If your marriage or de facto relationship breaks down, the outcome of your property settlement can be significantly affected by tax and stamp duty consequences. Understanding which taxes and duties may apply is important when negotiating your property settlement.
Property settlements and the transfer of property
A property settlement under section 79 of the Family Law Act 1975 (Cth) (Family Law Act) can require separating couples to adjust their property interests by transfers of real or other property. Different types of property attract different types of taxes and duties upon transfer. This article discusses two examples of property that may incur taxes and duties when transferred as part of a property settlement.
Example 1: Transfers of property from private companies
When one or both of the parties to a property settlement has control of or involvement with a private company, as part of the property settlement a court can order that the private company transfer either funds or property to a party that is shareholder of the company or an associate of a shareholder.
In the past this was treated as the company discharging an obligation to pay money, not a distribution of profits from the company in the form of dividends. This meant, due to exemptions under the Income Tax Assessment Act 1936, that the money or property would not form part of the recipient’s assessable income as a dividend.
However, in recent years the ATO has changed this position. In Tax Ruling 2014/5, the ATO determined that cash payments or transfers of property from a private company to an individual in family law proceedings will be treated as the payment of dividends from that company. The practical effect of this ruling is that any transfer from a private company will form part of the recipient’s assessable income for tax purposes as a deemed dividend
Tax on deemed dividends can significantly reduce the money that a party is left with following a property settlement. It is particularly important that this potential liability is considered in advance of the property settlement, as it will normally not be incurred by the recipient until lodgment of their tax return at the end of the financial year. With the appropriate advice and planning, other transactions or settlement structures may be used to effect division of funds or assets to minimise or defer such a liability.
Example 2: Section 79 property settlements and stamp duty exemptions
There are stamp duty exemptions available for conveyances or transfers as part of a property settlement under both the Family Law Act and the relevant legislation of the state in which the transaction takes place.
There are exemptions in the Family Law Act to the effect that state or territory duties or charges will not apply to transfers or conveyances of property when they are part of a section 79 property settlement. However, there is some doubt as to the validity of these exceptions. In practice, it is usually the state specific exceptions that are relied on to relieve parties to a property settlement from the payment of stamp duty.
This lack of certainty means it is particularly important to seek legal advice and understand the usual practice in your state and likelihood, given the courts’ prior decisions, of gaining an exemption.