Doing a deal with your ex-spouse has just been made a whole lot more taxing

On 30 July 2014, Taxation Ruling 2014/5 came into effect.

This ruling has important tax implications for the shareholders of private companies who receive a payment of money or the transfer of property from such companies in accordance with Family Law Court Orders under the Family Law Act.

Prior to this Ruling, it had been argued that such payments or transfer may not be treated as assessable income. This Ruling makes it clear that is no longer the case.

Any transfer of money or property to a shareholder (or an associate of a shareholder – eg a husband or wife) of a private company in accordance with an Order under the Family Law Act on and from 30 July onward, will be treated as an ordinary dividend to the extent it is paid out of the private company’s profits, and deemed to be assessable income of the shareholder under Section 44 of the Income Tax Assessment Act 1936.

This could have significant tax implications for the shareholder receiving the benefit of the payment or transfer (whether made to him or her, or an associate).

The dividends and payments noted above continue to be frankable (a franking credit is your share of tax paid by a company from which your dividends or distributions are paid, when a dividend is partially or fully franked it impacts on the amount of tax which is required to be paid on the dividend). Where a dividend is paid to an associate of a shareholder under Section 109C of the Income Tax Assessment Act, that associate is treated as being a shareholder including for the purposes of determining:

1. Whether the franking credit is included in their assessable income; and
2. Whether they are entitled to claim a tax offset equal to the franking credit amount.

If, following separation, the division of assets and liabilities of your relationship involves a business, company or other corporate entity, it is extremely important that you obtain expert legal advice about the income taxation, capital gains taxation and other impacts of agreeing to the transfer of any corporate asset pursuant to Family Law Orders. Failure to do so may result in you creating a significant taxation liability for yourself.