The scheme for Capital Gains Tax (CGT) is derived from Part 3-1 of the Income Tax Assessment (1997 Act). In conjunction with the Income Tax Assessment (1936 Act), these two pieces of legislation are the national basis upon which all income tax matters are dealt with. Despite repeated calls for reform, Australia’s tax system remains complicated. The Tax Institute asserts that this difficulty is a direct consequence of multiple laws, and the overly complex layout of the rules.
CGT is a tax on the profit realised on the sale of non-inventory assets such as stocks, bonds, real estate, and property. A capital gain occurs when the capital proceeds of the disposal of an asset is greater than the asset’s reduced cost base. A taxpayer must record this on their assessable income for that financial year, which may be subject to CGT. Exceptions to the imposition of CGT are categorised as follows:
- The main residence exemption
Subdivision 118-B of the 1997 Act indicates that a taxpayer’s main residence is exempt from CGT. A taxpayer can effectively ignore a capital gain/loss made from a CGT event which happens to their main dwelling. Notably, this exemption may not apply if the asset was a main residence during only part of the taxpayer’s ownership period, or if it was used for the purpose of producing assessable income. An example of an asset which is not exempt from CGT is an investment property.
- Roll-over relief
Per section 126-5 of the 1997 Act, whenever the disposal of an asset occurs due to an order made under the Family Law Act 1975, Binding Financial Agreement or certain other written agreement, CGT may automatically ‘roll-over’, whereby the CGT history and cost base of the transferor are passed to the transferee. Notably, the acquisition of an asset prior to the introduction of CGT (19 September 1985) will mean that the transferee is regarded as having acquired the asset pre-CGT.
CGT and Family Law
Within the family law context, issues concerning CGT may arise in circumstances involving property settlements. In the adjustment of property between parties, a CGT event may arise from the sale, transfer, or disposal of an asset. Issues may arise when separating couples nominate different dwellings as their main residence. The transfer of property to another spouse may only partially apply if the transferor has nominated a different main residence prior to the disposal taking place. By extension, the party acquiring the property (the transferee) may acquire the transferor’s liability for CGT. Consequently, any future disposal of the asset will leave the transferee with an unexpected tax debt, payable at the time of final disposal.
Presently, when calculating the value of assets for property settlement, the court may consider CGT implications of any asset disposals which have occurred. These considerations fall under s79 and s90SM of the Family Law Act 1975, regarding the alteration of proprietary interests between parties.
The case of Rosati v Rosati is a leading precedent regarding CGT in the family law context. In this case, the husband was operating a real estate agency, and asserted that he was suffering mental health issues. He wished to sell his business and find alternative employment. The trial judge held that the health problem did not necessitate that course of action occurring. The Full Court of the Family Court affirmed the decision and applied the following four principles:
- The incidence of CGT should be taken into account in valuing a particular asset varies according to the circumstances of the case including the method of valuation applied to the particular asset; the likelihood or otherwise of that asset being realised in the foreseeable future; and the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to that asset.
- If the Court orders the sale of an asset, or is satisfied that a sale of it is inevitable, or would probably occur in the near future, or if the asset is one which was acquired solely as an investment and with a view to its ultimate sale for profit, then, generally, allowance should be made for any CGT payable upon such a sale in determining the value of that asset for the purpose of the proceedings
- If none of the circumstances referred to in (2) applies to a particular asset, but the Court is satisfied that there is a significant risk that the asset will have to be sold in the short to mid-term, then the Court, whilst not making allowance for the CGT payable on such a sale in determining the value of the asset, may take that risk into account as a relevant s
- There may be special circumstances in a particular case which, despite the absence of any certainty or even likelihood of a sale of an asset in the foreseeable future, make it appropriate to take the incidence of capital gains tax into account in valuing that asset. In such a case, it may be appropriate to take the capital gains tax into account at its full rate, or at some discounted rate, having regard to the degree of risk of a sale occurring and/or the length of time which is likely to elapse before that occurs
The 2021 case of Taffner v Taffner considered the treatment of CGT liability incurred upon the sale of property. The husband claimed that the primary judge failed to consider the CGT burden of retaining his property, which therefore altered the overall distribution of assets between parties which was intended by the primary judge. Consequently, the excess burden contributed to the husband failing to refinance his mortgage on the property, and the property was subsequently sold. The husband’s appeal allowed for a re-exercise of discretion by the Court to consider the CGT liabilities.