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Why you should beware CGT in divorce transfer

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With one in three Australian marriages ending in divorce, a factor that separating couples need to be aware of is tax.

As part of any financial settlement there will usually be a split of assets. This means that legal ownership of some assets will change, which would normally be a trigger for a capital gains tax event.

In most cases, where an asset subject to CGT is transferred between spouses as a result of a divorce, a CGT rollover will apply - this has the effect of disregarding any capital gain or loss arising from the transfer.

divorce cgt

The receiving spouse is treated as if they had always owned the asset and is liable to CGT on the full capital gain when they ultimately dispose of it.

The marriage separation rollover is automatic. You cannot choose whether or not to apply it.

For tax purposes, it is important that any financial arrangement is formalised by a court order, maintenance agreement or binding agreement.

Avoid "informal" private agreements; for the rollover provisions to apply, the asset must be transferred under a formal agreement or settlement.

If the transfer is agreed as part of a private agreement, the normal CGT rules will apply.

This means that the assets will be treated as being sold at their market value by the disposing spouse (triggering a capital gain if the market value is greater than cost) and will be acquired at market value by the receiving spouse.

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Mark Chapman is director of tax communications at H&R Block, Australia's largest firm of tax accountants, and is a regular contributor to Money. Mark is the author of Life and Taxes: A Look at Life Through Tax.
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