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Tax, Property And Relationship Splits

Lawyers need to be mindful of potential tax liabilities when advising on the fairness of separation agreements, writes Mark Withers.

By: Mark Withers

30 December 2023

Many investors will have a sense of the matrimonial property rules that can give a spouse or partner a claim for 50 per cent of relationship property assets after a relationship that has run for only three years.

This issue is often forefront in parents’ minds when they seek to assist children into property.

The potential for money provided to a child being halved because of a relationship split down the line has many worried about the best way to provide this assistance and what the tax consequences of navigating relationship property rules might be.

Many people are under the common misconception that the three-year period that must elapse before a partner has a claim begins from the point the couple start living together in a traditional de facto arrangement, i.e. under the same roof.

The matter is not that clear-cut, though. The three-year period begins from when the relationship became “akin to a marriage”. This does not necessarily begin when you move in together under the same roof.

Lawyers suggest the better determinate of the start point is when your friends and family begin to consider you to be in a relationship with someone who has become your “partner” regardless of whether you are living together. But even then, this leaves room for interpretation and ambiguity.

In recent years, the protections that a trust affords you from relationship claims has begun to be eroded by the courts. Adding a new partner as a beneficiary to a trust can constitute a nuptial settlement and establishing a trust while already in a relationship will likely not offer much protection in the event of separation.

‘Contracting Out’

The best protection is entering a formal relationship agreement where part 6 of the agreement under the Property Relationship Act provides for couples “contracting out” of the act.

Part 6 deals with the right to decide how property is to be divided in the event of separation.

These agreements can specify what happens to assets during the lives of the parties, on the death of one partner, and in the event of separation.

These agreements are void unless certain requirements are met, so they are best left to lawyers to draft so they are formal and binding. One of the main requirements to be binding is that both parties must have taken independent legal advice before signing.

I have seen many situations where that legal advice to one party is “don’t sign”. This then forces a negotiation over the terms, and concessions may be needed by the wealthier party before agreement can be reached.

With respect to taxation, Subpart FB of the Income Tax Act provides the general rule with regards to the division of relationship property. This section provides general rollover relief to property transferred pursuant to a relationship agreement.

There are also sections FB3A and FB4 that deal specifically with land.

These sections provide rollover relief from bright-line and certain rollover relief concessions from the specific land taxing provisions in the Income Tax Act.

Taxing Event

The general rule is that the transferee is deemed to have acquired the land at the transferor’s cost and at the transferor’s date of acquisition, which generally means the transfer of property subject to a relationship agreement does not trigger a taxing event.

Care is needed with respect to future plans. For example, let’s assume a wife receives property that is tainted by her ex-husband’s land dealing activity. No tax will be triggered when these assets are transferred to her under the separation agreement but, if she subsequently sells them within 10 years of his acquisition date, she is liable for all the tax payable based on her ex-husband’s cost price.

Lawyers need to be mindful of these potential tax liabilities when advising on the fairness of separation agreements.

For families making funds available to children for house deposits, it must be made clear whether the money is provided as a gift or a loan. A loan can be recalled in the event of a child’s relationship ending, but a gift may well have become joint relationship property.

It may also be appropriate to encourage a child to formalise a contracting out agreement before gifts or trust distributions are made. The optimism of youth often means these hard conversations won’t happen unless some pressure is exerted to encourage them.

As always, seek professional advice, both legal and accounting, when considering land transactions that can have relationship property impacts.

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