Home » CGT Rolls Over for BFAs

With effect from Tuesday, 12 December 2006, we can expect greater use to be made of financial agreements as a means of resolving property disputes between married and de facto partners.

Since the commencement of the Family Law Act 1975 (“the Act”), married partners who have separated have been able to formalize agreements about the division of their property by asking the Family Court to make Orders by consent pursuant to Section 79 of the Act. Consent Orders have the same effect as if they were made at the end of a trial. Further, when property was to be transferred pursuant to such Orders, liability for Capital Gains Tax (“CGT”) would be deferred until a subsequent disposal of the property.

Since December 2000, couples seeking to arrange their financial affairs – whether before, during or after the breakdown of a marriage – have also been able to enter into Financial Agreements under Section 90 of the Act, which exclude the property jurisdiction of the Family Court, subject to certain formalities being met. The principal formality has been the requirement that each party to the Agreement obtain a Certificate of Independent Legal Advice (Section 90G). However, the Government has dragged the chain by not extending CGT roll-over relief to transfers entered into pursuant to a BFA.

Finally, the Tax Laws Amendment (2006 Measures No. 4) Bill 2006 passed through Parliament on 8 December, 2006, and received Royal Assent on 12 December.

The Income Tax Assessment Act 1997 has been amended to extend CGT roll-over relief to transfers made pursuant to:

1. a Financial Agreement made under Part VIIIA of the Act that is binding because of Section 90G of that Act; and
2. an Agreement that is binding because of a State, Territory or foreign law relating to de facto marriage breakdowns, and that – because of that particular law – cannot be overridden by an Order of a Court (except to avoid injustice).

The CGT roll-over relief is therefore also now available in respect of transfers, for example pursuant to a Termination Agreement entered into pursuant to the Property (Relationships) Act, 1984 (NSW).

Main Residence Exemption

Family Law practitioners need to be aware that there is a sting in the tail of this new legislation.

The new Act also changes the rules relating to the CGT main residence exemption, in so far as it applies to marriage breakdown. Now, there may be adverse CGT consequences, even where the main residence is transferred from one spouse to the other, if the parties separate before one of them transfers his or her interest to the other, as usually happens. If the party who has left the main residence chooses his or her new residence to be their “main residence”, then that party’s interest in the former matrimonial home may become an asset subject to CGT for the period during which he or she was not living in the home.

Accordingly, even in the most straightforward cases involving the transfer of the former matrimonial home from one party to the other, practitioners will need to be vigilant as to their client’s potential tax liabilities.


Chris Dimock is the Principal of the Sydney CBD law firm, Dimocks Family Lawyers. For further information, call (02) 9221 8390.