On 13 November 2013, the Australian Taxation Office issued a
draft taxation ruling, TR 2013/D6. That draft ruling
effectively reverses the ATO's long held view in relation to
the tax implications of private companies, associated with parties
to a marriage, distributing cash or property to those individuals,
or their related parties, as part of a family court order.
Here to tell us more about the draft ruling is Justin Byrne from
HopgoodGanim's taxation and revenue division.
The important points to note about the draft ruling are as
The ATO has, by virtue of the draft ruling, reversed its long
held view (contained in a number of private rulings provided to
taxpayers) that the "deemed dividend" rules contained in
Division 7A of the tax law, will not generally apply where
companies distribute cash or property to associates as part of
family law court orders; and
The ATO's new view, contained in the draft ruling, will
only apply once the draft ruling has been finalised.
Importantly, any tax positions taken by taxpayers prior to the
finalisation of the draft ruling will not be actively investigated
by the ATO. In other words, the ATO's old view will apply
up until the draft ruling has been finalised and should not be
subject to active scrutiny by the ATO.
The potential for a deemed dividend to arise upon the transfer
of company assets or cash to parties to a marriage or their
associated entities, may require a rethink of how the company's
assets are to be taken into consideration when drafting family
court orders. For instance, there may be other ways to deal
with the issue, including:
a transfer of shares in the company instead of the
a restructure of the company's assets utilising the tax
undertaking a selective share buy back; and
alteration of share rights.
In considering any of the above alternatives, a consideration of
the various specific and general anti-avoidance tax rules contained
in Part IVA of the tax law, may be required.
Generally, a transfer of assets between entities or the
distribution of assets or cash will give rise to a taxing
point. In the context of matrimonial proceedings, the effect
of those proceedings usually requires a transfer of the assets of
the parties to the marriage (and their associated entities).
Although specific CGT "rollovers" (effectively deferring
any taxing point) are available for some asset transfers, the scope
of those rollovers is rather limited.
Where access to assets of a company associated with the parties
to the marriage requires a payment of cash or distribution of
assets from the company, a taxing point may also arise.
However, there is a specific exemption in the "deemed
dividend" rules to prevent a deemed dividend arising where the
company discharges an obligation to pay money to the
recipient. Further, the payment must not be more than would
have been required to be paid had the company and the recipient
been dealing with each other at arm's length (eg were not
associated entities). This latter requirement is considered
by the Commissioner of Taxation in the draft ruling. In
essence, his view is that if the parties were not associated, there
is a good argument to suggest that a payment of nil would have been
made. On that basis therefore, the exemption would not have
any effective application in matrimonial proceedings.
This alert is intended to be used as a general guide only.
Clients' specific facts and circumstances have not been taken
into consideration in preparing this alert. Taxpayers should
obtain their own specific advice in relation to their matrimonial
proceedings, their taxation implications, and the drafting of any
family court orders proposed to be made.
Should you wish to discuss this Alert further, please do not
hesitate to contact your regular HopgoodGanim adviser, or
alternatively Justin Byrne from our taxation and revenue division,
or Geoff Wilson from our family law division.
If you are doing a Will, or you are the executor of a deceased estate, consider what taxes and duties could be payable.
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