Divorce – Now the Taxman Wants a Share
Divorce is at the best of times a very challenging and emotional time, with the various parties seeking to extract themselves from the situation they are in. Sometimes this process is relatively straightforward, however, unfortunately more often than not, the process is far from straight forward involving lawyers and significant costs for both parties.
Ultimately, the costs for both parties reduce the overall asset pool for the parties to share, but until recently the main costs were legal fees. This is set to change, as the Commissioner of Taxation is now holding his hand out for a share of the family pie.
Historically, any capital gains made on the disposal of assets to a spouse as part of a family settlement was deferred until the spouse subsequently sold the asset. This concession still remains, however, an equally important administrative practice has now been removed and a contra position adopted by the tax office in a ruling.
The tax ruling focuses on payments made by a family company under a Family Court Settlement. Often under a Family Court settlement a family company is ordered to (or one of the spouses is ordered to ensure the company) make a payment to the former spouse. Until recently the general practice by the ATO was to consider that such payments were not subject to the Division 7A rules (which can deem payments and loans to be dividends) as they considered the payments were covered by a specific exemption. However, the ATO’s viewed has changed meaning that the costs of a divorce are suddenly higher as these payments are now subject to tax.
In some circumstances this could reduce the settlement in the hands of one of the spouses by 46.5% and as a result of this change, parties may start to seek a change in the split of assets in divorce proceedings. As a result parties are likely to seek a larger settlement to ensure that they achieve an after tax settlement position equal to what they would have received before the change in ATO view.
The change in view from the ATO could move 50-50 settlements into settlements with unequal weighting, making them inequitable to account for the tax consequences on payment.
There are a number of potential solutions for mitigating the application of the deemed dividend provisions as part of a family settlement, however, careful consideration of the relevant factors are fundamental and these include the existing family investment structures.
Should you have any questions in relation to the above, or structures generally, please contact your relevant ESV Engagement Partner on 9283 1666.
Article by David Prichard