New Tax Implications For Property Settlement Matters Involving Companies

by Peter Magee on December 11, 2014

Peter Magee

Due to a recent ruling from the Australian Taxation Office there may be tax consequences where, as part of your property settlement with your former spouse, your company:

  • makes a payment or a loan to a shareholder;
  • transfers an asset to a shareholder; or
  • forgives a debt owed to the company by a shareholder.

In any of the above situations your company may be taken to have paid an ordinary dividend to the shareholder. The amount of the ordinary dividend would have to be included in the shareholders assessable income for the applicable tax year.

If you receive an ordinary dividend the amount included in your assessable income will be the amount of money you received or the market value of the property that you received.

For example: Graeme and Amy are currently getting divorced and are negotiating the terms of their property settlement. Both Graeme and Amy are shareholders in their company Hot Chocolate Pty Ltd. As part of their settlement they agree to an order that Hot Chocolate Pty Ltd will pay Graeme $100,000.00. The payment to Graeme of $100,000.00 in October 2014 is an ordinary dividend and would have to be included in his assessable income.

What impact will that have on Graeme?

If for the financial year ending 30 June 2015 Graeme earned $100,000.00 from working in his job as a personal trainer and received his $100,000.00 settlement from Hot Chocolate Pty Ltd his total assessable income for the 2015 financial year could be the total $200,000.00. This could see Graeme pay a larger percentage of his settlement sum in tax.

It is not only shareholders that this new ruling applies to but also associates of a shareholder. An associate of a shareholder includes a current and divorced spouse of the shareholder.

If as part of your property settlement with your former spouse your company:

  • makes a payment or a loan to your former spouse;
  • transfers an asset to your former spouse; or
  • forgives a debt owed to the company by your former spouse;

that payment, transfer or forgiveness of debt may be treated as a deemed dividend and would have to included in their assessable income even if they are not a shareholder in the company.

For example: Graeme and Amy are currently getting divorced and are negotiating the terms of their property settlement. Graeme is the sole shareholder in the company Hot Chocolate Pty Ltd. As part of their settlement they agree to an order that Hot Chocolate Pty Ltd transfers a rental property with a market value of $300,000.00 to Amy in October 2014. The market value of the rental property ($300,000.00) is a deemed dividend to Amy for the financial year ending 30 June 2015 and may have to be included in her assessable income

What impact will that have on Amy?

If for the 2015 financial year Amy earned $50,000.00 from working in her job as a dental assistance and received the rental property with a market value of $300,000.00 her total assessable income for the 2015 financial year could be $350,000.00. This could see Amy pay a large percentage of her settlement sum in tax.

For more information on property settlement matters and the possible tax implications of your agreement make an appointment with Armstrong Legal.

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