Divorce - what it means to you (and your business)
Breaking up is hard to do. Beyond the emotional and financial turmoil divorce creates, there may be a number of tax issues that need to be resolved. In the unfortunate event that divorce occurs, the emotional and financial turmoil can create a major tax headache for divorcing couples.
A recent ruling from the Australian Taxation Office (ATO) will create a tax burden for many divorcing couples that have assets tied up in a company. In the ruling, released on 30 July this year, the ATO confirmed that any settlements paid out by a corporate entity are treated as income and taxed at the relevant spouse's marginal tax rate.
Previously, when a company transferred assets or cash to one of the former spouses under a Family Court order, many people took the view that the transfer was not treated as a dividend and did not trigger tax.
If you are receiving assets from a corporate entity as part of a property settlement, it's essential that you understand the tax implications prior to settlement or a sizeable chunk of the settlement could go to the ATO. For business owners, outside of the tax and financial issues, it's important to not lose focus on what's important to keep the business running efficiently.
What happens to your superannuation in a divorce?
A spouse's interest in superannuation is a marital asset and can be split as part of the breakdown agreement. It's important to be aware however that superannuation cannot be paid directly to a spouse unless the spouse is eligible to receive superannuation (i.e. they have met a condition of release) but it can be rolled over into the spouse's fund until they are eligible to receive it.
Laws exist to prevent taxes such as Capital Gains Tax being triggered when superannuation assets are transferred. This is particularly important where your superannuation fund holds property. A Court order or Superannuation Agreement is required to give effect to the agreed split in the SMSF assets or to execute a rollover eligible for the CGT rollover concession.
If you have a SMSF and both spouses are members, it's important to get advice to make sure that all of the appropriate administrative issues are taken care of.
Where a divorce is not amicable, it's important to keep in mind that the SMSF trustee is required under law to act in the best interests of the fund and its beneficiaries. Anything less and the fund members may seek compensation for loss or damage.
In a divorce, assets are split based on a multitude of factors such as earning capacity, maintenance of children, and the assets held pre-marriage. Many couples don't go through their marriage with an equal view of how assets and income should be attributed until something goes wrong.
If there is a disparity between the income levels of each spouse, there are a lot of benefits to the household in general of evening out how income flows through to the family.
If your partner earns less than you, there is a very real financial benefit to topping up their super as superannuation has preferential tax rates. The same goes for taxable income. If you can even out income coming into the household, it spreads the tax burden.
No one really goes into a marriage thinking about possible divorce, but like many things financial, it's good to have a plan in place in the event that you do. This is where appropriate planning comes in. If you're just setting out on the matrimonial path – or coming off it – please contact us on 9957 4033 for confidential advice.
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Last updated November 2014. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.