Thinking of an informal property settlement? Don’t forget tax and duty
One of the reasons not to have an informal property settlement is because of the impact that tax (especially capital gains tax) and stamp duty can have. Exemptions are granted when consent orders are entered into, and may also be available when a binding financial agreement is also entered into.
Typically, transfers made pursuant to an order from husband to wife or vice versa are exempt from duty; and transfers made pursuant to an order that ordinarily attract capital gains tax usually have rollover relief, which means that whoever takes the item of property has to pay all the capital gains tax when they dispose of that property.
Of course, the rules are not quite so simple, and if you want pay full freight on duty and capital gains tax, then an informal property settlement is about the best way to do it.
Some years ago a new client came to see me. I’ll call her Joanne. She told me that she had an informal property settlement with her husband, Bob. Under the deal, the investment property was going to be sold, and Bob was to keep the proceeds. Bob was transfer to Joanne his interest in their home, which she was going to keep.
Joanne kept the home. Bob kept the income from the investment home (as after all he was to get the proceeds of sale).
When Bob went to sell the investment home, Joanne co-signed the contract of sale.
Some months later, Joanne got a big shock- something that would not have happened if they had made consent orders. Joanne got a friendly letter and assessment from the Commissioner of Taxation – she owed $9,000 in capital gains tax from the sale of the investment home. Imagine her shock!
When she came to see me, I told her that this would have been avoided if she had entered into orders. Yes, I know it was the “I told you so ” variety, but she needed to know. I then said to her that she could go to court and seek a property settlement (the time limit had not kicked in yet).
Joanne decided that she would just borrow the funds to pay the Commissioner as she did not want to spend money in going to court as well.
Recently I was contacted by John. John decided, on his accountant’s advice, to have a transfer of some property from one company (controlled by John and his wife Wendy) to another company (controlled by John alone).
While it was in the context of a split up, John and Wendy did not enter into orders. Result? John’s company has been slugged $22,000 in stamp duty. John almost died of shock. John has now taken the matter to the Office of State Revenue in a bid to get exemption, but for the moment at least he is in a legal quagmire- which might have been avoided if he had advice from an accredited specialist like me- and structured his transfer differently, and with the benefit of orders.