On 30 July 2014, the ATO released Taxation Ruling TR 2014/5 – Income tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate). The ruling was previously issued on 13 November 2013 as Draft Taxation Ruling 2013/D6 which I referred to in my blog on 20 December 2013 (“A leopard can’t change its spots but the ATO can!”).
The final ruling confirms the ATO’s view that any payment or transfer of property, by a private company to a shareholder or an associate of a shareholder as part of a family law settlement will, in most cases, result in the recipient having to pay tax on the amount of the payment or value of the property transferred.
The practical effect of the ruling is that if an investment property worth $300,000 and a motor vehicle worth $30,000 were transferred out of a family company to one of the parties to a marriage, the person receiving the items will be required to add $330,000 to their taxable income in the financial year in which that property is received.
The final ruling confirms that in some circumstances, the payment can be franked, in a similar way to dividends paid by many listed public companies are franked. This will help reduce the tax burden in certain cases.
One of the most significant points to come out of the final ruling is that it confirms that the ATO has changed its view on whether or not adding the company as a party to the proceedings helps avoid the potential tax problem. The ATO confirmed its new found view that even if the company is a party to the proceedings and the payment is therefore held to be an obligation of the company, the ATO will regard the payment, regardless of the amount, as more than would have been paid had the parties being dealing with each other at arm’s length. As a result, the exception in section 109J does not apply.
The ruling applies both before and after it was introduced and confirms that potential tax liabilities arising due to transfers from private companies need to be considered in family law negotiations.
Brendan Cockerill is a Business and Succession Lawyer at DDCS Lawyers, 18 Kendall Lane, NewActon, Canberra ACT 2601 and can be contacted on (02) 6212 7600.