Personal and family wealth is often housed in trusts, companies and other corporate entities. There is good reason for using these structures - they provide tax advantages and asset security.

However, tax advantages can also be lost if you transfer money or property out of a company or trust. For example, if you need to transfer money out of a company as part of a property settlement under the Family Law Act. In this situation, payments can be classified by the Australian Taxation Office as a "deemed dividend", with a risk that franking credits are lost and the maximum marginal tax rate is applied.

Previously, there was a way around this problem, by binding the relevant company or trust to court orders, which required that company/trust to make a payment in order to satisfy a property settlement claim under the Family Law Act. If documented and effected correctly, this type of payment may not have attracted taxation and both parties benefitted, because the property settlement was effected in pre-tax dollars.

However, the Australian Taxation Office has recently released a Draft Ruling which potentially negates the tax effectiveness of these type of arrangements. There is now a risk that if you seek to effect the old "tax friendly" arrangements, and get it wrong, the property settlement may actually end up being taxed at the highest marginal tax rate!

This is an example of the ever-changing climate regarding family law and taxation. In order to avoid costly mistakes, you should make it a priority to obtain specialist advice prior to entering into any property settlements.