Divorce and your tax returns

The accountant rang me on a Wednesday in late June, two days before the financial year ended. He said, "Mate, we need to talk about your marital status before I lodge." I had not thought about my marital status as a tax category. I had thought about it as a wound. He said it again, kindly, "Marital status. The ATO needs to know." That was the moment I learnt that divorce is not just an emotional event or a legal event. It is a tax event. And the ATO does not care that you are tired.

Australia has, on the whole, a sensible approach to the tax treatment of separating couples. There are concessions. There are rollovers. There are dates that matter. The catch is that the concessions only apply if you do the paperwork in the right order, and the dates only protect you if you can prove them. Most blokes I know got at least one thing wrong in their first year of separation. I got two things wrong. Here is what I wish I had known on day one.

The capital gains tax rollover (and the trap inside it)

Section 126-A of the Income Tax Assessment Act 1997 gives you a CGT rollover when assets transfer between spouses pursuant to a court order, a binding financial agreement, or formal arbitration. In plain English: if your ex transfers the investment unit to you under a consent order, neither of you triggers a capital gain at the moment of transfer. The cost base carries across. The CGT event happens later, when you eventually sell.

This is generous. It is also conditional. The rollover only applies if the transfer is pursuant to a qualifying instrument. If you and your ex agree informally to swap assets and just do it, no rollover. The transfer is treated as a disposal at market value, and the gain is taxable in the year of transfer. I know a bloke in Newcastle who lost forty-two thousand dollars to that mistake. He transferred a rental property to his ex on a handshake in March 2023. The order came through in November. The ATO did not care about November. The transfer happened in March without the paperwork, and the gain was his.

The lesson: get the consent orders or BFA in place before you move title. If you cannot, document the agreement in writing and have your solicitor confirm it qualifies as a "court order or maintenance agreement" under the rollover rules.

The family home and the main residence exemption

The main residence exemption usually shelters your home from CGT. After separation, there are two scenarios that catch people out.

• One spouse stays, the other moves out. The spouse who stays continues to claim the exemption. The spouse who moved out can choose to keep treating the old home as their main residence for up to six years (the "absence rule"), but only if they are not treating a new property as their main residence in the same period. You cannot have two main residences (except for a six-month overlap when changing).
• The home is transferred under consent orders. The receiving spouse inherits the cost base, and importantly, inherits the period of ownership. When they eventually sell, the exemption history flows through. Get this wrong and you can lose the exemption on years of growth.

Talk to your accountant about which spouse claims what and for how long, and put it in writing. Do it the same week you sign the consent orders, not the year after.

The date of separation matters more than you think

The ATO uses your "marital status" at 30 June to assess a range of items: spouse offset, Medicare levy surcharge, family tax benefit, private health rebate income test. If you separated under one roof in February but did not file paperwork until October, the ATO still treats you as separated from February provided you can prove it. Proof looks like:

• Separate bedrooms documented (text to a friend, email to a counsellor).
• Financial separation (separate accounts, no shared bills from that date).
• Notice to Centrelink or Medicare of change in circumstances.
• A diary entry, a statutory declaration, anything contemporaneous.

This matters because separating partway through the financial year changes the income tests. If your ex earned ninety thousand and you earned one hundred and sixty thousand, the household income test that triggers the Medicare levy surcharge applies for the period you were a couple, not the whole year. Get the date right and you save real money. Get it wrong and you either overpay or get audited.

Superannuation splits and the tax inside them

Super splits under family law are not taxed at the time of the split. The receiving spouse takes the benefit into their own super account with the same tax components (taxable, tax-free, taxed element, untaxed element) that it had on the way out. This is genuinely good news. It means a super split is not a CGT event and does not eat into your retirement savings the way a property sale might.

Three things to watch.

• Defined benefit funds. Splitting a defined benefit interest is technically possible but valuation is complex and the receiving spouse usually ends up with a non-member spouse interest with strange access rules. Get specialist advice.
• Self-managed super funds. If both spouses were members, separation requires careful unwinding. One member usually rolls out to a new fund. Watch the in-specie transfer rules and the trustee structure.
• Contribution caps. A super split does not count towards the receiving spouse's contribution caps. People sometimes worry about this. They should not.

The change in marital status with the ATO

Update your details through myGov as soon as the date of separation is settled in your own mind. Do not wait for the divorce decree. The ATO uses "separated" as a marital status category, distinct from "divorced". You can be separated for tax purposes without being legally divorced, and you should be, because that is what reflects your actual financial life.

While you are in there, also update:

• Your TFN declaration with your employer (the spouse offset claim is gone).
• Your private health fund (your rebate tier may change).
• Your superannuation beneficiary nomination (your ex is probably still listed).
• Your bank's record of marital status (relevant for joint accounts being closed).

The trap of the year of separation

The single most common mistake I see is people lodging their year-of-separation return as if nothing happened. They tick "married" because they were married for most of the year. They claim the spouse offset because they always have. Twelve months later they get an amended assessment from the ATO and a small bill with interest.

The right approach is to lodge the year of separation with care. Put the date of separation on the return. Apportion the spouse offset (if claimable) only for the period you were a couple. Disclose any asset transfers that happened in the financial year, even if they qualify for rollover. Keep the documentation: the consent orders, the BFA, the valuation reports, the bank statements showing financial separation. Give it all to your accountant in a single folder. Pay the extra hour of accountant time. It is the cheapest hour in the whole divorce.

A quick checklist for the year you separate

• Date of separation, written down and verifiable.
• Notice to ATO via myGov of marital status change.
• Notice to Centrelink, Medicare, private health fund, super fund.
• Consent orders or BFA in place before any major asset transfer.
• Main residence exemption strategy decided in writing.
• Super split (if any) lodged correctly with the trustee.
• Year-of-separation return reviewed by an accountant who has seen separations before, not just family returns.

You can survive the emotional year. You can survive the legal year. The tax year quietly piggybacks on both, and it will collect what it is owed whether you are paying attention or not. PAY attention.

Document the date. Lodge with care. Keep the receipts.