Accounting

In a property settlement, when is a pre-CGT asset not tax-free?

Even if an asset was acquired by you or your spouse before the introduction of capital gains tax on 20 September 1985, it may still be subject to tax when it’s ultimately sold.

Pre-CGT assets and family law

In the separation process, spouses may seek, or may be ordered to resolve their financial settlement through a conciliation process before the property settlement takes place. During this conference, both present and future taxation of the relationship’s assets are usually relevant factors in the settlement negotiations. This is notwithstanding that the Family Court may not give such factors weighting during the actual property settlement hearings.

For this reason, it is important to recognise when an asset may be subject to tax should it be disposed of in the future, as it can affect how the relationship’s asset pool are agreed to be divided. Importantly, as was the case in Kerr & Christie (2021) FamCA 624, an asset may be exposed to taxation even if it was acquired before the introduction of capital gains tax (CGT) on 20 September 1985 (a pre-CGT asset).

Kerr & Christie

In Kerr & Christie, the net value of the pool of assets that was subject to financial settlement was in the vicinity of $50m. Ms Kerr controlled about $35m and Mr Christie about $15m.

The issue being addressed in these proceedings was whether there was a CGT liability which affected the value of the shares in a private company as held by Mr Christie. Or more to the point, whether there was a CGT liability which affected the value of the two properties owned by that company, notwithstanding that these properties were pre-CGT assets.

Due to the materiality of this contention, the Court gave orders under the authority of subs114(3) of the Family Law Act (1975) (Cth) that Mr Christie, in the event that agreement to the financial settlement through conciliation is not otherwise reached, must obtain a private binding ruling from the Commissioner of Taxation to resolve the issue.

Read here our article on seeking a private binding ruling from the ATO.

When is a pre-CGT asset not tax-free?

As relevant to Kerr & Christie, tax law provides that an asset of a company will cease to be a pre-CGT asset when the majority underlying interests in that asset, usually denoted by the company shareholders, are not held by the same ultimate owners who together held the majority interests in the company immediately before 20 September 1985.

In other words, and to put simply, an asset owned by a company will no longer be a pre-CGT asset if the majority of shareholders in the company changed after 19 September 1985. It is at the point when the change of shareholders occurs that a pre-CGT asset will cease to be tax-free.

For tax purposes, if an asset ceases being a pre-CGT asset in the manner as described above, it will be taken to have been acquired by the company as at the time of the change of majority shareholders and the asset’s market value as at that same time will be deemed its tax cost base.

Importantly, these rules do not stop an asset from being a pre-CGT asset if there has been a change of shareholder after 19 September 1985, and the event that lead to the new owner standing in for the former owner was because of the former owner’s death. In this instance, the new owner is taken to have held the same interests as held by the former owner at any time whilst the former owner held them.

Implications in Kerr & Christie

In Kerr and Christie, Ms Kerr was seeking orders for the husband to obtain a private binding ruling from the Commissioner of Taxation on whether the two properties owned by the company were still considered to be tax-free, pre-CGT assets. Whereas Mr Christie made efforts to impress on the Court his confidence that no such future CGT liabilities existed in respect of those properties.

A distant observer to the proceedings can only presume that concerns were held by Ms Kerr that she would become liable for the future CGT liabilities should she become entitled to either or both properties as held by the private company. A distant observer would also presume that, if those properties were to be transferred to Ms Kerr and deemed to be no longer tax-free, she would intend to have any future CGT liabilities accounted for in the division of the relationship asset pool. It would also be expected that Ms Kerr would likely negotiate the financial settlement on that basis in the conciliation conference.

About the Author

Dean Crossingham

Dean is an Accountant and Tax Adviser who provides specialist tax services in relationship separation and divorce matters.

He provides expert guidance in navigating the tax consequences of a relationship breakdown. This includes expert tax advice on the division of relationship assets, property settlement tax structuring and negotiation support as well as ongoing accounting and tax services post property settlement.