If you are going through a family law property division, the first step in the process is calculating the net assets of each party. This means that we must determine assets and liabilities for both parties as well as taking into account the tax debts that are yet to be incurred.
Tax debts can be a contentious issue during property disputes. There are many different tax liabilities that can arise from individual tax debts, to company tax debts to capital gains tax. Generally, tax debts that are incurred during a marriage are considered a joint debt of the parties and are paid from the parties joint assets. There are, however, exceptions to this rule.
What is a common issue with tax debts are whether future tax liabilities are considered a joint debt and whether they are taken into consideration when negotiating a property settlement. The most common example of this issue is capital gains tax.
Capital gains tax is payable when a party sells an asset such as shares or a parcel of real estate and has made a profit. As family lawyers, we assist our client’s in obtaining advice from accountants and qualified tax experts to understand the tax liabilities that a party is likely to incur on the sale of an asset. However, whether it is considered a joint debt to be paid from joint funds is a question of when the tax liability is or will be incurred.
There is the guiding principle in the 1998 case of Rosati and Rosati which provides that only tax debts that are incurred as a result of the parties selling an asset to meet the terms of a property division can be included as a liability when calculating the party’s joint assets.
To put this into practice, if the parties to a dispute agree to sell an investment property during the course of their negotiations or upon the making of Court Orders for a property division, it is common practice that any capital gains tax incurred as a result of the sale would be paid jointly by the parties. When preparing the party’s balance sheet, the estimated capital gains tax would be included as a liability in the calculations for a property division.
However, if a party chooses to retain the investment property as part of the property division and it is not required to be sold as part of the agreement or Court Order, then any future capital gains tax payable upon a future sale will be that party’s sole responsibility and the liability will not be included in any of the calculations.
This may seem unfair to the person retaining the investment property, however when a party is keeping an asset, it cannot be known at the time of entering into a property division when or if that asset will be sold in the future. If the property is never sold, capital gains tax would not be required to be paid.
It is extremely important that tax advice is obtained from a qualified expert when there are assets that have the potential for capital gains tax once sold as the potential tax liability could be significant and could outweigh the overall benefit to a party entering into the property division.
If you are unsure about whether your current or future tax debts would be considered a joint debt, contact Lewis Family Lawyers today and we can discuss the different options available for you.
