People do not always appreciate that tax issues can arise when you separate from your partner. It is necessary to obtain advice from your family law solicitor in conjunction with your accountant/financial advisor regarding the tax implications that can arise from a property settlement, particularly one where transfers of property or complex financial structures exist.
Without that advice, you could be left with a nasty surprise from the Tax Office.
Here is a brief FAQ to clarify some of the issues:
1) Will my spousal maintenance payments or child support payments be taxed?
As a general proposition, no. Maintenance payments are exempt from the receiver’s income tax if the payments are made to a person who is or has been a spouse of the payer or for the benefit of a child of the payer, including for the benefit of a child of the other party to a relationship. Obviously this extends to de facto partners as well.
An exception to this may arise if a payment is made by the payer to divest themselves of an income producing asset, or to divert ordinary income that would normally be taxable. Make sure the source of funds from which you will be paid is made clear by the paying partner.
2) How will tax affect my property settlement?
Many family law property matters will require a consideration of capital gains tax. This usually applies to any disposition or change of ownership of an asset, with the exception of the following:
- Assets acquired pre 20 September 1985;
- Cars and motorcycles;
- Collectibles valued less than $500 and personal use assets of less than $10,000;
- Assets used to produce exempt income, including for film makers and
- The family home.
Capital gains tax can be tricky, so it is important to get advice from your accountant or financial advisor regarding the effect of any proposed orders.
3) Will the Court take tax payable into account when making property orders?
In short, yes. The Court considers the tax implications that may arise in property settlement matters. There are cases where the Court has found that if there is a reasonable chance the asset will be sold, the tax payable should be taken into account. A recent case decided that it would be just and equitable for the parties to share in tax liabilities in the same proportion that the property and superannuation interests were divided.
The fact is the more complicated a property settlement, the more likely that there will be tax implications. The fiction that taxation liability is avoided by a Family Court order is just that, a fiction.
If you or someone you know is going through a property settlement, it is important to have a specialist family lawyer on side.
Tiyce & Lawyers – we are here when you need us.