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    Tax Implications for Property Settlements

    31/08/18 8:30 AM

    Executive Summary

    1. The recent case of Sandini demonstrates the circumstances in which a transferor spouse may be exempt from CGT when transferring property to their former spouse under family law orders.
    2. Family lawyers must have a well-grounded knowledge of the tax implications of property transfers and should not hesitate to obtain single expert taxation advice when required.
    3. Care must be taken when drafting family law orders, as simple mistakes can have significant tax consequences for parties.


    Of the many issues facing family lawyers when advising a client going through the property settlement process, arguably one of the most complex is taxation. In all but the simplest of cases, the division of property will have tax implications for one or both parties – particularly where they are of significant net worth. It is therefore imperative for family lawyers to have a well-grounded knowledge of the tax implications of property transfers between spouses. This is particularly the case where businesses, trusts and other corporate structures are involved.

    Divorce Rollover

    Stamp Duty

    Under section 68 of the Duties Act 1997 (NSW), no stamp duty is chargeable on a transfer of matrimonial property if the property is transferred to either of the parties of the marriage or de facto relationship, a child or children of the parties to the marriage, a trustee of the children or a trustee of the estate of either party. The transfer must be in accordance with a Binding Financial Agreement or an order of a court exercising family law jurisdiction.

    Capital Gains Tax

    The division of property between spouses can trigger CGT liabilities for the transferor of property. Under Subdivision 126-A of the Income Tax Assessment Act 1997 (Cth) (‘ITAA’), the Divorce Rollover is available and the transferor is exempt from any CGT liability (whether a capital gain or capital loss) arising on the transfer if the following conditions are satisfied:

    1. The disposal or creation of the CGT assets occurs between spouses, or from a company or trustee of a trust to a spouse;
    2. The CGT event must be A1, B1, D1, D2, D3 or F1;
      • The most common CGT event is A1, being the transfer or disposal of property.
    3. The CGT event must result from a court order or maintenance agreement directly connected with the breakdown of the relationship.

    It is important to note that the Divorce Rollover does not eliminate the capital gain or loss. The transferee will carry the CGT liability (which will crystallise when the property is next transferred or sold).

    Importance of meeting the conditions of the Divorce Rollover: Sandini

    In Ellison v Sandini Pty Ltd [2018] FCAFC 44 (27 March 2018), the Divorce Rollover was held on appeal not to apply in circumstances where the transferee was a family trust and not a spouse.

    By way of background, the Family Court had ordered that shares to the value of $2.5m held by Sandini, a unit trust controlled by the Husband (Mr Ellison), were to be transferred to the Wife (Ms Ellison). After the order was made, the Wife emailed the Husband requesting that the shares be transferred to the corporate trustee of her family trust, which she controlled. Significantly, the orders were defective and named Sandini as trustee of the Wife’s family trust. Sandini was the trustee of the Husband’s unit trust.

    The Husband successfully applied to the Federal Court for declaratory relief that the transfer of shares was subject to the Divorce Rollover (thereby not incurring CGT liability). The Court held that even though the shares were being transferred to the Wife’s family trust, the change in beneficial ownership effected by the orders (being vested in the Wife) happened ‘because of’ the court orders. The Court dismissed arguments raised by the Australian Taxation Office (who were joined in the proceedings) that the Wife must be involved in the transfer as transferee in her natural capacity, as the Wife’s direction to the Husband to transfer the shares to the family trust controlled by her meant that she was sufficiently involved in the transfer for the purposes of the Divorce Rollover. The Court held that the orders were not invalidated by its defects as it was expressed with sufficient certainty to enable execution.

    The Wife and the ATO appealed the trial judge’s decision. On appeal, the Full Federal Court overturned the first instance decision by a 2:1 majority. While the Court unanimously agreed with the trial judge that a change in beneficial ownership triggered CGT Event A1, the majority held that ITAA s 126-15 required the transferee to be the former spouse personally. While the transferor may be a spouse, company or trust entity, it was not enough for the Wife to merely be ‘involved’ in the transfer in a capacity other than transferee. Further, the defects in the orders (by naming Sandini in the wrong capacity) did not satisfy the ‘because of’ requirement and constructive receipt provisions did not assist in this regard. Therefore, the transfer of shares to the value of $2.5m was not exempt from CGT.

    The matter has not yet been granted leave to appeal to the High Court, where it may ultimately be decided.

    Take away

    As a matter of law, Sandini holds that for the Divorce Rollover to apply, the transferee must be one of the spouses to a marriage breakdown. Further, the Divorce Rollover applies automatically and does not allow either party to elect otherwise. This is of note where the asset being transferred may result in a capital loss and therefore it may be more advantageous for the transferor to bear the capital loss for tax purposes. To avoid the operation of the Divorce Rollover in such circumstances, it may be advisable to transfer the asset through a private agreement that has not been approved by the Family Court.

    As a matter of practice, Sandini demonstrates the following:

    1. The importance of correctly drafting orders. If care is not taken in the drafting of orders, parties may have to bear significant tax liabilities due to simple mistakes.
    2. Family lawyers should have a well-grounded knowledge of the tax implications of property transfers, when CGT events are triggered, when other tax rollovers apply (such as the Small Business Rollover or Small Business CGT Concessions) and the circumstances in which it may be more advantageous for a transfer to occur outside of family court orders.
    3. In particularly complex matters, the parties should cooperate on tax outcomes sought and obtain single expert taxation advice where this may be of assistance.

    If you have further questions, please contact

    This is not legal advice. 

    Matthew Sibley

    Written by Matthew Sibley