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The Family Lawyer and Tax

The Family Lawyer and Tax

“The hardest thing in the world to understand is the income tax”

– Albert Einstein

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The above quote by Albert Einstein no doubt sits most comfortable with us Family Lawyers.

It is hard enough working as a Family Lawyer each day, without having to worry about the horrors of Tax Law.

However, in order to become good Family Lawyers we all need to at least have an understanding of the impact of tax in Family Law Property Settlements.

As a Family Lawyer, I did not want to personally present a paper that quoted various provisions of the Income Tax Assessment Act and try to convey to you what they all mean.


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We should be careful to remember that we are not experts in tax. We are experts in Family Law. That is what we do in our day to day practice. This does not mean that we cannot and should not educate ourselves and be aware of the importance of tax in every property settlement we do. A good Family Lawyer is vigilant about tax in every aspect of a property settlement matter. From the time the client walks in the door, until the time that the Orders are approved, a good Family Lawyer will always have their mind turned to the possible consequences of tax in any property settlement deal that is being negotiated.

This paper will be divided into two parts:-

  1. The first part will be a refresher on the existing Law and an examination of a few of more recent cases relating to the Family Court’s treatment of income tax in property settlements; and
  2. The second part of the paper will provide some practical checklists and tips in preparing your client’s property settlement case, whether that be preparing for Mediation or preparing for a Trial.

In this paper, when I refer to tax I am generally referring to all types of tax and realisation costs. Most of the cases have involved the taking into account (or otherwise) of capital gains tax. However, all of the authorities are equally applicable to any other type of tax or realisation costs that arise in a Family Law property matter. Typically, I will also be dealing with situations where the tax itself is not yet a liability.

In other words, there is not an outstanding Income Tax Assessment in place so that the liability can be easily included in step one of the four step process. In this paper, we are discussing the most common type of problem that confronts us as practitioners, and that is the triggering of tax liabilities to a party upon the future sale or disposition of an asset or alternatively the transfer of property or payment of monies by one spouse to another as part of a property settlement and consequent tax upon such payment/transfer.

It has been said quite often that such tax liability (sometimes referred to as a “latent” liability) does not form part of the step one process, in that they should not be included in the assets/liabilities schedule.

Whilst, I technically accept that a piece of property that is impregnated with tax does not mean that the property is worth any less, I still think it is easier to include such latent or future liabilities in a schedule as long as appropriate comments are made clarifying the nature and conditions upon which the liability will become real.

It is often the case, as I will illustrate later in this paper, that it is the actual final making of an Order that itself triggers an event that will create an unavoidable tax liability in the future for the husband and/or wife.

It seems we have a jurisdiction that has no difficulty with the concept of “notional property” – in other words, putting money into a spread sheet despite the fact that that money has been spent, yet struggles with the concept of including such “future” liabilities as at least notional liabilities in step one of the four step process.

Whatever school of thought you belong to the fact remains that an Order cannot be just and equitable unless the reality of the impost of such future tax liability upon either the husband or wife is taken into account in any property settlement Order. In other words, if there is a pool of $2 million and the husband is ordered to pay to the wife $1 million, then such an Order could not be said to be just and equitable if, as a result of raising the $1 million, the husband had to inevitably incur a tax liability of $150,000.00. However, for the time being it seems that the failure to take up the future tax impost is something that is said to render an Order not just and equitable as opposed to giving rise to a notional liability.

The Relevant Law

“It is, in my view, of real relevance to consider the issue of when or if the relevant property is likely to be sold, for a number of reasons. First, Tax Law is not a constant and differing views have been taken in this Country to rates and incidents of capital gains tax from time to time. The longer the likelihood a particular property being retained, then in my view the less it is justifiable to treat the property as being subject to a present notional liability…secondly, the person who holds the property may, over a period of time, be able to so arrange his or her affairs as to heavily reduce, if not completely eliminate, the liability.

The history of tax minimisation schemes, if not tax avoidance schemes in this Country is not such as to make one able to say with any confidence that this will not occur…thirdly, the extent of the liability will fluctuate with the market as it’s not a present liability. If the person who holds the property does not propose to release it, the incidence of the tax might be quite different at the time of sale…”

The above is a quote by the then Chief Justice Nicholson in the Full Court Decision of Carruthers –v- Carruthers (1996) FLC 92-707.

This was, with no doubt, an influential precursor to the Full Court’s decision in Rosati’s case several years later. One wonders, almost 18 years later as to whether His Honour would hold similar views in relation to the Australian taxation system. While it may be true that Tax Laws are constantly changing, it is clear that they are changing in favour of the Government and not the tax payer. We have seen a recent example of that with the closing of a further so called “loop hole” in the recent ruling by the Tax Office concerning the treatment of the payment of monies or transfer of property by a private company as a result of an Order made under Section 79.

One wonder as to what concerns, if any, a Court would have about notional tax calculated on a current day notional sale resulting in any sort of injustice between the parties because of a future intention by the Government to relax Laws so that individuals pay less tax. One also wonders about His Honour’s comments about how one can, in today’s world, avoid such tax liabilities. The best we can do is to delay some of the liabilities but not escape them.

It is not my intention to go through in detail the cases that led up to the land mark decision in Rosati’s case, which today still is the bench mark for the Court’s test to be applied in relation to tax and realisation costs. Reference is made to cases such as Rothwell and Rothwell (1994) FLC 91-108; The Marriage of Bland (1995) 19 FAMLR 325 and Elsey and Elsey (1997) FLC 92-727 as some examples of the Court’s movement towards the test laid down in Rosati.

In Rosati v Rosati (1998) FLC 92-804 the Full Court stated:-

“It appears to us that although there is a degree of confusion, and possibly conflict, in the reported cases as to the proper approach to be adopted by the Court in proceedings under Section 79 of the Act in relation to the effects of potential capital gains tax which would be payable upon the sale of an asset, the following general principles may be said to emerge from those cases:-

  1. Whether the incidence of capital gains tax should be taken into account in valuing a particular asset varies according to the circumstances of the case, including the method of valuation applied to the particular asset, the likelihood or otherwise of that asset being realised in the foreseeable future, the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to those assets; and
  2. The Court orders the sale of an asset or is satisfied that a sale of it is inevitable, or would probably occur in the near future, or if the asset is one which was acquired solely as an investment and with a view as to its ultimate sale for profit, then, generally, allowance should be made for any capital gains tax payable upon such a sale in determining a value of that asset for the purpose of the proceedings; and
  3. If none of the circumstances in (2) applied to a particular asset, but the Court is satisfied that there is a significant risk that the asset will have to be sold in the short to mid-term, then the Court whilst not making allowance for the capital gains tax payable on such a sale in determining the value of the asset, may take that risk into account as a relevant Section 75(2) factor, by weight to be attributed to that factor varying according to the degree of the risk and the length of the period which the sale may occur; and
  4. There may be special circumstances in the particular case which despite the absence of any certainty or even likelihood of the sale of an asset in the foreseeable future, make it appropriate to take the incidents of capital gains tax into account in valuing that asset. In such a case, it may be appropriate to take the capital gains tax into account at its full rate or at some discounted rate, having regard to the degree of risk of sale occurring and/or length of time which is likely to elapse before that occurs.”

There have been numerous decisions since Rosati that have affirmed it and numerous decisions that have illustrated the wide discretion that any particular Judge has in relation to the taking up or otherwise of tax, having regard to the particular circumstances of the case.

It is my contention that it is the nature and detail of evidence that is put before a particular Judge in a particular case that has a great deal of influence on what Orders can be made to properly take into account the instance of tax impregnated upon assets in the matrimonial pool.

The case of Lynch and Fitzpatrick (reported as JEL –v- DDF (2001) FLC 93-075) is often quoted as a case in support of the “special skilled” argument in big money cases. However, the case is important from several other aspects.

As part of the husband’s appeal, he also appealed that all of the realisation costs should be deducted from the asset pool because the asset pool was effectively valued on a net asset backing.

The case is interesting in that the Full Court, in its Judgment, clearly indicates that satisfying one of the Rosati principles does not secure success in tax being taken up and vice versa. Decidedly, in this case the Full Court held that none of the assets the husband retained would need to be sold in the short to mid-term, nor was there any risk that such assets would be sold in the short to mid-term and therefore the husband would be unlikely to bare such tax consequences in the near future.

However, the decision is important in that as a consequence of the Orders, the husband was required to make a cash payment to the wife by way of property settlement and the Full Court did hold that in relation to that payment the wife had to bare a proportion of such tax and realisation costs as a result of the sale of any assets or whatever was incurred by the husband so as to necessarily make the payment to the wife. The wife was ordered to bare such future liabilities in accordance with the percentage of the property split she was to receive.

The Full Court dismissed the wife’s cross-appeal in which the wife sought to dictate to the husband as to how that payment would be made. It was left to the husband as to how the payment would be made and therefore subsequently, what tax and realisation costs would be incurred and borne proportionally by both him and the wife. The Full Court even made comment that the husband should be able to dispose of assets and to make the payment as he sees fit and was not required to utilise or maintain an overdraft account which would incur further interest by borrowing monies to pay the wife.

In the case of Jarrott and Jarrott (2012) FAMCAFC 29 the Full Court heard an appeal by the husband in relation to a property settlement made involving a pool of approximately $2.2 million.

Part of the appeal related to the Trial Judge’s finding that the husband’s potential capital gains tax liability of about $90,000.00 could be incurred as a result of complying with the Orders, was a factor to be taken into account under Section 75(2). The case is helpful in that it appears, from the reading of the Judgment, that although there was some evidence before the Trial Judge about the nature and quantum of any capital gains tax liability, that the evidence was, in some respects, unsatisfactory.

The case is a clear reminder about the need to present precise and clear evidence about the nature and quantum of such liability before the Court.

The case however is interesting in relation to the potential use of Section 75(2) when taking into account the so called “notional” or “impregnated” tax liabilities.

The Full Court stated:-

“Her Honour was correct in finding, that in complying with the Orders she would make “could” give rise to a CGT liability of the husband. As such an “all or nothing” approach including CGT or not including it but trying to take into account under Section 75(2) had the potential to visit an injustice upon one of the parties. If allowance were made for CGT, either in the balance sheet or pursuant to Section 75(2) and no CGT liability materialised, the wife would be disadvantaged. Although the risk was less, the husband could be disadvantaged if CGT of $80,000.00 – $90,000.00 materialised and the Trial Judge had discounted that significantly in her conclusion with respect to Section 75(2) because its incidence was only a possibility.

The appropriate course would have been, although no one seems to have urged this upon Her Honour, and we have not been referred to any submission in which it was, to have made a contingent Order, which would operate if and when a CGT liability arose because it was not inevitable that it would, and as the wife asserted, there are some unsatisfactory aspects of the company’s financial disclosures…”

In Lovine and Connor (2012) FAMCAFC 168 the Full Court, once again, had to deal with inadequate evidence before a Trial Judge as to the nature and quantum of capital gains tax. Further, the Trial Judge had identified a number of alternatives that could be open to the husband (such as borrowing money or selling the matrimonial home) but there was no evaluation of each of the alternatives, nor were there any findings by the Judge.

At paragraph 122 the Full Court stated:-

“With great respect to the learned Trial Judge, who was clearly attempting to maximise the prospect of finality for the parties, his conclusion with respect cannot stand. In the circumstances of the evidence before him and his own expressed dissatisfaction in the manner in which the issue was addressed, the learned Trial Judge should, consistent with authority have made Orders effecting the result that if the husband incurred a liability or legitimate realisation cost in selling assets to meet his liability under the Orders, the parties would share in that liability in proportion to their beneficial entitlements as determined…”

Relevant Evidence re Tax in Property Settlement Cases

If you spend any time reading any of the authorities on tax (not just the abovementioned ones) then one will see a consistent theme coming through. That is, cases are often presented in a “shoddy” fashion without detailed evidence and particulars about potential tax liabilities attaching to various assets and what the quantum of tax liability could be in various different scenarios.

The following check list is designed to aid the practitioner in preparing and collating evidence for a property matter for the consideration of tax issues. It should not be considered an exhaustive list.

1. Prepare and use property spread sheets for each individual asset

I think it is imperative in any property settlement case that not only do you have your general spread sheet of assets and liabilities, but that you also have individual spread sheets for each major asset that your client has an interest in.

This ensure that you systematically deal with many issues relating to each piece of property and allows you to highlight issues that may be important about a particular piece of property.

Appearing as annexure “A” to this paper, is an extract of a copy of a spread sheet that I regularly use, but any sort of adaptation of this would be appropriate.

If you are able to maintain individual asset spread sheets then it makes your task a lot easier in preparation for a Mediation, during negotiations or in preparation for a Trial to make sure that you cover relevant details about each particular asset.

2. Method of Valuation

As we can see from Rosati’s case and other cases such as Elsey’s case the method of valuation can often influence a Court in determining whether to take up tax when valuing certain assets. Just because an entity has been valued on a net asset backing doesn’t mean that the Court will automatically take up taxation costs. However, the fact that it has been valued on a net asset backing and maybe even valued on a winding-up (notional liquidation) basis, will add weight to any argument that taxes should be taken up in calculating a real notional current day value.

If a single-expert is involved then don’t be afraid to ask the single-expert to calculate notional tax and realisation as part of the valuation exercise. Remember, it is not the Accountant’s job to determine if any of that tax will be taken up as part of the matrimonial settlement, but they are an expert and it’s one way of getting expert evidence in before the Court.

Some single-experts do not address such tax issues unless you specifically ask them to do so.

3. The likelihood of the sale/disposal of assets within various timeframes

As can be seen from Rosati’s case, it is of upmost importance as to what the Court determines is the likely timeframe before an asset will be disposed of. The Court is more likely to take up the tax consequences if the sale is necessary as a result of the Orders or it’s inevitable or immediate.

Therefore, do not neglect obtaining instructions from your client as to what their intentions are with each of the individual assets within the matrimonial pool. A client may be intending to sell a particular share portfolio and have a good reason for doing so, but if you don’t ask them the question then they may not volunteer that information to you. It is too late when Judgment is delivered and the client then tells you they have to sell their shares, but no capital gains tax has been taken up in the Judgment.

In other words, with each piece of property make sure that you’ve made diligent enquiries with your client about their short-term and long-term intention with regards to the holding of or eventual sale of each piece of property.

It may be, in some cases, that the marital separation will hasten one’s desires to sell or dispose of property.

4. The circumstances of acquisition

Obtaining details from your client about why a piece of property was acquired in the first place may provide a clue as to the inevitability or otherwise of the disposal of the property. For instance, a couple may have purchased a beach house and decided they would hang onto the beach house until the youngest child finished school and then they’d sell it and use it for their own retirement.

Whilst, such evidence alone does not necessarily mean that the Court would take up notional capital gains tax, the fact that your client can recall specific conversations and provide evidence about the nature of the asset’s acquisition and why it was intended to dispose of it in the future etc, will certainly assist in any argument to take up the tax.

Likewise, a client may have purchased a number of investment properties recently with the view to “flipping them over” after quick renovations. At the time of the Mediation or Trial, it may not appear that the properties have to be sold but if you present evidence about the reasons why the properties were purchased and what is intended with them, then this once again aids your case in having the tax taken up.

It is important, to never assume anything about each piece of property owned by your client. Always asks questions and find out as much as you can about each piece of property, whether it be a small investment property or a share in the business worth millions of dollars.

5. Obtain expert evidence

This seems quite straight forward but is often forgotten, as many of the cases you can read will highlight.

It is true, that most of us can perform a basic capital gains tax calculation on the sale of an investment property, but that doesn’t mean we’re experts, nor does it mean that the evidence that we would provide would be admissible.

Use the single-expert appropriately and otherwise, do not be afraid to use an expert in Tax Law or an Accountant with expertise in tax to provide the necessary evidence as to the type of tax and likely quantum upon the disposition of the asset.

6. How can a likely Order be satisfied – other tax consequences?

Always turn your mind to the ultimate outcome. Whether it be an agreement by negotiations or the conclusion of a Trial.

You should be anticipating various different types of Orders that could be made and exploring, in each case, the possible tax ramifications for your client.

It may be, that your client expects to retain certain properties and/or have to pay a certain sum of money. Remain vigilant as a practitioner – expect outcomes different to what you may have prepared for and look at different types of scenarios and tax consequences that may arise.

Always address any possible tax issue relating to the making of any Orders (or the reaching of any agreement) in written Submissions or in an Outline of Argument.

Remember the authorities that say quite clearly that it is appropriate for parties to share proportionally (according to the asset percentage split awarded by the Judge) in any necessary tax imposts as a result of a party complying with the Orders.

An Order could look something like this:-

“In the event, as a result of the Husband incurring any tax liability in complying with paragraphs 2, 3 and 6 of His Honour’s Orders dated ____ of ____ 20__ shall indemnify the husband with respect to 50% of such tax liability, with such amount to be agreed by the parties and failing agreement as certified by the independent expert, Mr X with each party to bare equally in the costs of Mr X in calculating such tax…”

However, do not use Orders such as the above as an excuse not to be particular or specific in gathering evidence for the Court. Remember, the more specific and detailed you can be in presenting evidence about the nature and quantum of tax outcome, then the more likelihood you give your client a greater chance of such tax being taken up and you certainly allow the Judge an opportunity to take up specific amounts if you have calculated them and provided such expert evidence.

7. Prepare schedules comparing tax incidents of property retained by each party as part of the property settlement process

In every case you prepare for property settlement you always prepare a schedule of orders and the effect of those Orders.

I suggest that it’s also important to look at the tax imposts on each of the assets retained by each of the parties as part of the proposed settlement.

In other words, it may be that your client is retaining a lot of assets that are impregnated with tax. There is no immediate desire to sell any of those assets, nor is the sale of those assets necessary to meet any Order. However, your client may be retaining assets impregnated with tax of some considerable amount compared to the other party.

By doing these schedules and obtaining expert evidence about the tax you’ll obtain a clear picture about any significant disparity.

Putting this type of evidence before the Court, once again, may enhance your prospects of at least having that disparity taken up and considered under Section 75(2) even if it’s not deducted notionally from step one.

8. Uncertainty/risk surrounding retention of assets

This is a separate consideration to a party’s intention. It may be that the asset is a high risk investment and/or there are other factors or industry risks that mean that a sale in the future is more likely than not.

Once again, obtain specific and detailed instructions from your client about any factors that relate to the ongoing holding of an asset.

Do not discount the single-expert’s Report. Read it carefully as it may highlight factors that could be relevant to a Court’s exercise of the Rosati discretion. The single-expert’s job is not to run your client’s case, but there may be evidence within that Report that assists you advancing arguments about the inevitability of tax on certain assets.

9. Control/lack of control over assets

Be very mindful of situations where your client has a minority ownership in a piece of real estate and/or a minority interest in a company or any other structure. Minority interests represent a lack of control.

We are well aware of valuation principles where the value of a minority share will be discounted for the lack of control.

In a way, the same could be said about the taking up of tax with respect to minority interests. It is suggested, that the Court is more likely to take up notional tax that impregnates an asset, when a party has no control over its future disposal.

In an unreported decision of Wilson and Wilson BR9107/1995 (March 1998) His Honour, Justice Warnick commented:-

“…an additional matter of relevance in my view relates to the question of control or lack of control by a party in respect of the question of disposition of an asset, upon the sale of which taxation will be imposed – in this instant case, the Accountant for the husband had deducted realisation costs in relation to shares held within a group of which the husband does not have control. In such circumstances, given that I do not have evidence from the persons and entities which together have control, of future intentions, I could not find that the shares will be retained by the group for any particular length of time. In that sense, the husband is at “risk” of the shareholding being sold and realisation costs and taxation being incurred. It would seem unfair to the husband to accept a valuation of his shareholding on a net asset backing for calculation of the net assets did not take account of realisation costs and the incidence of taxation, which might be incurred without the husband’s consent…in my view, similar considerations apply to the position of earnings retained within the group and the instance of tax thereon, if distributed…”

10. Declaring dividends to meet obligations

It is inevitable now more than ever that a party may need to declare a dividend from company profits to meet payment of an obligation to the other spouse imposed upon them by an Order of the Court in a property settlement.

It is always essential that you obtain expert advice from your client’s Accountant or Tax Lawyer as to the most effective way to fund any payment that is required under any potential Order or actual Order.

Evidence as to how that payment is to be made, together with calculations as to the tax to be incurred is also important evidence to have before the Court. One important factor to remember is that if a dividend is to be declared in order for your client to have sufficient funds to meet a payment to the other spouse, then don’t also forget that you may need to also notionally calculate the amount of tax on a further dividend your client may acquire to actually pay the tax.

For instance, your client may be ordered to pay the wife a cash sum of $5 million.

Using fully franked dividends, this may result in your client incurring a tax liability of close to $1.2 million. However, if your client has no monies outside of the corporate structure, then how does your client propose to pay the $1.2 million tax liability? No doubt, your client will need to declare a further dividend so the tax on this dividend should not be forgotten. For example, if your client has a tax liability of $1.2 million and needs to declare a further dividend then he/she may incur further tax on that dividend of somewhere in the vicinity of close to $300,000.00.

The actual funding and source of funding is always an imperative part of any property exercise – do not neglect it and seek expert advice and help in making sure you put the true picture before the Court.


The above quote by Albert Einstein no doubt sits most comfortable with us Family Lawyers.

It is hard enough working as a Family Lawyer each day, without having to worry about the horrors of Tax Law.

However, in order to become good Family Lawyers we all need to at least have an understanding of the impact of tax in Family Law Property Settlements.

As a Family Lawyer, I did not want to personally present a paper that quoted various provisions of the Income Tax Assessment Act and try to convey to you what they all mean.


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