Family Law Settlements – don’t get caught out by proposed new tax ruling

From as early as July this year a Final Tax Ruling is likely to issue which will reverse the Commissioner’s views on the taxation status of private companies paying money or transferring property in satisfaction of property orders made under the Family Law Act.

The draft ruling released for comment in November last year provides that where private companies are joined as parties to Court proceedings and ordered to pay money or transfer property to a shareholder or an associate of the shareholder such as a spouse/partner, the payment or transfer will constitute an assessable dividend requiring the recipient to pay income tax on the sum received or value of property.

This is a departure from the ATO’s previous position which did not construe such transactions under s79 of the Family law Act to be dividends.

The impact of the draft ruling also applies when private companies are not parties to Court proceedings but where a Court order requires the parties to cause the private company to transfer property of pay money to a shareholder or associate.

It is proposed by the ATO that the Final Tax Ruling will apply to private company transactions under Family Court orders both before and after the date the Final Tax Ruling issues. Although the Commissioner has advised the ATO will not undertake active compliance activities in relation to Court orders made before this date, if asked for example in a private ruling the Commissioner’s view will be consistent with the new approach.

We will always recommend you seek out specialist financial advice with respect to your matrimonial matters but now more than ever if these changes could apply to your property settlement.