Division 7A and Divorce
The ATO recently released draft taxation ruling TR 2013/D6 which deals with certain income tax consequences that may arise where, as a result of the Family Court ordering that interests in property be altered upon the breakdown of a marriage, money or other property is transferred from a private company to a shareholder, or an associate of a shareholder, of that company.Prior to the release of the draft ruling, the ATO considered that an obligation for a private company to pay money as part of a divorce settlement to an associate of a shareholder would not be treated as deemed dividend.
In the draft ruling, the ATO expressed an opinion that the payment of money or transfer of property from a private company to a shareholder (including a former shareholder) in satisfaction of the court order will be assessable as a deemed dividend. Furthermore, since 1 July 2006 a private company may frank a deemed dividend that arises because of a family law obligation, i.e. because of marriage or relationship breakdowns.
Subject to some exception, when the final ruling is issued, it is proposed to apply both before and after its date of issue. However, the ruling will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the ruling. The draft ruling would apply equally to property settlement proceedings involving de-facto couples (whether of the same-sex or opposite-sex).
Finally, capital gain or loss is disregarded due to marriage or relationship breakdown rollover.
There are considerable tax implications where matrimonial property proceedings and payments of money or transfer of property by a private company to a shareholder (or their associates) take place. Therefore, property settlements should be negotiated on an after-tax basis.