Minor changes in taxation law are not usually a matter of concern or interest to most people, unless their financial situation is directly affected by those changes. Up to now, money or property received via family law settlements was generally tax-exempt. That is set to change in a major way.
The Australian Taxation Office Draft Ruling TR2013/D6 was released on 13 November 2013. The Draft Ruling indicates that in the future, payments of money or transfers of property by a private company to a shareholder (or their associate) in family law proceedings will be subject to section 44 and Division 7A of the ITAA.
This ruling means that if husband and wife (or de facto couple) and their company arrive at a family law settlement where the wife receives a sum of money via certain channels, tax may now be payable on that sum.
Likewise, if their company is ordered as part of the settlement to transfer a property to the wife, that property may well be deemed to be a dividend paid to the wife, and hence, tax will be payable.
This Draft Ruling will affect family law cases where one party seeks to retain a company, generally the vessel through which a family business is managed, and seeks to make a payment from that company to the other party, either by cash payment or transfer of property.
In these circumstances, parties must ensure that their legal representatives draft settlement orders that do not trigger any tax events. Both lawyers and accountants should assist parties to finalise their property settlement proceedings in the most tax effective manner possible.
Unfortunately, however, this change in tax law means that in some cases it may be impossible to finalise a family law property settlement without initiating a tax event.
The Draft Ruling was available for public comment until January 8 2014, and a final ruling had not been issued as at the time of writing.
This is general information only, and does not constitute specific legal advice. If you would like further information in relation to this matter contact Helen St Jack via email at email@example.com or call (08) 9841 2322.