Div 7A & Family Property Settlements

In TR 2013/D6 the ATO has reversed its position and indicated that a payment from a private company to a spouse pursuant to a court order will not satisfy the requirements for exemption under section 109J and will be a deemed Division 7A dividend and as a result tax will be payable on these payments now.

Div 7A & Family Property Settlements

Often when a family law property settlements is required involving the payout from a family controlled company to the spouse not continuing on in the business.

Previous ATO Position

Previously payments made by a private company were not taxable as deemed dividends under Division 7A to the extent that the payment:

·         discharges an obligation of the private company to pay money

·         is an amount not more than would have been required to discharge the obligation (if the amount is no more than an arms length amount)

·         the recipient spouse was not a shareholder at the time of payment the payment may still have been treated as a dividend under the general provisions in the Act.

New ATO Position – TR 2013/D6

In TR 2013/D6 the ATO has reversed its position and indicated that a payment from a private company to a spouse pursuant to a court order will not satisfy the requirements for exemption under section 109J and will be a deemed Division 7A dividend and as a result tax will be payable on these payments now..

The rationale for this approach in the ATO’s eyes is that the parties are not dealing at arm’s length and the parties been dealing at arm’s length, the company would not have made a ‘gratuitous’ payment.

What are the possible consequences?

Ø  There will be significant tax liabilities attaching to these payments from companies

Ø  ex-spouses eligible for such payments under Family Court Order may end up with significantly less money

Ø  Ex-spouses eligible for such payments may have to accept payments by instalment over many years to meet their funding requirements and manage the tax impacts.

Ø  Some ex-spouses who need funds urgently may agree to accept lower settlements in exchange for access to funds more quickly (recognising that funds are finite and taxes will as a result be higher).

Ø  Negotiate / voluntary settlements may be harder to achieve as effective after tax funds will be lesser

Ø  Parties may be more adversarial in contesting claims on assets such as super and the family home which are not impacted by this.

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