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Tax implications of family law property division – part 3

We are continuing on with our look at the tax implications of property division.  So far we have looked at capital gains tax and stamp duty.

Today I am looking at income tax ramifications.

Where separating parties have an interest in a business they often decide that one person will continue with the business – and keep the company. To ensure the division between them is equitable it may be necessary for the other party to be “paid out” their interest – and the parties want this to be done by way of a payment or transfer from the company itself.

This is something that parties can agree to and the Family Law Courts can make Orders about but it can have considerable – and unintended – tax consequences.

The normal rule is that a payment of money or the transfer of property to a shareholder will be included within the assessable income of the recipient shareholder under the ordinary receipt of dividend rules.

But the Income Tax Assessment Act also provides that amounts paid/property transferred to a person who is not a shareholder but who is associated with a shareholder or to a former shareholder or associate of a former shareholder (and the payment/transfer is made because they were a shareholder) are included in the recipient’s assessable income.

It used to be that the Tax Office viewed payments/transfer made as part of a family law property division as not falling within that definition but since 2013 it has considered that they do.

Anyone separating should carefully consider legal and financial advice before agreeing to any property division.

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