Property Settlement Case
The client is contemplating a financial separation from their partner by transferring their joint tenancy of a property in New South Wales solely to themselves. This property has been the client's primary residence since its purchase in 2006 and has never been rented or used for business purposes. They are evaluating the tax implications of using either formal Consent Orders or a Binding Financial Agreement (BFA) versus an informal private agreement. A formal agreement would enforce the settlement through the Family Court but would trigger a Capital Gains Tax (CGT) rollover to the client. The client is also concerned about the potential tax debts of their partner and how the right of survivorship would function if the partner passes away before the title transfer is completed.
Questions about this case
These answers have been verified by a lawyer in the LEAP networkWhat are the tax implications for both myself and my partner if we opt for a formal Consent Order or Binding Financial Agreement compared to an informal private agreement?
Opting for a formal Consent Order or Binding Financial Agreement (BFA) can result in the rollover of your partner's Capital Gains Tax (CGT) liability to you. This means you will be responsible for the CGT when you eventually sell the property, which may increase your future tax burden. A formal agreement provides legal protection by being enforceable through the Family Court, giving clarity and finality to the settlement. In contrast, an informal private agreement may avoid the rollover of your partner's CGT liability but lacks enforceability, potentially exposing you to future challenges.
If my partner’s CGT liability is rolled over to me, how does this affect my future tax obligations when I eventually sell the property?
If your partner's Capital Gains Tax (CGT) liability is rolled over to you under a formal agreement, you will be accountable for the CGT on any capital gain from the entire period of ownership when you decide to sell the property. The taxable gain will be determined based on the difference between the property's original purchase price and the sale price. If you hold the property for more than 12 months, you may qualify for a 50% CGT discount.
In the event my partner passes away before the transfer of Title is complete, how would the right of survivorship affect the CGT liability and my ownership of the property?
The right of survivorship means that if your partner passes away before the Title transfer, the property would automatically transfer to you, circumventing the estate. In this case, any CGT liability associated with your partner would not be transferred to you, as the property would pass directly to you as the surviving joint tenant.
Can the ATO pursue me for my partner’s CGT liability if he and his estate are unable to pay the debt?
The ATO would not pursue you directly for your partner’s CGT liability if they cannot pay, as CGT obligations generally belong to the entity that made the capital gain. However, if under an informal agreement your partner remains liable but cannot pay, complications may arise during the property transfer.
What are the legal protections or consequences of choosing an informal private agreement over a formal court-approved settlement?
Choosing an informal private agreement carries certain risks. Unlike formal agreements, informal arrangements are not enforceable by the Family Court, leaving you vulnerable if your partner changes their mind. Informal agreements may also lack the comprehensive legal protections that formal agreements provide, which can lead to disputes and complications in the property transfer process.
What is the rate of CGT applied to a taxable gain of $1,050,000?
In Australia, the Capital Gains Tax (CGT) rate is not fixed and depends on your personal income tax rate. If you've held the property for over 12 months, a 50% CGT discount applies to the gain. The taxable amount is then added to your assessable income and taxed at your marginal tax rate.
