The Family Court of Australia has attempted to clarify the Court’s position with respect to contingent liabilities (such as Capital Gains Tax or “CGT”) in the family law context in the case of Pfenning & Snow  FamCA 29 (27 January 2016). At present the law in this regard is confusing and cases, when applied, appear inconsistent.
In Pfenning the issue of a potential sale cost and CGT (as well as taxation on fully franked dividends) was raised in the context of determing a just and equitable division.
Pfenning Snow Pty Ltd owned three commercial properties. The combined value of said properties was in the vicinity of $9.5 million dollars. If all three properties were sold the following costs would be incurred:
- $285,000.00 in sales costs;
- $1,535,155 in CGT;
Further, the monies from the balance of proceeds of sale, if extracted from the company would result in $5,400,000.00 in net terms (following extraction from the company through franked dividends – that would resulted in a further taxation of $2.27 million dollars).
Reference was made to a ruling from the Australian Taxation Office (TR 2014/15) released on 31 July 2014 – it’s worth a read for family lawyers as it gives a very good summary of the current position on Division 7A (109B to 109ZE) of the Income Tax Assessment Act 1936 (“deemed dividend provisions”).
It was the Husband’s case that to meet the wife’s claim for a cash sum in her orders sought the Husband would be forced to sell the commercial real estate he held. No orders were sought by him for the sale of any property but it appeared implied (and supported in his evidence in chief) that in order for him to meet the sum owing to the wife, monies would have to be drawn from the sale of commercial real estate. Evidence was given that he could explore further avenues depending on the sum that had to be paid (such as seeking to borrow against one of the commercial properties).
Justice Kent reviewed the case law with respect to Capital Gains Tax issues at  to . He made particular reference to Rosati & Rosati (1998) FLC 92-804 which has been referred to by family lawyers as precedent for the general principles that have emerged, in these cases:
- 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 that asset.
- If 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 to its ultimate sale for profit, then, generally, allowance should be made for any capital gains tax payable upon such a sale in determining the value of that asset for the purpose of the proceedings.
- If none of the circumstances referred to in (2) applies 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 s 75(2) factor, the weight to be attributed to that factor varying according to the degree of the risk and the length of the period within which the sale may occur.
- There may be special circumstances in a particular case which, despite the absence of any certainty or even likelihood of a sale of an asset in the foreseeable future, make it appropriate to take the incidence 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 a sale occurring and/or the length of time which is likely to elapse before that occurs. (original emphasis)
Applying Rosati, Justice Kent gave a concession for the sale of one of the commercial properties to meet the wife’s entitlement – this is because His Honour identified the property the Husband would most willingly sell (as given in his evidence) and His Honour found the need to Order the sale of a certain property to meet the wife’s entitlement.
There is an inconsistency in the law which remains whether CGT need be a “possible” liability or a “certainty” of a liability. This case seems to support the contention that CGT must be a certainty although (with reference to IABH & HRBH (2006) FamCA 379 and His Honour Watts comments) the CGT possibility may still be relevant consideration under “future needs” considerations (75(2) factors).