Tax Implications

There are important tax and duty concessions available to parties whose property interests need to be re-organised on breakdown of their relationships. For example, transfers of property between spouses are exempt from NSW stamp duty, and there is capital gains tax roll-over relief.

Presumably there is a social policy behind this; that the community should not profit from marriage breakdown.

A recent Australian Taxation Office (ATO) draft ruling runs in the opposite direction. By way of explanation, a draft ruling is an opinion issued by the Tax Office. This new draft ruling will particularly affect parties who operate a private company (or companies), and whose assets acquired during the relationship are comingled with company assets. This occurs very frequently in private companies.

If a couple had assets in a company (or potentially, trust), and part of the divorce settlement involved getting the asset out of the company and into the name of a spouse, that transfer was previously exempt from income tax under Division 7A of the Tax Act. This is even though on the face of it, the payment or transfer of assets would have to be a dividend or a distribution. Applied to this situation, the new draft ruling from the ATO will make the recipient spouse pay tax on what he or she receives as though it were an unfranked dividend.

The ATO has explained that its original intention for the exemption was that it apply only to commerical arrangements undertaken at "arms length", because some of the transfers of assets or payments made in this way are done to take advantage of the 30% company tax rate and are disguising "soft loans" or under-valued market transactions. The ATO has said that in the context of family law property settlement, a payment made in this way to a spouse or partner will never be an "arms length" dealing, and the exemption thus will not apply.

The new draft ruling directly contradicts previous binding private rulings issued by the ATO, which makes the net result of the draft ruling confusing. Given this draft ruling, it therefore becomes even more important to take competent tax advice when working out the structure of a family law property settlement. That advice should be directed not to what percentage of the property you receive, but to ensure that all tax liabilities both actual and potential are taken into account. That then implies advice on how best to structure the settlement to minimise the impact of tax but if that is not possible, to ensure that it is taken into account.