Family Law property orders can attract exemptions from stamp duty, Capital Gains Tax (CGT), and other taxes and duties, provided they are carefully drafted, satisfy the relevant taxation laws, and importantly, are strictly complied with.
Failing to comply with the precise terms of the Family Law orders can result in duty and CGT exemptions no longer applying. This can have disastrous results from a taxation perspective.
Take for example the matter of Sandini, in which the Husband and Wife had agreed to Family Law property orders which provided for the Wife to be transferred of a large amount of shares held by their family trust, and for the Husband to retain the family trust and indemnify the Wife in relation to all future trust-related debts and expenses.
The family trust had owned the shares for many years, and the shares had grown in value significantly during that time.
Ordinarily this share transfer would attract CGT rollover relief, because it was occurring by virtue of a Family Law order. This meant that the transfer from the trust to the Wife would not trigger CGT, and the Wife would receive the shares “pregnant” with all of the CGT accrued during the entire period that the trust had owned them.
On the day the share transfer was due to occur under the Family Law orders, the Wife emailed the Husband and asked him to instead transfer the shares to a new trust which she had recently established. The Husband complied with her request and transferred the shares to the Wife’s new trust rather than to her personally.
Unfortunately, the transfer to the Wife’s trust was not in compliance with the Family Law orders, and did not attract CGT rollover relief.
After lengthy Federal Court litigation involving the Husband, the Wife, their respective trusts, and the ATO, the Husband’s trust was ultimately deemed liable for the CGT on the shares. The Full Federal Court found that because the Family Law Orders hadn’t been strictly complied with, the transfer from the Husband’s trust to the Wife’s trust was a CGT event, and Husband’s trust was not entitled to CGT rollover relief. The Husband ultimately had to pay several million dollars of CGT on the shares.
The lesson from Sandini is that any variation or departure from the terms of Family Law property orders may have serious and unforeseen taxation consequences. You should seek urgent legal and accounting advice before departing from the terms of a property settlement, regardless of how minor that departure may seem.
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Article By: Sarah Keenan
Director
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