Up until 13 November 2013, several private rulings of the Australian Taxation Office had established a general rule regarding section 44 and Division 7A of the Income Tax Assessment Act 1936 (Cth) (ITAA). The general rule was that section 44 and Division 7A of the ITAA did not apply to the payments of monies or transfers of property by a private company to a shareholder (or their associate) in family law proceedings. For example, if a husband and wife and their company were parties to proceedings before the Family Court of Australia and orders were made that the company pay to the wife a sum of money, that sum would not be assessed as a dividend under section 44 of the ITAA. Likewise, if the company was ordered to transfer property to the wife, that property would not be deemed as a dividend either.
The Australian Taxation Office Draft Ruling TR2013/D6 was released on 13 November 2013. In short, the Australian Taxation Office has back flipped on its previously held position on this issue. 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. Both of the above examples would therefore trigger a tax event.
The Draft Ruling acknowledges that the Australian Taxation Office’s position has changed on this matter and indicates that orders made prior to 13 November 2013 will not be subject to the Ruling. From the date of the Ruling onwards, however, orders in family law proceedings will be subject to the terms of the Ruling.
The Ruling is presently open for public comment until 8 January 2014. Shortly thereafter, it is anticipated that the Draft Ruling will be made final.
The Draft Ruling will affect those matrimonial 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, orders will have to be drafted by the parties’ solicitors so as to ensure that the matrimonial settlement does not trigger any tax events and that the parties can finalise their property settlement proceedings in the most tax effective manner possible. The reality may be that in some cases it is simply impossible to finalise the property settlement without triggering a tax event.