Summary

The Australian Taxation Office recently issued a ruling confirming that cash payments or transfers of property from private companies to individuals as part of a property settlement for separating couples, are likely to be treated as dividends from those companies.

Effectively it means that cash payments or transfers of property from private companies to individuals in family law proceedings will now be taxed.

What has changed?

Previously, parties to family law proceedings could have these payments or transfers considered as discharging "an obligation…to pay money" under section 109J of the Income Tax Assessment Act 1936, rather than as a distribution of profits from a company.

Private companies holding assets that formed part of a couple's pre-separation wealth were often used as a way to fund divorce/separation settlements, as those assets were not subject to further tax.

Under the new ruling, a payment or asset transfer from a private company will likely give rise to a deemed dividend which may or may not be frankable by that company. This means that many property settlements involving money or assets held by private companies may attract immediate tax liabilities or require the payment of "top-up tax".

The ATO has indicated that it will not retrospectively review any court orders made prior to 30 July 2014, but future property settlements should be structured in light of the new ruling.

What's the good news?

The good news is that with careful tax planning in the early stages of family law disputes, it is still possible to take advantage of tax deferrals, franking credits and capital gains tax benefits (including rollover relief) when structuring overall property settlements.

Importantly, payments between individuals in family law proceedings (which do not involve private companies) generally do not require further tax to be paid.

Separating couples should ensure that they seek appropriate advice about maximising the value of their property settlements and tax-effective structures to manage these, now and into the future.