Transfers due to Separation

Navigating Property Title Transfers due to Separation and Divorce in Victoria

Separating from a partner is one of life’s most challenging transitions. Amidst the emotional upheaval, there are significant practical and legal hurdles to clear, none more important than the division of matrimonial property.
In Victoria, transferring a property title from joint names into a single name, or from one partner to another, is a critical step in finalizing a financial settlement.

Understanding the legal requirements, the role of the State Revenue Office (SRO) and Australian Taxation Office (ATO), and the potential for significant tax savings through stamp duty exemptions can make a profound difference in your financial future. This page provides a brief overview of the process for property title transfers following a relationship breakdown in Victoria.

Formalizing Property Transfers due to Separation

When a relationship ends, the "family home" is often the most valuable asset. While some couples choose to sell the property and split the proceeds, many opt for one partner to "buy out" the other. This requires a formal transfer of land and simply moving out or having a verbal agreement is sometimes not enough. To legally change ownership, a Transfer of Land document must be lodged with Land Use Victoria.

Failing to formalize this process can lead to future complications, such as:

• Liability issues: If both names remain on the title, both parties remain legally responsible for the mortgage, rates, and land tax.
• Estate complications: If one party passes away, the property may automatically pass to the ex-partner under "joint tenancy" rules, regardless of what a Will says.
• Future borrowing power: Having an old mortgage in your name can prevent you from securing finance for a new home.

Stamp Duty Exemptions for Transfers due to Separation in Victoria: Section 44

The most significant financial benefit available during property transfers due to separation is the Stamp Duty Exemption. In Victoria, stamp duty is officially known as Land Transfer Duty.
Under normal circumstances, transferring a share of a multi-million dollar property would incur tens of thousands of dollars in tax.
However, under Section 44 of the Duties Act 2000 (Vic), transfers of land are exempt from duty if they are made solely because of the breakdown of a marriage or a domestic (de facto) relationship.

Who is Eligible?

Transferors (the people giving up or transferring an interest):

• The parties to the marriage or domestic relationship (or related trustees). 
  

Transferees (the people receiving the interest):

• The parties to the marriage or domestic relationship.
• Dependent children of the parties.
• Exclusive related trustees acting for the parties or dependent children

Married vs. De Facto Relationships

The stamp duty exemption in Victoria applies equally to both married couples and de facto partners (including same-sex couples). For de facto relationships, the Victorian State Revenue Office typically requires evidence that the parties lived together on a genuine domestic basis for at least two years, or that there is a child of the relationship.

The Role of Formal Agreements

There is also certain tax benefits that can be accessed if the separation is done with a formal agreement. This is usually evidenced by one of two legal documents:

1. Consent Orders - Consent Orders are the "gold standard" for property settlements. These are written agreements that are filed with and approved by the Federal Circuit and Family Court of Australia. Once the Court reviews the agreement and deems it "just and equitable," the orders become legally binding.

2. Binding Financial Agreements (BFA) - A BFA is a private contract between the parties. It does not require court approval but must meet strict legal requirements under the Family Law Act 1975. Both parties must receive independent legal advice and have their lawyers sign a certificate confirming this advice was given.

The Step-by-Step Transfer Process

Transferring property in Victoria is now almost exclusively handled through PEXA (Property Exchange Australia), an electronic settlement platform. Here is how the process generally unfolds:

Step 1: Reach a Financial Agreement - You and your former partner must agree on how the property will be divided. This includes determining the value of the property and how much the departing partner will receive.

Step 2: Legal Documentation - Consult with a family lawyer to draft either Consent Orders or a BFA. This document must clearly state that Property A is to be transferred from Person X and Person Y to Person X alone (or Person Y).

Step 3: Refinancing the Mortgage - If there is an existing mortgage, the partner keeping the home must usually refinance the loan into their sole name. The bank will conduct a valuation and a credit assessment to ensure the remaining partner can afford the repayments on their own. The bank will require a copy of the signed Consent Orders or BFA before granting "Unconditional Approval."

Step 5: Settlement - On the scheduled settlement date, the PEXA system automatically handles the exchange of funds and the lodgment of documents with Land Use Victoria. The mortgage of the departing partner is discharged, the new mortgage is registered, and the title is updated to reflect the new ownership.

Capital Gains Tax (CGT) Considerations

Marriage or relationship breakdown rollover

A marriage or relationship breakdown rollover may apply when the transfer of property (by you, a company or the trustee of a trust) results from a court order, a binding financial or formal agreement or an award.
This rollover means that you disregard any capital gain or loss made when you transfer the property to your spouse.

For the transferor (the person, company or trustee of a trust transferring an asset):

• Your interest in the property is transferred to your spouse.
• You disregard any capital gain or loss.
• You report the rollover in your tax return.

For the transferee (the spouse who receives the asset):

• The property and cost base are transferred to you.
• You make a capital gain or loss when you dispose (such as selling) of the property.
• If you already had a legal interest in the property, you must calculate your capital gain or loss separately to the interest transferred from your spouse.
• If the transferred property was acquired by your spouse (or a company or trustee) before 20 September 1985, CGT doesn't apply.

However, if they made a major capital improvement to the dwelling on or after 20 September 1985 the improvements are separate assets and you may be subject to CGT.

If a rollover doesn’t apply

The rollover doesn't apply to property that's divided under a private or informal arrangement. This includes anything outside of a court order or binding financial or formal agreement.

For the transferor:

• Your interest in the property is transferred to your spouse. You must consider any capital gain or loss made when working out your capital gain (or capital losses carried forward to future years) on your tax return for that year.
• Where the dealings are not arm's length, you are taken to have received the market value of the property for CGT purposes.

For the transferee:

• The property is transferred to you and you're taken to have acquired it at the time of transfer.
• You make a capital gain or loss when you sell the property.
• Where the dealings are not arm's length, you are taken to have acquired the property at market value for CGT purposes
• If you already had a legal interest in the property, calculate your capital gain or loss separately from the interest transferred
  from your spouse.

Note: An arm’s length dealing is where each party acts independently and without influence or control over the other. It depends on the nature of your relationship and the bargaining between you.
To determine the property's market value at the time of transfer, you should get a professional market valuation.