Family law CGT rollover and late-life separation: dividing assets without crystallising tax

For Australian couples facing late-life separation — sometimes called "grey divorce" — dividing the accumulated retirement assets is one of the most consequential financial events of their lives. Couples in their 50s, 60s and 70s usually have decades of joint financial activity behind them: a family home, investment properties, share portfolios, superannuation, perhaps business interests. When the relationship ends, that pool has to be split between two people who now each need to fund a separate retirement from a share of what was meant to be a joint nest egg. The relationship breakdown CGT rollover under Subdivision 126-A of the Income Tax Assessment Act 1997 is what makes this division possible without triggering large capital gains tax (CGT) bills on the internal transfers. Without the rollover, transferring an investment property from one spouse to the other would be a CGT event at market value — often a substantial tax bill for the transferring spouse even though they receive no cash. The rollover lets a qualifying transfer happen with no immediate CGT, deferring the tax until the receiving spouse eventually sells.

The basic problem the rollover solves is structural. Family law transfers are not arm's length — they're driven by the property settlement, not a commercial sale. Without a rollover, transferring a CGT asset between spouses would trigger CGT event A1 at market value, so the transferring spouse would realise the gain built up over the asset's life. On a $1.5M investment property carrying a $600,000 latent gain, that could be well over $100,000 of CGT, payable at the very moment both parties need every dollar for their separate futures. The rollover removes that: under it, the transferor disregards the capital gain or loss, and the transferee makes the gain or loss only when they later dispose of the asset.

The rollover requires a formal instrument — this is the single most important practical point. It applies where the transfer happens because of a court order under the Family Law Act 1975 (including a consent order), a binding financial agreement (a BFA under Part VIIIA for married couples or Part VIIIAB for de facto couples), an arbitral award under section 13H of that Act, or a written agreement that is binding under a corresponding state, territory or foreign relationship-breakdown law. Where it applies it is automatic, not optional. But a private or informal agreement does not qualify — if a couple simply agree between themselves to shuffle assets without one of these instruments, the normal CGT rules apply and the transferring spouse wears the tax. Getting the formal instrument in place before any asset moves is therefore essential, and pushing the family lawyer to formalise it early is a key role for the financial adviser.

The cost base inheritance is the mechanism that defers, rather than erases, the tax. For a post-CGT asset, the transferee takes over the transferor's cost base — the original purchase price, acquisition costs and capital improvements — and the holding period for the 12-month CGT discount continues from the transferor's original acquisition date. The latent gain built up during joint ownership is preserved in the transferee's cost base, so the asset effectively arrives "with the tax bill attached", payable on a future sale. Pre-CGT assets are treated differently and more favourably: where the transferor acquired the asset before 20 September 1985, the transferee is also taken to have acquired it before that date, so it keeps its pre-CGT status and a future sale by the transferee is not subject to CGT at all.

The practical consequence for settlements is that "equal value" is not equal after CGT. Take a couple dividing a $2M pool — $1M in cash and a $1M investment property carrying a $400,000 latent gain. If one spouse takes the cash and the other the property, both nominally have $1M. But the property carries a future CGT liability — roughly $74,000 (after the 50% discount, at a 37% marginal rate, FY25-26) when it is eventually sold — so its real value is closer to $926,000. The cash carries no such tail. A fair settlement should compare assets on an after-tax basis, not on gross values. The family home is the usual exception: the main residence exemption means it arrives CGT-clean regardless of how much it has grown.

Superannuation is split under its own regime, separate from the CGT rollover, and it is one of the largest categories in most retirement-age pools. Super is divided under Part VIIIB of the Family Law Act, typically by a court order or BFA specifying a "splitting" payment (a portion of one spouse's super moves to the other's fund) or a "flagging" order (the super is flagged pending a future event such as the member's retirement). The split is generally tax-neutral — no immediate tax for the receiving spouse, and the preservation status carries across. Couples sometimes try to deal with super through the ordinary property provisions, which doesn't work; the lawyer must draft the orders specifically to engage Part VIIIB.

The family home needs particular care in a long-marriage split. Where one spouse buys out the other and stays, the staying spouse keeps the main residence exemption on the whole property. Where the home is sold and the proceeds divided, the exemption applies to the sale and both walk away with their share free of CGT. Where one spouse moves out to rented accommodation while the home is being sold, the six-year absence rule can preserve the home's main residence character for the absent spouse, preventing the period of absence from creating a partial CGT exposure. And the Centrelink position shifts at separation too: a couple assessed against the couple thresholds becomes two singles assessed against the single thresholds, which can be more or less generous depending on the numbers — worth modelling as part of the settlement. Both spouses must tell Centrelink of the separation, and reversionary pension nominations, binding death benefit nominations and other estate documents that named the former spouse should be updated immediately.

What do worked planning examples show?

These two cases show how the relationship breakdown CGT rollover applies in practice. Illustrative only — not personal advice — using FY25-26 figures.

Case 1 — David and Helen, both 64, separating after 38 years. Assets: family home worth $1.4M (no mortgage); an investment property worth $900,000 (with a $300,000 latent gain); $1.1M of combined super; and a $250,000 joint share portfolio. They want roughly equal division. Several splits are possible. Under one, Helen takes the family home while David takes the investment property and shares, with a super-splitting order moving some of his super to Helen. The investment property carries the $300,000 latent gain, so after the 50% discount David faces a future CGT liability of around $55,500 (at a 37% marginal rate, more or less depending on his income in the year he sells), while Helen's home is CGT-clean. Under another, they sell both properties, divide the proceeds, and split the super — no future CGT tail for either, but both have to find new housing. On these facts the rational approach is to model both after-tax, weigh Helen's preference to keep the home, document the settlement through a binding financial agreement or court order so the rollover applies to the internal transfers, and put the super split through Part VIIIB. The rollover covers the property transfers; super follows its own track.

Case 2 — Margaret, 67, and Robert, 71, separating after 45 years. Assets: family home worth $1.2M; a large share portfolio worth $1.8M (with a $700,000 latent gain, mostly in pre-CGT shares); and modest combined super of $400,000. Here the pre-CGT share parcel is the standout asset. Because pre-CGT shares passing under the relationship breakdown rollover keep their pre-CGT status — the receiving spouse is taken to have acquired them before 20 September 1985 — a future sale of those shares is entirely CGT-free. So who takes them matters: whichever spouse receives the pre-CGT shares can later sell them without CGT, an advantage the family home (also CGT-clean, but producing no income) doesn't share. On these facts the rational steps are to confirm the pre-CGT status of the parcel, and to use it deliberately in the settlement — for instance, the spouse taking the home might also take a portion of the pre-CGT shares so that both end up with a sensible mix of CGT-free capital and income-producing assets. Careful documentation through a formal instrument is, again, what makes the rollover available.

For couples facing late-life separation, the relationship breakdown CGT rollover is the machinery that lets the property pool be divided without an immediate CGT hit — but it depends on a formal instrument, and the asset choices made under it carry significant downstream tax consequences. The advice work is to coordinate with the family lawyer so the proper court order or binding financial agreement is in place before any transfer, to model the division on an after-tax basis rather than on gross values, to handle the super split separately under Part VIIIB, to run the post-separation Centrelink numbers for both spouses, and to update every estate planning document that named the former partner. Too often the rush to settle leads to lopsided asset choices and overlooked tax tails; careful planning at settlement protects both parties' retirements for decades.

Sources

• Australian Taxation Office (ATO) — Relationship breakdown and capital gains tax
• Australian Taxation Office (ATO) — When the relationship breakdown rollover applies
• Australian Taxation Office (ATO) — Calculating cgt on a rollover asset
• Australian Taxation Office (ATO) — Marriage or relationship breakdown
• Australian Taxation Office (ATO) — Superannuation interests