Confirmation that no more Division 7A exclusions on matrimonial property settlements.
This game-changing ruling may affect the manner in which property settlements1 for family groups with companies are able to be arranged.
What happened?
Recently the ATO confirmed2 that payments or transfers of property to a husband or wife from a private company will be considered a distribution of profits from the company.
Such transactions will therefore be assessed as dividends either pursuant to the ordinary dividend assessing provisions3 or Division 7A in almost every matrimonial property or cash settlement, regardless of whether the parties are shareholders (or associates of the shareholders) in the private company or whether the private company is a party to the Family Court order.
The final view of the ATO is virtually similar to their initial draft view – it only contains added commentary on how an associate receiving a deemed dividend can access franking credits on the deemed distribution (by treating the associate as a shareholder for these purposes4) as well as how the CGT rollover provisions would operate when property is transferred pursuant to a family court order.
What does this mean for you?
Basically such payments or transfers of property would likely give rise to a “matrimonial” Division 7A deemed dividend (such a dividend may be frankable by the private company5).
As mentioned, the final ruling basically agrees with the views expressed in the initial draft ruling6, namely that payments made in discharging monetary obligations (the “Section 109J exclusion”) of the Family Court will still be a Division 7A deemed dividend7.
For completeness and because this is a very tricky area of law, we have set out below the different taxation consequences that
may arise depending on the type of family court order that has been made8.
Situation 1: Family Court order on private company to transfer property to matrimonial party
In this case there will be no Section 109J exclusion because the exclusion only applies to payments in the discharge of other monetary payments (and not to the transfer of property)9.
This transfer of property will therefore most likely give rise to a matrimonial deemed dividend (that may be frankable) and the CGT consequences for the private company on this transfer are deferred until such time as that matrimonial party disposes of that property again (with suitable adjustments to the cost base of the property held by the matrimonial party)10.
Situation 2: Family Court order on private company to pay money to matrimonial party
If a private company is ordered to pay money to a matrimonial party, Section 109J may theoretically be able to exclude this payment from the operation of Division 7A (because the payment of money will result in a discharge of the Family Court obligation to pay money)11.
However, the Section 109J exemption would not apply because it would be virtually impossible to make an arm’s length payment in satisfaction of a Family Court order12.
In such a case, the payment of money will also most likely give rise to a matrimonial deemed dividend (that may be frankable).
Situation 3: Family Court order on matrimonial party to pay money or transfer property to other matrimonial party
If the Family Court orders a matrimonial party to pay money or transfer property to the other matrimonial party, there will be
no Division 7A consequences. This is because the payment or transfer of property is made by the other matrimonial party (and no private company is involved).
However, if a matrimonial party is ordered to pay money or transfer property to the other matrimonial party and causes a private company to pay the money or transfer the property to the other matrimonial party, there may be a matrimonial deemed dividend (that may be frankable)13.
In such a case the Section 109J exemption will not apply to payments made by the private company because the private company is not discharging its own obligation to pay money (the obligation was imposed on the matrimonial party and not on the private company)14. The private company has no obligation that it can discharge with this payment as it was not part of the family dispute proceedings and hence not subject to the Family Court order.
How can Nexia Australia help you?
This ruling acknowledges that it is contrary to many private rulings that have been released previously. Accordingly, the ATO will not actively seek to review any orders made before 30 July 2014 – however, should any such matters be brought before the ATO for consideration (e.g. a private ruling application), they will decide in accordance with the views in the ruling15.
The rules regarding Division 7A and deemed dividends are complex and the tax rules relating to this area are always under scrutiny16.
Therefore, determining whether Division 7A applies to you as well as potential strategies to legitimately minimise the potential impact can be a daunting task.
Furthermore, there are also potential stamp duty and CGT rollover relief available for parties going through a divorce settlement.
However, Nexia can assist you through this whole process as we have the necessary expertise and experience in this area.
Please contact your Nexia Advisor if you would like to discuss any of the issues mentioned in more detail or if you would like us to perform a financial health check of your affairs.
1 Family Court order pursuant to Section 79 of the Family Law Act 1975
2 See TR 2014/5 issued on 30 July 2014 that basically confirms its previous draft view in TR 2013/D6 issued on 13 November 2013
3 Section 44 of the Income Tax Assessment Act 1936
4 See Paragraphs 8 and 129 of TR 2014/5
5 Section 109RC of the Income Tax Assessment Act 1936
6 See our alert on TR 2013/D6 in November 2013 on the nexia.com.au website
7 The Section 109J exemption will therefore not apply, because although the payment will discharge a monetary obligation, it is virtually impossible to make an arm’s length payment in satisfaction of a Family Court order (See Paragraph 113 of TR 2014/5)
8 Unless otherwise specified, the matrimonial party who receives the cash or the property is either a shareholder or an associate of a shareholder of the private company.
9 Paragraph 91 of TR 2014/5
10 Subdivision 126-A Marriage or relationship rollover and Paragraphs 134 and 135 of TR 2014/5
11 Paragraph 90 of TR 2014/5
12 Paragraph 113 of TR 2014/5
13 Paragraph 89 of TR 2014/5
14 Paragraph 86 of TR 2014/5
15 Paragraph 42 of TR 2014/5
16 The Board of Taxation is currently busy with a review of Division 7A with its final report to the Government expected by 31 October 2014.
