The ATO has issued its final version of Taxation Ruling TR2014/5, which clarifies the position of its earlier draft Ruling that the receipt of cash or property from a private company pursuant to Family Court Orders is subject to tax as an assessable dividend.
Under this Ruling, where a private company is required pursuant to Family Court Orders to pay money or transfer property to a shareholder or associate (being a party to the matrimonial proceedings), the payment of money or transfer of property is taken to be a payment of an ordinary dividend or a deemed dividend (as the case may be).
Such a dividend is generally taxed in the hands of the recipient shareholder or associate at their marginal tax rates, which could result in a significant amount of tax payable by the recipient.
The new Ruling also clarifies a number of ancillary tax effects that can arise from the payment or transfer in this manner, including:
- That dividends can be frankable;
- That there are cost base adjustments to the shares of the private company post-distribution for Capital Gains Tax (CGT) purposes; and
- Confirming that CGT rollover consequences apply (for both parties) on the transfer of property.
Whilst this Ruling refers to matrimonial property proceedings and Family Court Orders, it is believed that it is equally applicable to property settlement proceedings as they apply to de facto couples and settlements involving Binding Financial Agreements.
It is important that parties with an interest in a private company, particularly family business owners, speak to an experienced Family Lawyer about protecting their personal and business interests in the event of a separation, to ensure that their business can continue to operate with minimal disruption and so their property settlement is structured in a tax effective way and with minimal deterioration of personal and company wealth.
This Tax Ruling adds another layer of complexity to be considered in property settlement negotiations between spouses and de factos so as to ensure that the implications of this Ruling are not overlooked, resulting in an otherwise equitable property settlement turning out to be an inequitable one, particularly for the party that is in receipt of cash or property from the private company. Any exit tax that will be payable due to this Ruling will need to be crystallized to the greatest possible extent and taken into consideration as a further liability of the parties to be apportioned. Consideration should be given to specifically address in the Family Court Orders or Binding Financial Agreements, how the resulting tax liabilities are to be funded, particularly if either party proposes to transfer or receive assets that cannot be readily liquidated into cash.
For more information or advice concerning Tax Law, contact the experienced team at Rockliffs Lawyers today.