Relationship Breakdown – Tax Trap

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A relationship breakdown can be emotionally and financially traumatic for both parties involved, requiring the expertise of a tax agent. Assets division and property settlements can become challenging, mainly when dealing with assets owned by a family company, even in cases where the split is amicable.

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 according to a Family Court order was not considered a dividend payment. This was because the private company was “discharging a liability” when it made the payment or transfer.

In a recent ruling TR 2014/5, the ATO 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) according 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). The recipient shareholder or associate generally taxes this dividend at their marginal tax rate. This can result in a significant amount of tax payable by the recipient and, therefore, fewer 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 must now 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 to address your post-settlement financial situation to avoid hidden tax traps. Please contact us if this is relevant to you.

Kreston Stanley Williamson Team

*Correct as of March 2015

Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.

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