Divorce financial settlements facing new costs

Date: Oct 17, 2014

One of the most taxing parts of going through a divorce is dividing up jointly held assets between the two partners. Not only do individuals face considerable emotional strain, but the divorce financial settlements can also create a significant financial burden.

In recent months, the Australian Tax Office (ATO) has formulated a new tax (Taxation Ruling TR2014/5) which applies to the transfer of property during a divorce. In particular, any assets that are held as part of a company and are transferred as part of the divorce proceedings will now be subject to tax.

Specifically, this change means that any transfer of company assets as part of a divorce is now treated as an ordinary dividend, and will be taxed at the same rate as other financial dividends. 

There are two forms that this transfer can take, and which will be subsequently taxed by the ATO. Both lump sum payments and the transfer of property - such as real estate, for example - can now be taxed during divorce proceedings if they have come from a company.

Crucially though, this payment has to be made out of the profit the company has acquired. Payments made as part of financial settlement during a divorce that have not originated in a firm's distributable surplus are not subject to this tax, provided the individual is also not a shareholder.

This new regulation has been in force since the new financial year - July 30 2014. However, the new ruling does not apply if the terms of settlement of a taxation dispute were agreed to prior to this date. Any divorce financial disputes that were ongoing during the change-over period will be judged under these new rules. 

These changes also represent a significant change of course from the ATO. Previously, transfers of property made under these conditions were not subject to taxation.

It is also worth remembering that any tax incurred through this new system will be borne by the receiving party, further highlighting the importance of getting the right advice in this situation.

With this area of the law representing a significant area of concern for companies, individuals need to contact a divorce lawyer as part of the divorce process. They will be able to advise on the best way to progress with the allocation of matrimonial property, along with any taxes that are incurred through this process.

Given how complicated the transfer of assets can become during divorce proceedings, individuals can't afford to not get the right support in place beforehand.