For many people dealing with the emotional fallout of a marriage breakdown, financial complications are the last thing they need.
However, as assets are divided and property settlements negotiated, care is required to ensure the tax implications of any agreement are fully considered and factored in.
Now a new ruling from the Australian Tax Office (ATO) has the potential to make it even harder for divorcing couples to work out who gets what, and how much.
Earlier this year, the ATO finally issued the final version of Taxation Ruling TR 2014/5, in an attempt to clarify its position in relation to the taxation of cash or property paid from a private company under Family Court orders.
Prior to the release of the new ruling, the ATO's position had been that payments of cash or transfers of property from a private company to satisfy a property settlement pursuant to a Family Court order were not considered a payment of a dividend, on the basis that the private company was "discharging an obligation" when it made the payment or transfer.
The new ruling appears to be a direct reversal of the ATO's previously held position, and indicates that, where a private company is obligated pursuant to Family Court orders to pay money or transfer property to a shareholder or associate (being a party to the matrimonial proceedings), the payment of money or transfer of property is taken to be a payment of an ordinary dividend or a deemed dividend.
This dividend would then be taxed in the hands of the recipient shareholder or associate at their marginal tax rates, which could potentially result in a large amount of tax payable (depending on the recipient's personal tax situation).
The new ruling also clarified a number of other issues, including:
- Dividends resulting from these payments can be frankable;
- Where a payment involves the distribution of capital, a cost base adjustments to the shares of the private company may be required for CGT purposes; and
- CGT roll-overs may apply (for both parties) on transfer of property (depending on the application of the individual CGT rules).
While the ruling deals specifically with matrimonial property proceedings and Family Court orders, it's equally applicable to de facto couples and property settlements involving Binding Financial Agreements.
This new position suggests that holding family assets in a corporate structure generally will prove to be problematic in the event of a relationship breakdown, and that the transfer of money or property from a company is best avoided in a property settlement to minimise tax implications.
It's now more important than ever that parties with an interest in a private company (especially family business owners) take this opportunity to speak to a their advisors about protecting their personal and business interests in the event of a separation, to ensure that their business can continue to operate with minimal disruption and that their property settlement is structured in a tax effective manner and with minimal deterioration of personal and company wealth.
Every family has its own unique asset pool, and the combination of asset types, holding structures (such as trusts or companies) and associated tax attributes is limitless.
This Ruling underlines the importance of balancing tax planning and flexibility with asset protection considerations. Accordingly, before any significant asset purchase it is important to discuss the options with your taxation and financial advisors.
It's also important, when negotiating your property settlement and determining the division of the matrimonial pool of assets with your family lawyer, to ensure that your taxation and financial advisor sits at the table so that your post-settlement, after-tax financial situation is canvassed in full and that any tax traps (such as this ruling) are spotted and sprung … before you get caught.
Should you have any questions in relation to any of the above you should contact your trusted Goodwin Chivas & Co advisor on 02 9899 3044.