August 24, 2014

The increasing costs of divorce – when property settlement results in an unpalatable Taxation Liability

The issue of Taxation Ruling TR 2014/5 on 30th July 2014 (the Ruling) has endeavoured to bring clarity to Division 7A implications in the transfer of property or payment of money as a result of an order.

Previous Application

The previous application was that an order made under section 79 of the Family Law Act 1975 was potentially able to be exempted under Section 109J of the ITAA 1936. The Ruling serves to deny that exemption.

Current Application

Where such an order gives rise to money being paid and or property being transferred from a private company whether the company is party to the proceedings or an associate of a party to the proceedings, then the payment of money or transfer of property shall be an ordinary dividend. It is possible for these dividends to be frankable.

An example of section 79 orders to pay money or property as described in the ruling is reproduced below:

Husband and Wife are parties to matrimonial property proceedings before the Family Court. The Husband is the sole shareholder of XYZ Pty Ltd which is the vehicle for the family business and has retained profits of $200,000. The distributable surplus as worked out under section 109Y of the ITAA 1936 is greater than $100,000.

The Family Court makes a section 79 order for XYZ Pty Ltd to pay the Wife $100,000.

The payment of $100,000 is assessable to the Wife as a dividend under section 44 of the ITAA 1936, by virtue of section 109C of the ITAA 1936.

Where to from here …?

The issue of this Ruling means that orders for payments or transfer of property can have significant adverse tax consequences and accordingly prior planning and preparation in relation to the structure of a settlement and the drafting of the subsequent section 79 orders is necessary.

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