Tuesday, 12 August 2014

Tax ruling change - potential significant impact on property settlements

At end of financial year the Australian Tax Office issued a final public ruling that provides that payments from a private company to a spouse in accordance with a Family Law Courts order are now to be treated as a deemed dividend and subject to personal income tax. Previously these payments, per earlier practice and many private rulings from the ATO, were treated as tax free payments to the spouse receiving the money.

This is a considerable policy change impacting on those couples whose property includes family companies. Indeed the ruling from the ATO notes a reversal of a "significant body" of previous private rulings and a general practice.

Additionally, it is arguably contrary to other tax breaks that are available for separating couples, such as stamp duty exemptions and capital gains tax rollover relief.

Business advisers have been quoted in news articles (such as in the Australian newspaper and the Australian Financial Review last week) as saying that the change could mean that people are unable to retain their businesses as they are required to come up with more money to make up the difference to their former spouse and to do so they will have to sell the business.

Whether that will occur or not will depend on the circumstances of each case but what is going to occur is that parties to family law proceedings will need to carefully consider whether non-company assets should be divided in a different manner in order to achieve a better tax outcome. But there are some matters where almost all of the assets that the parties "own" are held by a company and such an option will not be available. In those cases, accountants will need to determine the tax implications and costs of splitting the assets so parties know what the net outcomes will be.

If there is extra tax payable it will need to be taken into account when determining a just and equitable outcome between the parties with the result that the parties are dividing less than they previously would have been.

In some circumstances, where a spouse does wish to retain the company and its assets, it is also possible that company restructures will be necessary resulting in complex tax arrangements being undone in order to try and achieve an equitable result.

Some commentators are calling for government intervention - legislation to overturn the ATO's ruling. It will be interesting to see if the government responds. 

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