Relationship breakdown – tax trap

Current as of March 2015

A relationship breakdown can be emotionally and financially traumatic as assets are divided and property settlements negotiated. Even where a split is amicable there can be difficulties agreeing on how to apportion the assets, especially when some of those assets are owned by a family company.

The Australian Tax Office’s (ATO) previous position was that the payment of cash, or the transfer of property from a private company, to satisfy a property settlement pursuant to a Family Court order was not considered a payment of a dividend. This was on the basis that the private company was “discharging a liability” when it made the payment or transfer.

In a recent ruling TR 2014/5 the ATO has controversially overturned their previous position. Their position is now that, where a private company is obligated to pay money or transfer property to a shareholder or associate (being a party to the matrimonial proceedings) pursuant to an order by the Family Court, the payment of that money or transfer of property is taken to be a payment of an ordinary dividend or a deemed dividend (to the associate). This dividend is generally taxed in the hands of the recipient shareholder or associate at their marginal tax rate. This can result in a significant amount of tax payable by the recipient, and therefore less assets available to split between the spouses on settlement.

The ruling also clarifies a few technical points:

  1. The dividend can be franked
  2. There are cost base adjustments to the shares post distribution, and
  3. CGT roll-over consequences apply for both parties

The result of this ruling is that an otherwise equitable property settlement can be turned into a very inequitable one for the recipient of money or property from a private company.

The amount of tax payable by the recipient, will now need to be included in the negotiations and addressed in the Family Court orders or Binding Financial Agreement.

The cost of divorce will now rise for many couples if their property settlements are not effectively structured.

When negotiating your property settlement and determining the split of assets, it is now more important than ever to consult a tax adviser so that your post settlement financial situation is addressed to avoid hidden tax traps. Please contact us if this is relevant to you.

DISCLAIMER
This newsletter has been produced by Stanley & Williamson as a service to its clients and associates. The information contained in the newsletter is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this newsletter, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under Professional Standards legislation.