Do Tax and Realisation costs in a property settlement really matter?
As the end of the Financial Year and tax time roll around once again it serves as a timely reminder about issues of family law and tax. On its face, yes it’s a pretty dry topic that should probably be avoided after 5 drinks or at your next dinner invite. However, when it comes to your property settlement not talking to your family lawyer and getting quality advice about the tax implications of your family law property settlement can make an incredibly big difference.
To be clear, we are not accountants or tax lawyers. That said, we are very good at identifying when you need to speak to them and the questions that you need to ask. You don’t have to do it alone and we can be with you every step of the way. We can meet with you and your accountant together so that you can discuss the options from both a family law and accounting perspective and make an informed decision about the best way forward.
In property settlements where investments, companies, trusts and self-managed super funds are involved we regularly work together with your other advisors as part of crafting your case. Whether it is in the evidence gathering and valuation at the early stages or looking towards working out how to structure your agreement your accountants and tax advisors have an important role to play.
A good example is when we looking at whether realisation costs, including tax should be taken into account as part of a property settlement.
By realisation costs, we are talking about things like agent’s commission, marketing expenses, conveyancing costs and bank fees associated with selling a property as part of dividing the asset pool.
From the tax side of things, we are generally talking about the Capital Gains Tax that will be triggered following the sale of an asset acquired for investment purposes.
If there are companies or trusts involved, there may also be more complex issues that need to be dealt with in terms of the costs of transferring assets (such as motor vehicles or cash) out of the structure to one party, transferring loan accounts from one to the other and paying any extra tax that may be due as a result of structuring the settlement in a certain way.
The decided cases make it clear that when it comes to future tax and realisation costs, the individual facts and circumstances are very important. However, there are a few aspects that tend to have more general application.
Where the parties agree or a Court orders the sale of an asset or is satisfied that a sale of it is inevitable, or would probably occur in the near future, or if the asset was acquired solely as an investment with a view to its sale for profit, then, generally, an allowance should be made for any realisation costs and tax payable upon such a sale. There are also other situations where a Court may be satisfied that there is a significant risk that the asset will have to be sold in the short to mid-term or some other special circumstance where there needs to be some consideration given to that as part of working out the final outcome.
Why does all that matter? Well in simple terms in property settlement matters we are just as interested in the amount of the liabilities as we are in the value of the assets. Whether we are trying to negotiate your optimal outcome at mediation or seeking to persuade the Court there are often genuine reasons for disagreement between lawyers and judges about whether a tax or realisation cost should be taken into account and how. By working with your accountant and other advisors we can help advise you about the best way to proceed, including the information and documents the other party or the Court will need to support that outcome. Get it right and generally you get a far better outcome.
Ignore it, get poor legal advice or no advice at all and the consequences can be quite disastrous. There is nothing worse than signing off on what you thought was an amazing property settlement that you agreed which a few months down the track turned into a lot less than you thought.