A recent ATO ruling could mean that couples going through a divorce, and who have assets in a family company or trust, will end up receiving much smaller settlements.
The ruling makes it more difficult for couples who have set up a family structure to access the cash or assets held within them without paying tax when it is distributed.
In the past, spouses could divide up property within a private company or trust as part of the divorce settlement without paying tax. Now, depending on their marginal tax rate, people could pay up to 49 percent tax on those assets. This tax liability will need to be taken into account during the settlement process to ensure an equitable division of property.
Divorcing couples in this position will need to focus on transferring assets using the capital gains tax roll-over concessions. This will require a more holistic view of the assets held by the couple and difficulties can arise where the majority of assets are held in trust. Families will need to revisit their company or trust structures to ensure they are still up-to-date, and perhaps need to consider whether such structures are still the best vehicle to manage their wealth.
While the main advantage of such structures remains – paying tax at the company rate of 30 percent rather than personal marginal rates – this new ruling may cause headaches.
The trouble is, getting a divorce is not a prime consideration for most couples when they set up family companies or trusts.
Author: Mark Pizzacalla, HLB Mann Judd, Melbourne