Divorce and Division 7A

In Taxation Ruling TR 2014/5 the Commissioner confirms one of the most overlooked tax issues in marriage breakdowns.

For example, if money or property is paid or transferred to a shareholder, if these payments are paid out of the private company profits, it will generally be an assessable dividend.

In addition, money or property transferred to an associate of a shareholder will be a deemed dividend under Division 7A. As the obligation to ensure the payment is made is on the divorced person and not the company, the exemption in section 109J of the 1936 Act will not apply.

While both these dividends are frankable, it is worth remembering that in many matrimonial proceedings one party gives up their interest and control of the company. As such, if there was not an agreement to frank these dividends before the proceedings are finalised, the remaining directors may not want to frank the dividend later.

Now why do I say it is one of the most overlooked tax issues??? Once it is released accountants “claim” it is a change of position….

But since 2004 the ATO has had a clear position that is exactly as is the Ruling – http://law.ato.gov.au/atolaw/view.htm?DocID=AID/AID2004461/00001&PiT=99991231235958. And this is much more “authoritative” than the unnamed “private rulings” that the accountants are claiming exists (I was too lazy to over the register of private rulings and start searching…)

So please don’t blame the Commissioner for not considering all the tax issues that arise from a transactions – rather thank him he has not been auditing the clients you have been ignoring Division 7A for since 2004…

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
This entry was posted in Income Tax, Legislation, Rulings. Bookmark the permalink.

One Response to Divorce and Division 7A

  1. Pingback: Divorce and Dividends #2 | Tax Rambling

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