CGT and Divorce | How to Minimise Financial Consequences for Divorcing Clients

Accountants and family lawyers need to work in unison to ensure the best possible outcome for all parties involved. This extends beyond the initial financial disclosure part of the process.

Property settlements and financial consequences

As family lawyers, we want to avoid our clients entering into a final agreement that they are happy with from a family law perspective, only for them to implement the agreement and discover unintended financial consequences. 

Taxation triggering actions

Typically a settlement can put various transactions, transfers of property and/or sale of a property into play. These transactions may trigger some form of taxation event that they were unaware of, or had not properly considered. If the possible tax hasn’t been considered properly and consequently one of the divorcing parties end up with a debt that they are liable to meet but were not expecting we will have an unhappy client By the time a situation like this occurs, the client may not have any avenue to remedy the issue. They cannot pursue the other party for payment or contribution, because the property matter has been settled.

The best way to prevent this from happening to your clients is to ensure that you work closely with their family lawyer before the settlement is finalised. 

One example of this is when we are negotiating about a cash payment for our client to make to the other party, which may require borrowings.As an alternative to borrowing, if our client had shares or investments, they might consider liquidating those to use the proceeds to make that payment to the other party. Whilst that approach might have the benefit of our client not having to borrow funds, the selling down of those investments may have the potential to create taxation consequences for our client. 

New information

What we want to avoid is for our client to get to their property mediation only then to discover that we had not factored in something we had, until then, been unaware of. If this happens, a mediation may need to be adjourned so the client can seek additional advice from their accountant before proceeding.

Ideally, family lawyers should be thoroughly informed before going into mediation so that our clients can make the best and most informed decision possible. Working together with you from an early stage will help avoid hampering the process for all involved.Multiple properties

A situation that may arise is when the divorcing couple owns multiple properties. Whilst the transfer of a property to a spouse pursuant to court orders will not trigger tax because of rollover relief. The person who has the property transferred to them needs to understand that, if they decide to sell an investment property, there could be taxation consequences on that sale, which can only be identified by you as their accountant.

When the property is involved, sometimes our clients are alert to the fact that there are sale costs involved, but often they have not thought about whether there will be further tax consequences based on who owns the property and how that liability will be paid the next time they lodge their tax return.

Assets held within entities

As more of our clients have entities such as companies and trusts as part of their financial structuring, we often come across situations where one party will retain an entity and the other may be keeping the property and for example vehicles owned by that entity. It is important that our clients understand the taxation consequences that may be triggered on the transfer of an asset from an entity to one of the parties to the marriage. 

The optimal outcome for our mutual clients

At the end of the day, we are all looking to minimise the negative financial consequences for our divorcing clients. In addition to you being alert to these potential issues, we need to make sure that our understanding of what our clients are going to be left with is a true reflection of the position that they are going to be in, and that there will be no unintended tax consequences. 

As accountants, you are aware of the ideal way to structure your client’s finances. Having you as their accountant involved in implementing agreements and thinking about what we are going to require the other party to sign in order to achieve a desirable outcome, is essential.

The earlier we can have close interactions with our clients and their accountants, the earlier we are able to get the full picture of their finances and have an idea of what the final agreement may look like. This early contact means that our client is going to be better off in terms of being able to properly consider their options and understand the best way to avoid paying unnecessary taxes.

These may well be straightforward scenarios for you as accountants, but for family lawyers, your advice and guidance in these types of situations is crucial to a successful final agreement for anyone going through the property settlement process.

When to connect with your client’s family lawyer

It is never too early for accountants and family lawyers to get into contact with one another when dealing with a divorce matter. If your client is going through a separation, encourage them to introduce you to their family lawyer early on to ensure you can be called on during this process to minimise any negative financial consequences.