As we approach the end of the financial year, there are a number of taxation issues that you must consider if you are currently in the process of dividing your assets or negotiating a property settlement:
Division 7A Loans
Division 7A of the Income Tax Assessment Act 1936 (Cth) (ITAA36) aims to deal with payment of profit from private companies, to ensure that tax is paid. Where a private company makes a loan to a shareholder/owner in a taxable year, Division 7A can deem that the company has in fact paid a dividend on which tax is payable. However a dividend will not arise if the loan is either repaid or is subject to a loan agreement. The loan agreement would require principal and interest to be paid over the term of the loan.
Where there are existing obligations by parties to a family law dispute to Division 7A loans, a minimum payment will be due, and should be declared prior to 30 June. Compliance is important to ensure further taxation liabilities do not arise.
Trusts
If you have a family trust, then it is necessary for the trustee to make a resolution as to the distribution of income prior to 30 June. Typically, these obligations are defined under the trust deed.
This resolution may impact any child support paid pursuant to a child support assessment, or any government benefits paid, as it is likely to increase your taxable income for the financial year. For this reason, it is important for trust distributions to be addressed and agreed between lawyers/parties to a dispute, to ensure there is transparency around taxation advice and potential consequences for both parties.
Impact of change of income on child support and other benefits
If you have obligations to pay child support, or alternatively you receive child support, any change of income which is triggered by the lodgment of taxation returns could impact the amount paid. A change of income can be from an annual pay review, incentive payments or a restructure of your finances, dealing with salary packages (including superannuation and other benefits) or from dividends being paid from a trust or a business.
This must be taken into account when negotiating child support/maintenance payments, noting that it may also impact any government benefits paid (by way of parenting payments and the like).
Capital Gains Tax
If you sold investments in the previous financial year, then any capital gains tax owing may be required to be dealt with in your upcoming tax return.
Depending on the agreement reached with your former partner, or court orders made, this liability may be shared between the parties in agreed proportions, or by one party solely. To avoid complications at this time of year, many agreements ensure that funds are set aside for capital gains tax, and estimates of the amount to be paid are provided by the parties’ accountants well in advance.
It is important to note that capital gains tax is assessed as the end of the financial year and can be offset against other losses so the amount required to be paid can vary from the original estimate. Therefore it is crucial that agreements deal with obligations for a party for both an over payment and underpayment for CGT as part of any final settlement.
Valuation of Business
If your asset pool includes a business entity then it is wise to hold off on any valuation of the business until taxation returns are finalised for the current year (provided this is practicable) as this will provide the most up to date information regarding the value of that entity.
It is vital that you have the support of both a family lawyer and accountant when navigating financial settlements, to ensure that all taxation consequences are taken into account.
For further assistance or information please do not hesitate to contact a member of our Family Law team on (03) 9663 9877.
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