The tax implications of marriage break-ups can be far-reaching. Many practitioners are faced with helping clients through this difficult time, making TR 2014/5 important.
Taxation Ruling TR 2014/5
Previously released in draft form (TR 2013/D6), the new ruling confirms a major change in the ATO’s view of the tax treatment of separation payments made by a family company to a spouse under a Family Court order.
The ATO will now seek to treat the payments and transfers of property from the company as a distribution of profits, and it will assess them as dividends in the spouse’s hands. Previously, the ATO had generally treated such payments and transfers as tax-free.
. When money or property is to be transferred to an associate of a shareholder:
To the extent that it is paid out of the private company profits and is an ordinary dividend, the ATO calls it assessable income of the shareholder under s 44.
. When money or property is to be paid or transferred to a shareholder:
The ATO says the payment of money or transfer of property is a payment for the purposes of s 109C(3). In addition, the ATO indicates that s 109J does not stop the payment being treated as a dividend under s 109C(1).
. When dividends are frankable:
Payments that amount to ordinary dividends are frankable. Where a dividend is taken to be paid to an associate of a shareholder under s 109C and is franked, that associate is themselves treated as being a shareholder.
. CGT rollover applies:
Where a private company transfers property to a shareholder in compliance with an s 79 Family Law Act order, the rollower consequences in s 126-5 of the ITAA 1997 apply (if acquired after 20 September 1985) and the cost base of the shareholder’s shares in the private company are both reduced pursuant to s 12615(3) and increased pursuant to s 126-15(4) of the ITAA 1997 In addition, where a private company transfers property to an associate of a shareholder, the rollower consequences in s 126-5 apply and the cost base of the shareholder’s shares in the private company is reduced (s 126-15(3)).
A break-up example
In the 2014 income year, Phil and Joan are parties to matrimonial property proceedings before the Family Court. They are the sole shareholders/directors of XYZ Company, which is the vehicle for their family business and has retained profits of $6,000,000. XYZ Company itself is not a party to the proceedings.
On 24 February 2014, the Family Court makes ans 79 order for Phil and Joan to cause XYZ Company to transfer real property to Joan with a market value of $1,500,000. On 25 March 2014, XYZ Company makes the transfer of property to Joan as directed by Phil and Joan under the court order.
The transfer of property is an assessable dividend of $1,500,000 to Joan under s 44 of the ITAA 1936.
