Are legal settlements taxable income in Australia? This is a common concern for individuals going through family law matters. In Australia, most family law settlements, including property division and spousal maintenance, are not considered taxable income for the recipient.
However, there are some exceptions where tax consequences may apply, such as capital gains tax (CGT) on certain asset transfers. Understanding the tax treatment of legal settlements is essential to avoid unexpected financial obligations.
Below, we answer some of the most frequently asked questions regarding legal settlements and taxation in family law cases.
Are Financial Settlements in Family Law Considered Taxable Income in Australia?
Property Settlements
A property settlement in a divorce or separation involves dividing assets, liabilities, and financial resources between former spouses. The good news is that a property settlement itself is not considered taxable income.
This means that if you receive money or assets as part of a settlement, you do not need to include them in your tax return as income.
However, capital gains tax (CGT) may apply if certain assets, such as investment properties or shares, are transferred. Fortunately, there is a CGT rollover relief for assets transferred between spouses under a family court order. This means that CGT is deferred until the recipient sells the asset in the future.
Spousal Maintenance
Spousal maintenance is a financial support payment made by one spouse to another after separation or divorce. In Australia, spousal maintenance is not considered taxable income for the recipient, nor is it tax-deductible for the payer.
This differs from countries like the United States, where maintenance payments are often taxable.
Child Support Payments
Child support payments are also not taxable income for the parent receiving them. Similarly, the parent making the payments cannot claim them as a tax deduction. Child support is strictly intended for the welfare of the child and does not have tax implications for either party.
Lump Sum Payments vs. Periodic Payments
Lump sum settlements and periodic payments (such as regular spousal maintenance) generally follow the same tax treatment. Neither is taxable income for the recipient, and there are no tax deductions available for the payer.
The only tax concern arises when lump sum payments involve asset transfers that trigger CGT obligations.
Also Read: How to Avoid Paying Taxes on Divorce Settlement
How Does the Australian Taxation Office (ATO) Treat Legal Settlements in Family Law Cases?
Capital Gains Tax (CGT) on Asset Transfers
The ATO considers certain legal settlements to have tax consequences, particularly when they involve assets subject to capital gains tax.
When assets such as real estate, shares, or investment properties are transferred between parties due to a divorce or separation, the CGT rollover provisions can help defer tax liability until the asset is sold in the future.
For example, if a family home is transferred from one spouse to another under a property settlement, no CGT is payable at the time of transfer. However, if the home is later sold and does not qualify for the main residence exemption, CGT may apply.
Superannuation Splitting and Tax Implications
Superannuation is often one of the largest assets to be divided in a property settlement. In Australia, superannuation is not considered taxable income when it is split between former spouses.
However, the funds remain within the superannuation system and can only be accessed under normal superannuation conditions (such as reaching the preservation age). When a spouse eventually accesses their superannuation, normal tax rules will apply based on their individual superannuation structure.
Tax Considerations for Business Assets and Trusts
If a family law settlement involves business assets, companies, or family trusts, the tax implications can be more complex. The ATO may view certain asset transfers as triggering CGT or affecting company tax obligations.
Additionally, restructuring family businesses during a divorce may involve stamp duty and GST consequences, depending on the circumstances. Seeking professional tax advice is highly recommended when business assets are involved in a settlement.
Legal Costs and Tax Deductions
Legal fees incurred during a family law matter are generally not tax-deductible. However, in rare cases where legal costs are associated with generating taxable income (such as negotiating business asset settlements), deductions may be available.
Consulting a tax professional can clarify whether any portion of legal fees may be deductible.
Also Read: Are Divorce Settlements Taxable in Australia?
Need Expert Family Law Advice? Contact Justice Family Lawyers
While most legal settlements in family law are not taxable income, some aspects–such as CGT on asset transfers and superannuation splitting–can have tax implications. Understanding these rules can help avoid financial surprises during a divorce or separation.
Do you have questions about your legal settlement and its tax implications? Justice Family Lawyers provides expert guidance on property settlements, spousal maintenance, and asset division.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
