The Tax Cost of Relationship Property Settlements
Grange Associates Ltd - 11 May 2012
The Income Tax Act 2007 (‘the Act’) contains a number of concessions
that apply when property is transferred as a result of a relationship/matrimonial separation. Basically, the
concessions allow property that would otherwise give rise to a tax liability upon transfer, to be transferred
tax-free. This outcome typically occurs by deeming the recipient of the property as having stepped into the
shoes of the other party. Further down the track, when the recipient sells the property the relevant tax
outcome would arise at that time.
Examples of property where the concessions apply include trading
stock, bloodstock, depreciable property, livestock, timber, land and a look-through interest in a
The concessions in the Act relate to transfers of property made
pursuant to a “relationship agreement”, which simply put, is defined as “an agreement for the purpose of Part
6 of the Property (Relationships) Act 1976” or “an order under section 25 of the Property (Relationships) Act
Part 6 of the The Property (Relationships) Act 1976, enables the
parties to a relationship to contract out of the provisions of that Act. Similarly, an order is made in
respect of property. Because the relevant sections of the Property (Relationships) Act relate to property of
the individuals, property held by other entities such as companies or trusts may not be covered. This
arguably limits the tax concessions applicable to transfers of property between the individual members of the
relationship. For example, the concessions could apply to shares held by the individuals in a company, but
not to the underlying assets of the company.
It is important that the tax cost of transferring property not subject
to the concessions is identified and taken into account when deciding how assets should be divided, for
example the tax cost could be factored into the property’s value. Alternatively, a tax neutral method of
transferring the property may be available, such as structuring a transfer to allow other general concessions
to apply (such as the wholly-owned group dividend exemption). Tax avoidance implications would need to be
considered and ruled out in this type of scenario.
In extreme cases, one of the parties may be willing to bear the tax
burden so they can separate and move on with their life. However, it will be cleaner and cheaper to know
up-front whether the concessions apply and to plan ahead accordingly.
While the existence of the concessions is relatively well known, the
risk that the concessions do not apply to third party property is sometimes overlooked. The realisation that
a tax cost could apply to property transfers can exacerbate an already difficult situation, whether it is
before, during or after a settlement is reached.
All information is correct at the date of article
publication. Please note we provide the information as a service only. Accordingly, the contents are
not intended as a substitute for specific professional advice and should not be relied upon for that
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