Many divorcing couples are unaware of the significant tax implications around divorce particularly about tax obligations arising after the transfer of real property from one party to another.

When going through a divorce you must be not only getting the best property settlement lawyers but also sound financial and tax advice.

You can also ask your accountant to talk to your family lawyers while preparing your court pstaaperwork.

One of the biggest questions about the tax implications around divorce is whether a family law property settlement (of any size) will result in negative tax consequences.

The answer lies in how a property settlement or transfer affects a person's capital gains (or losses) over time. This article discusses the main tax implications around divorce which divorcing couples need to be aware of.

Types of Taxes Included in a Divorce Settlement

The most significant tax implications surrounding divorce arise from the flow-on effects of Capital Gains Tax or CGT. Other relevant tax areas include stamp duty, "deemed dividends," superannuation, and even your legal costs.

Child support payments are not counted as taxable income, nor can you claim your child support payments made as an income tax deduction. Child support payments may, however, affect Family Tax Benefits (from the ATO) received by the person receiving child support.

Family Tax Benefits (FTB) are a two-part payment delivered to eligible families in Australia to help with the cost of raising children.

Family Tax Benefits have two elements:

  • Part A – is a payment made for each child determined by the family's financial circumstances.
  • Part B is an additional payment given to help families who need extra financial support.

If a parent's child support payments increase or decrease then this will affect the amount of Family Tax Benefits the government will give them.

Spousal maintenance (or alimony) is also not included in taxable income or permitted to be claimed as a tax deduction by the person paying it.

Capital Gains Taxes

Capital gains taxes will be triggered by the occurrence of a capital gain event – which can be either a gain or a loss. The Income Tax Assessment Act 1936 (ITAA) identifies 50 potential events that can raise tax implications around divorce and family law property settlements.

There are ways to avoid paying capital gains tax on divorce settlements.

Stamp Duty

During a family law property settlement, stamp duty is not payable on the transfer of real property from one spouse to another – as long as the transfer is shown to be under a court order or Financial Agreement (defined in the Family Law Act 1975).

Deemed Dividends

The Income Tax Assessment Act (ITAA) will consider that a person has been "deemed" to have received a taxable dividend during the following events:

  • transfer of an asset
  • transfer of cash
  • debt forgiveness (from a private company)

In this way, the person who receives the financial benefit is the person who is expected to be taxed at the full marginal tax rate.

For example, if your former spouse owns a company and pays you as part of an existing contract, the Australian Taxation Office (under the ITAA) will deem the amount you receive as a dividend, which will be added to your existing taxable income. This will make you liable to pay more income tax. Similarly, company trusts when split during divorce can have similar dividend consequences.

Divorcing couples dealing with multiple company assets need skilled accountants to guide them through the correct procedures to keep their taxation burden as low as is legally possible.

Goods and Services Tax (GST)

Goods and services tax (GST) is one of the easiest tax implications around divorce. The laws are simple. The person receiving the house or car won't be required to pay GST on the transfer in a family law property settlement.

Real estate and property transfers (family home, cars and furniture) made as part of family law property settlements will generally not attract GST because they are considered private assets and not "enterprise assets". Enterprise assets must be registered for GST, private assets are exempt from this requirement.

However, if a divorcing couple's company is formally disposing of assets from one party to another, that company will have to pay GST on the transfer, particularly if the company is claiming the item (such as a house, shares, or car) as a credit or an enterprise asset.

There could also be some instances where company-held investment properties could be considered enterprise assets. Your accountant and your legal team should be able to guide you in these instances.

Legal Costs

Your legal costs are included in capital gains calculations as incidental costs incurred when transferring a capital gains asset (house, car, etc – as part of your divorce settlement). Legal costs will be treated differently from your other assets though. They will likely be deductible under the Income Tax Assessment Act – and you should be asking both your accountant and lawyer about this while drafting your court paperwork.

Is A Lump Sum Divorce Settlement Taxable In Australia?

A lump sum divorce settlement is generally not subject to taxation. This exemption includes transfers of property between spouses as part of the settlement.

The Australian Taxation Office (ATO) treats these transfers as a form of property settlement rather than a taxable gain or income. This approach is designed to simplify the financial aspects of divorce, allowing both parties to move forward without the added concern of immediate tax implications on their settlement.

However, it's important to note that while the initial transfer may not be taxable, any future income generated from the assets received or capital gains upon their eventual sale could be subject to tax.

As such, individuals going through a divorce are advised to seek professional financial and tax advice to understand the long-term implications of their settlement fully.

Importance of Accurate Recordkeeping Subjected for Tax

The next area that divorcing couples need to pay close attention to – is accurate recordkeeping. This applies particularly for other tax implications around divorce – issues arising around stamp duty, income tax consequences "deemed dividends", GST and even your legal costs.

Divorcing couples should be keeping accurate records around the ownership of their key assets – including all the relevant costs of acquiring, holding and selling property. You should have copies of items such as:

  • the contract of purchase or sale of land and real property (including motor vehicles)
  • stamp duty paid on initial purchases
  • cost of major renovations.

You should be holding these records for between five to seven years – and you can ask your accountant and family law specialist on the best ways to safely store this information.

Understanding Your Tax Obligations

The tax implications around divorce and asset division are extremely complex and nuanced and it's important to consult with both your accountant as well as your family law specialist while you are working towards the splitting of your marital assets. Even in quite straightforward cases, clients can experience unexpected tax consequences if they are not careful.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.