Tax is probably one of the least concerns for two people in the unfortunate event of a divorce. However, often overlooked changes made by the ATO in July 2014 has meant that many couples going through divorce be left with excessive and hefty tax bills.
If assets are controlled by a private company owned by one or both of the parties in the matrimonial proceedings, the Family Court ordered division of assets can create a taxable distribution. This distribution can be taxed at a rate up to 46.5%.
The introduction of the Division 7A in 2014 rules have meant that even if the partner is not a shareholder of the company, they have the potential to be paying the full tax amount as the distribution is treated just like any other distribution, regardless of the Family Court proceedings. A small silver lining of these Division 7A changes is that tax itself can be lowered through the use of company franking credits, as the partner receiving the distribution is treated as a shareholder. This works in favour to offset the individual tax paid on the distribution, however, if no franking credits are available the tax owing is can still be a significant liability.
These distribution taxes can represent an unlucky trap for divorcing couples, as they contradict the assumption that there is no tax associated with divorce, a confusion created as a result of the minimal Capital Gains Tax involved in Family Court proceedings. Often these hidden taxes can be planned for and potentially avoided, so that if you are potentially entering into a divorce you can focus on the things that really matter. If you need any assistance in managing the distribution of property and assets during a divorce, please feel free to contact us as we would be more than happy to help.