Income Tax Rulings

Another problem with marriage breakdowns

When a family court order as a part of a marriage breakdown requires assets held in a family company to be transferred there is no CGT payable due to the 126A rollover.

BUT if the receiving spouse is a shareholder the Commissioner says it is a dividend and taxed under section 44 of the ITAA36. And even if the spouse is not a shareholder but is an associate of a shareholder it is a Division 7A loan.

So you are looking at 46.5% tax and no cash to pay it… But why not frank it I hear you say… Try this…

My ex-wife comes into your office and says she received substantial assets out of our family company as a part of a marriage settlement under a family court order. You explain this is a deemed dividend but you can reduce the tax payable by 30% by franking the dividend.

HOW DO YOU FRANK THE DIVIDEND? You call me up and ask me, as the director of the family company, to agree to frank the dividend… Agree to give up franking credits to my ex wife who left me for some McDreamy doctor – Not likely.

So the answer is either don’t get divorced or don’t have assets transferred out of the family company under a family court order.

Income Tax Part IVA Planning Stuff Rulings

Part IVA and partnerships of discretionary trusts

The most annoying habit of the Commissioner is to let everyone do something for years and then to finally try to close it down. Take the Commissioner’s announcement on 16 December 2009 that an unpaid present entitlement from a trust to a corporate beneficiary is a loan to which Division 7A applies. So 12 years of saying every trust should have a corporate beneficiary and 12 years of auditing these structures saying nothing is overturned overnight… Well it is about to happen again I fear…

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Thirty years ago, every accounting and legal partnership was a partnership of individuals. But this has changed to the point where the most common structure today is a partnership of discretionary trust rather than individuals. Actually these partnerships of discretionary trusts are becoming old hat as everyone moves to a company where the shareholders are discretionary trusts.

But in Taxpayer Alert TA 2013/3, the Commissioner raises concerns about the restructure from a partnership of individuals to a partnership of discretionary trusts. He does his norm “sham” argument but it is obvious he thinks these restructures may be schemes to which Part IVA might apply. The Commissioner states that professional practices may operate as a partnership of discretionary trusts, but may not be used for the to avoid tax obligation through income splitting.

This is only a Taxpayer Alert. And the Commissioner is very clear he is only considering tax benefits arising in the 2013/14 and later income years. So if you undertook a restructure like this before 1 July 2013 it appears it is safe.

But it starts to look like December 2009…