Powered by
MOMENTUM
MEDIA
From delaying a settlement to overlooking potential tax implications, one lawyer has highlighted common mistakes separating couples make when splitting their assets and how upcoming CGT changes could impact them.
Tiyce & Lawyers Family Law Specialists principal Michael Tiyce has warned that the upcoming changes to the capital gains tax (CGT) regime from 1 July 2027 could potentially impact the way separating couples manage property and other assets, and many of them are unaware of the impacts on their property.
He said delaying a settlement could create unexpected financial risk, while failing to seek advice early could affect the value of the assets they ultimately walk away with.
“Separating couples can understandably focus on the headline value of their assets, be it the family home being worth $2 million, an investment property being another $1 million, or there is a significant share portfolio,” Tiyce said.
“But a property settlement looks towards the legal and financial consequences attached to those assets, not just the division of their value between two people.
“As the capital gains tax regime changes from next year, it is increasingly important that separating couples understand the potential implications for their particular asset pool before agreeing to a settlement. Two assets with the same market value can leave parties in very different financial positions, once future liabilities are taken into account.”
The first tranche of Labor’s CGT and negative gearing reforms were the subject of controversy due to the widow tax that applies under the reforms, as reported by The Australian.
However, last week, Treasurer Jim Chalmers agreed to expedite legislation to address the widow tax in order to secure the passage of the National Disability Insurance Scheme (NDIS) reforms.
The bill to remove the widows and spouses tax would provide protection for individuals whose assets have grandfathered access to negative gearing or the 50 per cent capital gains tax (CGT) discount under the provisions in the first tranche of CGT legislation, but would otherwise lose that grandfathering if the asset changed hands from multiple ownership to single ownership through divorce proceedings, relationship breakdown, or the death of a joint owner.
In a press conference last week, Chalmers addressed media reports that Opposition Leader Angus Taylor had pressured Labor into passing legislation to remove the widow tax in exchange for supporting Labor’s NDIS changes.
Chalmers said Labor previously made it clear that it would be addressing some of the issues raised with CGT and negative gearing reforms. Labor released draft legislation to rectify some of these issues earlier this month, with consultation closed on 21 August.
Tiyce welcomed the proposed fix, pointing out that it recognises that a transfer of an asset following a relationship breakdown or divorce is "fundamentally" different from someone voluntarily acquiring a new investment.
"A person should not necessarily be treated as having made a new investment simply because a jointly owned asset has become solely owned by them as part of a family law settlement," he said.
Difference between liability
Furthermore, Tiyce made a critical distinction between an immediate tax liability and a future tax liability, explaining that in qualifying relationship breakdown circumstances, CGT can typically be deferred when assets are transferred between spouses, “but the tax position does not simply disappear”.
He said the recipient may inherit the asset’s existing cost base, and as such, the future capital gain remains relevant when assessing the real financial value of that asset. Tiyce cautioned separating couples against making decisions based purely on the headline value of their assets or the prospect of an upcoming tax change.
“Understanding the potential after-tax position first puts both parties in a much stronger position to make informed decisions about timing, asset division, and their long-term financial position,” he said.
Think about the tax position
Tiyce underscored that a relationship breakdown does not necessarily mean CGT is immediately payable when assets are transferred between former spouses. In qualifying circumstances, he said, rollover provisions can defer the CGT consequences, but the underlying tax exposure would remain.
“The tax position can effectively follow the asset, meaning someone who retains an investment property, shares, or a business interest may also be taking on the future CGT exposure associated with that asset,” Tiyce said.
He urged separating couples to identify and consider these issues early in their separation process, alongside advice from an accountant or tax adviser, rather than treating them as an afterthought once a settlement has already been negotiated.
“This means that someone could walk away with an asset that looks great on paper, but is in reality also inheriting a significant tax liability when it is eventually sold,” Tiyce said.
While separation and divorce have multiple emotional and practical implications, Tiyce cautioned separating couples against either rushing to settle simply due to an upcoming tax change or delaying a settlement in the hope that this could produce a more fruitful result.
Instead, he stressed that the best approach is to understand the potential consequences of timing and make an informed decision based on the circumstances of the individual asset pool.
He said: “The aim of a property settlement should not simply be to divide assets into two piles that look equal on paper. It is about understanding the overall legal and financial position each person will be left with and ensuring they have properly considered the liabilities and future consequences attached to the assets they retain.”
