The Australian Taxation Office (“ATO”) recently published Draft Taxation Ruling TR2013/D6. The ruling is, basically, a rewrite of the ATO’s opinion on the applicability of Division 7A of Part III (“Division 7A”) of the Income Tax Assessment Act 1936 (“ITAA36”) to family law settlements involving family companies where the family company is joined as a party to the proceedings and payments are made by the family company or assets are transferred from the family company to one of the parties to the relationship.
Division 7A makes, subject to some exemptions, payments from private companies and transfers of assets from private companies to shareholders or their associates taxable dividends.
The overriding effect of the draft ruling is that the ATO no longer holds the view, which has been previously expressed in a number of private binding rulings, that joining the family company as a party to the proceedings results in the parties being able to take advantage of section 109J ITAA36.
Section 109J is one of the exemptions to Division 7A which states that a payment or transfer will not be a taxable dividend if the transfer or payment is made to satisfy an obligation of the private company.
As, in the eyes of the ATO, Section 109J now no longer applies even if the family company is joined as a party to the proceedings, this means that any payment or transfer from a private company to a party to the relationship as part of a family law property settlement will in most instances be a taxable dividend in the hands of the recipient.
The ruling is only a draft at this stage and does not apply until the final ruling issues, however, its impact should still be considered in all current and future family law matters. In particular, the ATO’s new approach will require the potential tax liability to be considered in negotiations.
Brendan Cockerill is a Business and Succession Lawyer at Dobinson Davey Clifford Simpson, 18 Kendall Lane, New Acton, Canberra ACT 2601 and can be contacted on (02) 6212 7600.