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When does the Federal Circuit and Family Court of Australia consider Capital Gains Tax and Other Realisation Costs in Property Settlements?

Whether the Court will consider Capital Gains Tax (“CGT”) and other realisations costs dependant on the findings of the Court as to the likely timeframe for a sale or transfer of an assets relative to the parties’ property settlement.

The leading case of Rosati v Rosati [1998] FamCA 38 discussed the general principles the Court can be guided by when considering whether or not the Court should consider accounting for taxation and other realisations costs in a property settlement.

Firstly, whether the value of an asset should include taxation and realisations costs is
dependent on:
1. The method of valuation applied to an asset;
2. The likelihood or otherwise of that asset being realised in the foreseeable future;
3. The circumstances of its acquisition; and
4. The evidence of the parties as to their intentions in relation to that asset.

Secondly, allowances should be made for CGT and other realisations costs upon the value of
an asset if:
1. The sale of the asset forms part of the property settlement Orders;
2. The Court is satisfied that the sale of the asset is inevitable or probable;
3. The asset is one that is acquired solely as an investment with the view of obtaining a
4. profit.

Thirdly, if an allowance for taxation and realisation costs are not attributed to the value of the
asset, but the Court considers that there is a significant risk that the asset will have to be sold in the short to mid-term, the Court may attribute weight for section 75(2) factors (future needs) according to the degree of risk and the timeframe that would elapse before the asset needs to be sold.

Finally, the Court has discretion to make allowances for taxation and realisations costs in special circumstances, including the discretion to apply tax at its full rate or a discounted rate
having regard to those special circumstances.

Whenever a property settlement is being considered, it is appropriate that tax and realisation
costs are accounted for as an item of property in the balance sheet. In the case of Kelby v Kelby [2017] FamCA 438 at [26] the Court in interpreting Rosati determined that the phrase “legal costs of sale” excluded CGT was payable from the sale of a property.

In considering the above, does this mean that the Court will consider a future capital gains tax liability payable upon the sale of an investment property at some point when it is eventually sold? This was considered in a case of Blake v Blake [2007] FamCA 10, where the trial judge accepted the Husband’s evidence that following his property settlement, the Husband intended to sell one of his properties and if possible, retain the two investment properties. The trial judge made allowances for latent CGT on all three properties but on appeal, the Full Court found that CGT allowances should only be made on the property that the Husband intended to sell immediately.

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