The Australian Taxation Office (ATO) has reversed its long held view, expressed in a number of private rulings, that the deemed dividend rules contained in Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) do not apply where family companies distribute cash to either the husband or the wife as a result of Family Court Orders.

Previously, the Commissioner's view of this issue was that Family Court orders for a company to pay money to a party in a matrimonial dispute created an obligation on the company and, as a result, the payment attracted the protection of s.109J of the ITAA 1936 and was accordingly not a deemed dividend, nor subject to income tax.

The recent draft ruling of the ATO (TR 2013/D6) reverses this view and holds that such payments are in fact dividend payments and therefore subject to income tax. One of the requirements of s.109J is that the payment is not more than would have been required to discharge the obligation had the private company and the recipient been dealing at arm’s length.  In the Commissioner's new view, an arm’s length transaction necessitates a commercial consideration and, as such, a private company pursuing its own interests would not make the payment in the first place.

The change is not operational until the final ruling, which is expected in the first half of 2014.

What effect will the ruling have on my property separation?

The ruling, if finalised, is likely to have significant taxation implications for property separations where a family company is involved, making tax-efficient separations more difficult to achieve.  It is likely that the taxation consequences will be of greater importance in negotiating settlements. 

At Coote Family Lawyers, we are well versed in the various taxation consequences of a property separation. We have developed a network of accountants and financial advisors to provide, if necessary, expert advice to optimise your taxation consequences.  

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