Family law, investment properties and CGT: remembering CGT

If you own an investment property and it is intended that the property will be sold either to give effect to family law property settlement orders, or it was acquired solely as an investment with a view to its ultimate sale for profit, then, generally, allowance should be made for any capital gains tax payable when dividing property under a property settlement.  A failure to have proper family law and tax advice in relation to the capital gains tax consequence can prove to be a costly error when dividing property.

In Taffner & Taffner [2021] FamCAFC 68, the Full Court was asked to consider whether the trial judge had erred by failing to consider capital gains tax liabilities, where one property (K Street property) had been sold and where another property had the possibility of being sold (H Street property), as follows:

1. At Trial, the issue of capital gains tax was not referred to in submissions, despite it being agreed that the sale of the K Street property and the H Street property would incur such a liability. The decision as appealed.
2. The Full Court noted that the primary judge was therefore placed in a difficult position and had to do the best he could with almost no assistance in terms of evidence.
3. The husband asserted that the order for retention of the H Street property by him, cast the burden of capital gains tax of that property solely on him, with the effect that the actual division of property was 65.87% to the wife, rather than the 60.63% that had been assessed by the primary judge at Trial. Accordingly, the focus of the appeal became where the burden of the capital gains tax on the H Street property ought to have fallen.
4. It was common ground between the parties at Trial, that the K Street property and the H Street property were investment properties and that their sale would trigger a capital gains tax
5. The precise calculation of the capital gains tax payable by the husband should have been the subject of expert evidence, properly given. On Appeal, the husband sought to adduce further evidence that:
   1. He was unable to refinance the mortgage;
   2. The H Street property was sold in January 2021 for the sum of $1,655,000.00, with settlement of the sale occurring in February 2021; and
   3. The best estimate of the capital gains tax payable (as deposed by the husband’s accountant) was the sum of $139,476.00.
6. The Full Court found that the potential capital gains tax liabilities that would arise on the sale of the K Street property and the H Street property needed to be considered. Since the parties had not provided any proper evidence of the likely capital gains tax payable, that consideration could not be achieved.  The capital gains tax could not be taken into account on any list of assets and liabilities, and hence, in determining the share of the net property each party should receive. However, several formulaic orders existed which would ensure that the payment of such a liability would not disturb the ratio of the division that was arrived at by the primary judge.
7. The Full Court also found that an order that could have been made to the effect that in the event that the H Street property was sold, say within two years of the orders, the wife was to pay to the husband 39.37% of the capital gains tax incurred in the sale. Such an order would have had the effect of preserving the division of property which the Trial Judge had found to be ‘just and equitable’. It would have also been appropriate to make a similar order in relation to the K Street property, but with the husband to pay to the wife 60.63% of the capital gains tax incurred.

Conclusion

It is sometimes difficult for capital gains tax to be estimated with precision during the course of the year.  Taffner highlights an ability to work around this by framing orders that provide for the payment of capital gains tax in proportions that are consistent with how it is intended property be adjusted overall and the agreed or determined outcome.  This is consistent with how other debts are dealt with under a set of family law property settlement orders.

Family & Relationship Law advice

If you have queries about the treatment of tax considerations in your family law property settlement, please contact our Family & Relationship Law team for a 30 minute no cost consultation to provide you with tailored advice in relation to you and your individual circumstances.  Our lawyers continue to work remotely and are available for telephone and Skype/ Zoom appointments.  Our Family & Relationship Law team is here to help you navigate difficult issues during these difficult and unprecedented times.