1. Family Law and Taxation
Ben Symons
Barrister – State Chambers
PRESENTED TO THE LEGALWISE SEMINARS – 7 JUNE 2017

2. Capital gains tax – rollover relief
Essentially, in order for an asset transfer or action taken by a spouse to a former spouse to qualify for rollover relief the transfer or action must:
(a) Be made pursuant to a court order or arbitral award either under the Family Law Act 1975 (Cth) or a corresponding State, Territory or foreign law; or
(b) Be done pursuant to a binding financial agreement, in circumstances where the couple has lived apart for 12 months and there is no reasonable likelihood that they will resume cohabitation.
An asset transfer or action taken pursuant to a private agreement will not qualify for CGT rollover relief.
Where rollover relief applies, there is no CGT and the transferee spouse inherits the cost base of the transferor

3. Stamp duty - exemption
Pursuant to section 68 of the Duties Act 1997 (NSW) dutiable property / assets transferred to:
another spouse;
a child of the spouse; or
a trustee of the child;
As a result of the breakdown of a marriage or de-facto relationship are generally exempt from stamp duty where the transfer is made:
Subject to a court order under the Family Law Act 1975 (Cth); or
Subject to a binding financial agreement under the Family Law Act 1975 (Cth);
Subject to the Property Relationships Act 1984 (NSW); or
The Chief Commissioner is otherwise satisfied that the transfer is made as a result of marriage or defacto relationship breakdown.

4. Overview of Tax Planning in relation to Family Law
Purpose:
(1) Effect a “clean break” in respect of matrimonial assets;
(2) Minimise tax; and
(3) Cost effectively transfer wealth to each spouse.
Why relevant?
Most couples will typically have at least 3 major assets that require protection and planning:
(i) A property;
(ii) Superannuation; and
(iii) Cash at bank;
A couple may also have assets in a private company, a partnership or a family trust that require tax effective planning for a “clean break”
A failure to properly consider how assets may be tax effectively transferred may leave a lawyer exposed to a professional negligence action

5. Matrimonial home – tax effective division
The Matrimonial Home
Often one spouse will stay living in the matrimonial home;
That spouse should be entitled to claim the principal place of residence CGT exemption, provided:
It was their principal place of residence when it was purchased (i.e. not rented out at that time);
that the couple did not live away from the property for more than 6 years
The spouses who leaves the matrimonial property can transfer their interest:
free of CGT pursuant to section of the Income Tax Assessment Act 1997 (Cth);
Free of stamp duty pursuant to section 68 of the Duties Act 1997 (NSW).

6. Investment property – tax effective division
Investment property may be registered in the name of both spouses, or possibly the spouse that has a higher income;
Upon separation investment property will be registered in the name of one party;
The spouses who relinquishes their interest in an investment property can transfer their interest:
free of CGT pursuant to section of the Income Tax Assessment Act 1997 (Cth);
Free of stamp duty pursuant to section 68 of the Duties Act 1997 (NSW).

7. Real property – transfer by private agreement
Transferring property by way of private agreement
Where a spouse in whose name an investment property is registered has carry forward losses, the property can be transferred by way of a private agreement:
This will result in a CGT event for that spouse, the CGT will be absorbed by carry forward losses;
This will step up the cost base of the investment property for the spouse receiving the asset.
A private agreement should be entered in to before the remaining assets of the relationship are the subject of a court order.

8. Superannuation – tax effective division
Effecting division
There are 2 main ways to split superannuation upon marriage / defacto relationship breakdown:
Court ordered payment split;
A superannuation agreement (essentially, a binding financial agreement).
Factors that a court will take in to account in deciding to order a super payment split:
Whether giving one party the superannuation assets would enable the other spouse to keep the family home;
Whether one spouse (and particularly a spousing living in the original family home) has children;
The ages of the former spouses and how soon they might satisfy a condition of release;
The value of other property interests, as compared with the value of superannuation; and
The needs of the parties for cash and liquid assets.
(These requirements arise out of judgments of the Family Court in BAR & JMR (No. 2) [2005] FamCA 386 and Coghlan v Coghlan [2005] FamCA 429)

9. Superannuation – how a court may effect a payment split
A court may effect a payment split in relation to superannuation in one of three ways:
Section 90MT(1)(a) of the Family Law Act 1975 (Cth) - An order giving the non-member spouse an entitlement to be paid an amount, calculated in accordance with the Superannuation Industry (Supervision) Services Regulations 1994 (Cth) (“SIS Regulations”);
Section 90MT(1)(b) of the Family Law Act 1975 (Cth) - An order giving the non-member spouse an entitlement to be paid a “specified percentage” of any splittable payment to be made from the superannuation fund; or
Section 90MT(1)(c) of the Family Law Act 1975 (Cth) - An order that the non-member spouse be paid an amount every time a splittable payment is made, calculated in accordance with the SIS Regulations.

10. Superannuation agreements – requirements to be valid
Pursuant to section 90MJ of the Family Law Act 1975 (Cth), a superannuation agreement, essentially a binding financial agreement between spouses to split superannuation, will only be valid if:
it identifies the superannuation interest that is to be split; and
if the interest is a “percentage only interest”, that is mainly relating to certain superannuation scheme for judges and parliamentarians, it should specify a percentage of the interest that should be split;
If the interest is not a “percentage only interest” then the agreement must specify:
a base amount to be paid and a method to calculate this base amount; or
a percentage that will apply to all splittable payments in respect of the interest (for the non- member spouse).
The marriage or de-facto relationship is broken down at the operative time;
The agreement is in force at the operative time; and
Regulation 7A of the Family Law (Superannuation) Regulations 2001 (Cth)

11. Superannuation agreements – requirements to be valid (cont’d)
A superannuation declaration is required by each spouse where the superannuation interest exceeds the low rate cap amount ( : $195,000; : $200,000).
It must be a written declaration that:
The spouses lived together in a married or de-facto relationship;
The spouses have separated and thereafter lived separately and apart for a continuous period of least 12 months immediately before making the declaration; and
In the opinion of the spouse making the declaration, there is no likelihood of cohabitation being resumed.

12. Superannuation – method of making a splittable payment
At a high level, a superannuation splitting order may be effected in one of four ways:
Create a new interest for the non-member spouse in the same superannuation fund, such that they become a member of the fund;
The non-member spouse may request that the superannuation interest be rolled in to another superannuation fund of the non-member spouse. This request must generally be effected within 30 days;
The non-member spouse receives a specified percentage or a specified amount of a superannuation payment made to be made to a member spouse;
The non-member spouse may request that the trustee pay a lump sum directly to the non-member spouse if they satisfy a condition of release.

13. Superannuation splitting – tax consequences
Creation of an interest in the same fund or a rollover to a new fund:
CGT – transfer will be exempt;
Stamp duty – transfer will be exempt from stamp duty.
Splittable payment made to a non-member spouse:
The non-member spouse will need to meet a cashing restriction (be above preservation age or otherwise over the age of 60);
The non-member spouse will be deemed under section of the Income Tax Assessment Act 1997 (Cth) to have received a superannuation pension payment from the fund.
Payment of a lump sum to a non-member spouse:
Only possible where non-member spouse has met a “cashing restriction”. This usually means they must be over the age of 60
They will be deemed under section of the Income Tax Assessment Act 1997 (Cth) to have received a superannuation pension payment from the fund.
The non-member spouse will be deemed under section of the Income Tax Assessment Act 1997 (Cth) to have received a superannuation lump sum and will not be subject to tax

14. Partnership – tax effective division
Income of the partnership
An outgoing spouse can receive partnership income from separation until divorce to minimise tax;
They should receive an arms length share of income.
Tax effective division of assets
The exiting spouse must give appropriate notice that they will be exiting the partnership (section 32(c) of the Partnership Act 1982 (NSW));
This will trigger a CGT event in respect of all the assets of the partnership;
The CGT consequences will depend on the type of asset that is effectively sold

15. Partnership – tax effective division
CGT consequences for different assets
Capital assets – e.g. goodwill – exempt from CGT under section of the ITAA 1997;
Depreciating assets – no balancing adjustment event where:
exit made under court order or binding financial agreement; and
Both spouses elect in writing that roll-over relief is to apply and the election contains that “cost” of the asset and the “effective life” of the asset.
Trading stock – assessable income, because a sale outside the ordinary course of business
Other planning ideas
May like to structure the sale by way of a private agreement if outgoing spouse has capital losses, the remaining partner can pay then obtain a cost base in the assets;
The outgoing spouse may also be able to use the small business CGT concessions to contribute the proceeds they receive to a superannuation fund
GST
Transfers of assets as a result of marriage breakdown are typically subject to GST because they are a supply made in the course of a furtherance of an enterprise, a partnership

16. Private companies – exiting a company tax effectively
Income of the company
An outgoing spouse can hold shares and receive dividend income from separation until divorce to minimise tax;
Upon divorce, this income splitting opportunity will not be available.
Asset sale versus a share sale
A share sale will be cleaner and more tax effective because:
There is no stamp duty unless the value of real property in the company is greater than $2 million;
The exiting spouse may be able to access the small business CGT concessions;
Legal documentation is generally far less complex (i.e. there must be sale contracts for each assets transferred, and new contracts / other documentation for each employee)
A transfer of shares pursuant to court order or binding financial agreement will be exempt from CGT and stamp duty

17. Private companies – transferring assets to an exiting spouse
Alternatively, a spouse controlling the company may wish to transfer an asset(s) from the company to the exiting spouse.
This will have tax consequences for the company. Generally, a transfer made pursuant to either:
Court order;
A binding financial agreement.
Will be:
Exempt from CGT;
Exempt from Stamp duty (Revenue Ruling SD. 183 – states that ideally both parties to the marriage should be shareholder in the company or if just one spouse is they should control the voting power of the company to get the benefit of this exemption).
The outgoing spouse will inherit the cost base of the transferor company

18. Private companies – asset transfer tax consequences
Division 7A: An asset transfer (any sort of property) will be a distribution for the purposes of Division 7A (TR 2014/5 – Section 109J ITAA 1936 does not apply).
Division 7A: that distribution will be frankable if it is made pursuant to a court order, or a binding financial agreement for a marriage (but not for a defacto relationship – section 109RC ITAA 1936)
An exiting spouse should pay full market value for the transfer to avoid the operation of Division 7A;
A share buyback could also be used to try and avoid the operation of Division 7A;
Private agreement: A transfer could also be made pursuant to a private agreement if the company had losses and the exiting spouse wanted to step up their cost base in the asset;
GST – GST will apply to the transfer of a commercial property of a motor vehicle because of the operation of section 72-5 of the A New Tax System (Goods and Services Tax) Act 1999

19. Private company – tax issues for company arising from exit of a spouse
Losses – ideally the same owners need to be maintained in respect of a least 50% of the voting, dividend and capital distribution winding up rights of a company when a spouse exits the company;
This is to enable the “continuity of ownership” test to be satisfied;
It may be necessary for an exiting spouse to continue to hold a small minority interest for this test to be satisfied (of course, this requires co- operation between the parties)
Pre-CGT assets – a greater than 50% change in the underlying ownership of the company could freshen up pre-CGT assets. The exiting spouse maintaining a minority interest may assist avoid this “freshening up”

20. Private company – loans made by a company to a spouse
A company may have made a loan to a spouse, particularly where they needed the money to pay for day-to-day expenses;
Tax consequences if loan forgiven:
unfranked dividend for the purposes of Division 7A (but potentially frankable);
If the loan was used for an income producing purpose, the debt forgiveness provisions are engaged and it will reduce the carry forward losses of the spouse of the cost base of the assets that it was used to purchase.
Ideally, the exiting spouse should repay the loan;
If they are an employee, part of the loan repayment could be consideration for their termination;
If the exiting spouse does not have sufficient funds, they could be paid a franked dividend and then use these funds to repay the loan

21. Private company – loans made by a spouse to the company
The company should repay any loans that it has taken from an exiting spouse to ensure that there is a “clean break”;
Such a repayment should be properly documented to ensure it is not construed as a dividend or a distribution of property from the company;
If the spouse could not prove that the money received was a repayment of a loan, any such distribution would be treated as being an unfranked dividend (but potentially frankable if made subject to a court order or binding financial agreement)

22. Trusts – splitting the income of the trust
A former spouse can still be part of the “family group” of a family trust (Section (2A) of the ITAA 1936);
Distributions can continue to be made to a former spouse and they will be taxed at marginal rates – this may be a tax effective way of paying maintenance to a former spouse;
However, a former spouse will be an “outsider” for the purposes of the income injection test in relation to the trust loss rules
Therefore, a former spouse will not be able to inject income in to the trust

23. Trusts – splitting the assets of the trust
Assets may be transferred to a former spouse as part of a settlement in relation to matrimonial property;
CGT – exempt if made pursuant to court order or a binding financial agreement (section of the ITAA 1997);
Stamp duty – a more difficult question about whether exempt under section 68 of the Duties Act 1997 (NSW). To claim this concession the OSR considers in Revenue Ruling SD 183 that:
The only beneficiaries of the trust should be the spouse and possibly the children of their relationship;
One spouse controls the trust (either as an individual or director of a corporate trustee)

24. Trusts – loan from trust to exiting spouse
A loan may have been made to a spouse from a family trust, this may have been the case if they needed a loan to meet day-to-day expenses;
Ideally these loans be repaid;
Debt forgiveness
If the debt is forgiven and the loan was used for an income producing purpose, the debt forgiveness provisions will be engaged;
Carry forward losses of the individual, and the cost base of income producing assets acquired with the loan could have their cost base reduced;
Risk: reimbursement agreement
Where a trustee makes a beneficiary presently entitled to income, but ultimately flows this income to another beneficiary, the beneficiary may be deemed not to be presently entitled to this income, and the trustee can be assessed on this money at the top marginal rate

25. Trusts – Loans from beneficiaries to the trust
Ideally these loans need to be paid out;
It should be properly documented that they are the repayment of a loan in order to avoid having the payment misconstrued as income;
Commercial debt forgiveness
If the loan is forgiven and it was used for an income producing purpose (which is likely), then:
the carry forward capital and revenue losses of the trust will be reduced; and
the cost base of the assets of the trust could be reduced.
Forgiveness of these loans is a tax inefficient outcome.

26. Child Maintenance Trusts
Essentially a discretionary family trust established on the breakdown of parents relationship to provide income to children – children are tax at marginal rates rather than punitive rates;
In order to establish this trust, the following requirements must be met:
The trust must be a court order /determination / assessment that their relationship has broken down;
The effect of this court order / determination is that at least one parent must be under an obligation to provide for maintenance of the children (this could include a child parented in something other than a marriage / de-facto relationship);
At least one of the parents must have custody of the children;
The property transferred should be in discharge of this court order / assessment / determination;
the capital and income thereto, should be held for the benefit of the children (the capital should vest in the children on vesting date)
The trust should derived income from investments (distributions from other trusts are not likely to qualify as investments);
The income derived will be exempt income to the extent it reflects an arms-length return on that investment.
The above requirements need to be met for the income from the trust to be “excepted income” for the purposes of section 102AG of the ITAA 1936;
CGT payable on transfer of assets in to trust;
Stamp duty payable on property transferred in to trust
Trust only suitable where parents agreeable / cooperative

27. Contact details
Ben Symons – Barrister-at-law State Chambers 52 Martin Place Sydney NSW 2000 Ph: LinkedIn: