the legal transaction actually implemented, not on a generalised description of what the parties wanted to achieve.

19. Businesses

Business-related settlements raise the most heterogeneous tax issues. Whether the parties sell the business, transfer the business, transfer shares, transfer partnership interests, divide business assets, retain the business with an offset, extract cash, repay related-party loans, or restructure before settlement, each path has its own tax footprint. Issues to address at high level include goodwill (often the largest asset and the largest CGT exposure); trading stock; depreciating assets and balancing adjustments; CGT assets generally; GST; employee entitlements; small-business CGT concessions where eligible; earn-outs and the look-through earn-out rules; and deferred consideration. See our guides on Keeping a Business After Separation, Business Interests in Divorce and Business Valuation in Australia.

20. Partnerships and Sole Traders

Partnership and sole-trader settlements require care because legal ownership and accounting presentation do not always coincide. Transfer of partnership interests, disposal of partnership assets, partnership tax accounts, partner loans, trading stock, goodwill, GST, business debt and sole-trader asset transfers each require separate analysis. Treating a partnership as a single homogeneous entity, or assuming that an accounting balance is the same as a legal entitlement, leads to mistakes.

21. Superannuation

Superannuation splitting is governed by Part VIIIB (married) and Part VIIIAB (de facto) of the Family Law Act 1975 (Cth). A payment split is not the same as an ordinary transfer or withdrawal. Preservation rules, tax components (taxable element, tax-free element), defined-benefit interests, pensions, transfer balance issues and SMSF compliance all interact. CGT relief for assets in a self-managed superannuation fund affected by a splitting order should not be assumed; it depends on current law and the specific transaction.

See our dedicated guide on Superannuation Splitting in Divorce.

22. SMSFs

Self-managed superannuation funds raise specific additional issues. In-specie transfers of fund assets, related-party acquisition rules, liquidity to fund a payment split, member balances, the fund's trust deed and rules, valuation, tax components, property held in the fund (often subject to a limited recourse borrowing arrangement), and compliance with splitting orders all require careful attention. An SMSF is not an ordinary family trust and fund assets are not the personal property of the members.

23. Inheritances and Deceased Estates

Where inherited property enters the property settlement, tax issues include the deceased's cost base history; the rules governing how an estate or beneficiary acquires CGT assets; the treatment of an asset later sold (with potential application of the main-residence exemption to the deceased's former home in defined circumstances); the involvement of any testamentary trust; the difference between an in-specie inherited asset and a cash legacy; estate administration timing; and foreign inherited assets. See our guides on Inheritance in Property Settlement and Testamentary Trusts.

24. Family Loans and Debt Forgiveness

Tax consequences may attach to private-company loans, trust loans, parental loans, forgiveness, release, assignment, repayment, deceased-estate forgiveness, Division 7A and the commercial debt forgiveness rules in Subdivision 245-A of the Income Tax Assessment Act 1997 (Cth). A “simple” agreement to write off a family or related-party loan can produce tax consequences that no one budgeted for. See our companion guides on Gifts and Loans from Parents and Debts After Separation and Divorce.

25. Legal Fees

Family-law legal fees relating to private property settlement and parenting matters are typically capital or private in character and not deductible against assessable income. Legal fees relating to income-producing assets or business matters may have a different character and should be analysed separately. GST treatment differs for businesses. Invoices and allocation should be retained. Definitive deductibility advice depends on the facts and on current ATO guidance.

26. GST

GST may be relevant to business asset sales, going-concern transactions, commercial property, partnership property, development property and certain enterprise assets. Most ordinary transfers of a private family home between former spouses are not analysed as taxable business supplies, but the facts matter — for example, where one party is a property developer or where the home has been used as part of an enterprise. GST registration, taxable-supply analysis, the going-concern concession and adjustment events must each be considered on commercial settlements.

27. Foreign Assets and Foreign Tax

Overseas property, foreign shares, foreign companies or trusts, exchange rates, foreign capital gains tax, withholding tax, double-tax agreements, Australian tax residency, foreign duty or transfer tax, document translation, foreign legal advice and timing differences all require attention. Foreign tax paid does not always produce a full Australian credit; double-tax agreements may allocate taxing rights but rarely eliminate them; and foreign duty regimes may apply to a transfer that attracts an Australian concession. Specialist Australian and foreign advice is usually required for any material overseas asset.

28. Cryptocurrency and Digital Assets

Disposals of cryptocurrency — sale, exchange between coins, use to acquire goods or services, and (subject to the facts) certain transfers between wallets — generally trigger CGT events. Cost-base records must include acquisition costs and dates for each parcel; staking and other rewards may have separate income or CGT implications; capital versus revenue characterisation matters; volatility complicates valuation; foreign exchanges add reporting and translation issues; and transfers between spouses under a qualifying instrument may, in principle, attract relationship-breakdown rollover. See our dedicated guide on Cryptocurrency in Divorce.

29. Capital Losses

Realised capital losses and unrealised capital losses behave differently. Capital losses generally remain with the taxpayer that incurred them and cannot simply be transferred to a former spouse. Company and trust losses are subject to their own continuity-of-ownership, same-business and family-trust election rules and may be reduced, lost or quarantined on changes of ownership or control. The economic value of any loss depends on the taxpayer's future circumstances and should not be recorded at a fixed dollar value without analysis.

30. Record Keeping After Rollover

A recipient of an asset under a marriage-breakdown rollover should receive (and retain) the original purchase contract; the original settlement statement; evidence of legal and capital improvement costs; depreciation and capital-works schedules; prior valuations; previous rollover documents; main-residence history; rental records; corporate-action records for shares; trust deeds and distribution minutes; foreign tax evidence; and any specialist accounting or valuation reports. Missing records can produce substantial future problems on the next disposal — the ATO is entitled to require evidence of the cost base claimed by the taxpayer.

31. Drafting Consent Orders

Tax-aware Consent Orders typically address: precise identification of each asset; the transfer mechanism (transfer, sale, in-specie distribution, assignment); refinance; timing and deadlines; the documents to be signed (transfer instruments, share transfer forms, assignments, fund-splitting documents); the intent to rely on rollover where appropriate; duty applications; record handover; indemnities; payment of assessed liabilities; tax reserves to be held against contingent assessments; a fallback sale where refinance fails; accountant involvement; and implementation costs. Formulaic tax declarations that do not match the transaction should be avoided — they can create inconsistency with what actually happens.

32. Drafting BFAs

Tax-aware BFA drafting includes: complete disclosure; tax schedules listing assets and their relevant tax attributes; asset history and acquisition records; agreed valuation assumptions; implementation provisions (transfers, refinance, restructure steps); warranties; indemnities; record delivery; treatment of later assessments and reviews; failed-rollover fallback; and amendment or review mechanisms where appropriate. Indemnities allocate risk between the parties but do not bind revenue authorities.

33. Indemnities and Tax-Risk Allocation

A tax indemnity is a personal promise by one party to reimburse the other for a defined tax liability. It can address control of objections, access to records, cooperation, notice of assessment, payment deadlines, security and limits. The indemnity is only as useful as its drafting, its enforceability and the payer's capacity to meet it; insolvency, disappearance or simple unwillingness can convert what looked like a complete allocation of risk into a substantial uncovered liability. Indemnities are not a substitute for tax advice, sound modelling and structure choice.

34. Tax Returns and Amended Assessments

Settlement documents should address unresolved tax matters: outstanding returns; estimated or default assessments; expected amended assessments; objections in progress; ATO audits; company or trust returns yet to be lodged; and possible penalties and interest. Allocation of responsibility, cooperation, access to records and funding of professional fees for unresolved matters should be specified rather than left to inference.

35. Seeking Specialist Advice

Tax-aware family-law settlements often require coordinated input from the family lawyer; a commercial lawyer; the accountant or tax adviser; a valuer; a conveyancer; a financial adviser (within the scope of applicable regulation); a foreign lawyer where overseas assets are involved; and a superannuation specialist where relevant. Parke Lawyers provides legal advice; we do not provide regulated financial-product advice.

36. Practical Tax-Review Workflow

1. Identify each proposed sale, transfer, distribution or restructure.
2. Confirm legal ownership of every asset.
3. Identify the acquisition date and cost-base records for each asset.
4. Determine whether tax has already crystallised on any transaction.
5. Assess rollover or exemption eligibility for each proposed transfer.
6. Estimate tax where the disposal is sufficiently likely.
7. Identify state duty, GST and transaction costs.
8. Distinguish personal, company, trust and SMSF liabilities.
9. Compare sale and transfer alternatives, including staged options.
10. Obtain specialist calculations where the amounts are material.
11. Draft orders or agreements to match the intended transactions.
12. Retain all records for the recipient's future disposal.
13. Implement within any time limits specified by the orders or by revenue legislation.
14. Confirm lodgments and revenue-authority requirements after implementation.

37. Worked Hypothetical Examples

Each example below is fictional and illustrative only. None reflects a Parke Lawyers client. They are written to show the analytical structure, not to predict any outcome.

Example 1 — Family home under Consent Orders. A and B own their long-held home jointly. Consent Orders provide that B transfers their interest to A. The transfer may attract marriage-breakdown CGT rollover under Subdivision 126-A; if the home has been the parties' main residence throughout, the future tax position on sale by A depends on what use A makes of the property afterwards. State transfer-duty relief may apply on appropriate application. Cost-base records and ownership history should be transferred with the property.

Example 2 — Investment property transferred with latent CGT. Y receives an investment property under Consent Orders. CGT rollover is available; Y inherits X's cost base, acquisition date and depreciation history. When Y sells in five years at a market gain, the entire historical gain (and adjusted cost base after capital-works deductions) crystallises in Y's tax return. A cash equalisation recognised the latent tax at a discounted figure to reflect timing and uncertainty.

Example 3 — Immediate external sale of an investment property. Parties decide the investment property is to be sold to an external purchaser as part of the settlement. The disposal triggers CGT in the ordinary way; the gain is split between the legal owners according to their ownership interests at the time of disposal. Sale proceeds fund the agreed distribution and any modelled tax.

Example 4 — BFA requiring a share transfer. A BFA provides for the transfer of listed shares from C to D. Validity and operation of the BFA are essential preconditions to rollover. If the BFA is later set aside under section 90K or section 90UM, the basis on which the transfer was made may be undermined and tax consequences should be reconsidered.

Example 5 — Transfer of shares in a private company. E and F hold all the shares in a private company. F transfers shares to E. Rollover is potentially available for a transfer of CGT assets between qualifying former spouses on the satisfaction of the statutory conditions; but franking credits, director loan balances, retained earnings and the implications for any later dividends or extractions must each be modelled.

Example 6 — Company transferring an asset rather than shares. Instead of a share transfer, the company transfers a piece of real property to a spouse. The transfer is by the company — a separate taxpayer — and the rollover available between spouses may not apply to a transfer by a company. CGT, GST, duty and Division 7A all need to be analysed before the transaction is executed.

Example 7 — Family trust owning the business premises. The discretionary trust controlled by G holds the premises from which the family business operates. Transferring the premises out of the trust to a spouse personally is a transfer by the trustee — and engages CGT, duty, possible Division 7A consequences (through any interposed corporate beneficiary) and possible resettlement risk if associated steps materially vary the trust.

Example 8 — Division 7A loan account. H has a substantial loan account with the family company. The parties propose to forgive the loan as part of settlement. Without proper Division 7A treatment, the forgiveness can trigger a deemed dividend equal to the forgiven amount, with consequent tax to H. The path is redesigned — taking franked dividends, repayment from settlement proceeds, or a different allocation of assets — after modelling.

Example 9 — SMSF holding real property. The parties' SMSF holds an investment property and a limited recourse borrowing arrangement. A splitting order is contemplated. The fund's liquidity, the availability of any CGT relief in the fund, the related-party acquisition rules and the impact on the borrowing arrangement are modelled with a specialist super adviser before any commitment.

Example 10 — Inherited shares with incomplete cost-base records. One spouse holds shares inherited many years ago. Cost-base records depend on the deceased's acquisition history and the rules that applied at the time of death. The records are incomplete; reasonable estimates and reconstruction are required, with documentation retained for the recipient's future return.

Example 11 — Overseas investment property. An apartment held overseas in one spouse's name has increased substantially in value. Australian CGT applies on a future disposal subject to the relevant double-tax agreement and the inherited cost base on any relationship-breakdown transfer; foreign capital gains tax, foreign duty on the transfer and foreign legal requirements are addressed with local advice.

Example 12 — Cryptocurrency transferred between spouses. The parties hold cryptocurrency across several exchanges and wallets. They propose to transfer a portion to one spouse. The CGT position on transfer, the records available, the cost-base parcels and the practical mechanism (movement between addresses, exchange transfer, off-exchange transfer) are all considered before execution.

Example 13 — Tax reserve held from sale proceeds. The home is sold on settlement. The parties agree that a portion of the proceeds will be held in trust pending confirmation of any tax liability arising on the disposal, with a defined release mechanism. The arrangement reflects uncertainty about partial main-residence entitlement after a period of rental use.

Example 14 — Future tax discounted because sale is not imminent. An investment property is to be retained by one spouse for the foreseeable future. The Court accepts a discounted figure for latent CGT rather than full deduction, weighing probability, timing and the recipient's control over the disposal decision.

Example 15 — Failed refinance causing a fallback sale. Orders provide for the retaining spouse to refinance by a specified date and a fallback sale if refinance fails. Refinance is not approved; the property is sold; CGT and duty consequences are assessed on the actual transaction (sale to a third party), not on the transfer that was originally contemplated.

Example 16 — Rollover unavailable because implementation does not match the instrument. The Order identifies a transfer from one spouse to the other of certain shares; in implementation, the company redeems the shares instead. The redemption is a different transaction with different tax consequences and the rollover that was assumed when negotiating the settlement is not available.

38. Common Mistakes

• Treating headline market value as after-tax value.
• Assuming every transfer under a property settlement is tax-free.
• Describing CGT rollover as permanent CGT removal.
• Assuming every Consent Order or BFA qualifies for rollover.
• Assuming state transfer-duty relief is uniform across Australia.
• Deducting future CGT at its full nominal amount in every case.
• Assuming the family home is always fully CGT-exempt.
• Confusing a transfer of shares with a transfer of company assets.
• Forgetting that a Consent Order does not bind the ATO or a state revenue office.
• Forgetting that an indemnity does not release the indemnified party from the revenue authority.
• Forgiving a Division 7A loan without modelling the deemed-dividend consequences.
• Treating an SMSF as an ordinary family trust.
• Ignoring depreciation history when transferring an investment property.
• Failing to hand over cost-base records to the transferee.
• Implementing transactions that do not match the operative instrument.
• Deferring tax advice until after documents have been signed.

39. Urgent-Advice Triggers

• Proposed sale of a substantial asset on or about settlement.
• Transfer of investment property, shares or business interests under contemplation.
• Family company involved on either side of the settlement.
• Family trust assets to be transferred or restructured.
• Shareholder or beneficiary loan accounts in the structure.
• SMSF holding real property or affected by a splitting order.
• Cryptocurrency holdings of any material value.
• Overseas asset of any material value.
• Recent or pending ATO audit, objection or amended assessment.
• Outstanding tax returns or estimated assessments.
• Refinance deadline approaching with no executed plan.
• Settlement contemplated outside Consent Orders or a BFA.

Calls to Action

Tax in a property settlement is an area where the cost of doing it poorly is felt for years. Parke Lawyers combines family-law, commercial, property, tax and litigation experience to advise on the structure, modelling, drafting and implementation of tax-aware property settlements. For service-level help see Family Law, Commercial & Business Law and Property & Conveyancing. Reviewed by Jim Parke, Lawyer & Chartered Accountant.

Frequently Asked Questions