Articles

19th Sep, 2007

CGT and Binding Financial Agreements
by Alexis Vaughan

The recent passing of the Tax Laws Amendment (2006 Measures No. 4) Bill 2006 in December 2006 has had a great effect upon the way in which matrimonial property disputes are resolved.

Under the Family Law Act 1975 (“the Act”), partners who separate have long been able to formalise their agreements regarding property by obtaining Consent Orders pursuant to s 79 of the Act. This method has the feature of deferring liability for Capital Gains Tax (CGT) until there is a subsequent disposal of the property.

December 2000 saw an alternative way for couples to formalise the affairs relating to their property in the form of Binding Financial Agreements pursuant to s 90 of the Act. Until now, couples who chose this avenue did not enjoy the same CGT roll over benefit as under s 79.

The amendments to the Income Tax Assessment Act 1997 mean that the CGT deferred liability now applies to both property settlements made via Consent Orders and Financial Agreements.

However, it is important to note that the amendments also contain a possible negative consequence in the circumstance of a marriage breakdown. The amendments alter the rules relating to the CGT main residence exception. If the parties choose to separate before one passes the interest in the property to the other (which is usually the case), and the party not living in the main residence chooses their new residence to be their main residence, then the interest that that party holds in the former matrimonial home may become an asset liable for CGT for the period they were no longer living there.

Thus a greater proportion of property disputes are predicted to be resolved through the flexible form of a Financial Agreement, but even with the new legislation legal practitioners must be extremely aware of their client’s potential tax liabilities following settlement.

This article is a summary of CGT and Binding Financial Agreements and is not intended to be a comprehensive piece of advice.