On 30 July 2014 the Australian Taxation Office (ATO) issued Taxation Ruling TR 2014/5 (previously released in draft form as TR 2013/D6) to address the tax effect of private companies paying money or transferring property to shareholders or their associates, in order to satisfy Family Court orders made pursuant to section 79 of the Family Law Act 1975.
The Ruling operates to make such payments or transfers to a shareholder an ordinary dividend assessable as income of the shareholder. The Ruling also makes payments to associates of a shareholder a deemed dividend for the purposes of Division 7A of the Income Tax Assessment Act 1936 (despite section 109J which states that the payment of an amount is not taken to be a dividend to the extent that it discharges an obligation of the private company to pay money to the entity and is not more than would have been required to discharge the obligation had the private company and entity been dealing with each other at arm's length).
The practical effect of the Ruling is that payments out of company profits in satisfaction of a Family Court orders are subject to income tax at up to 49% (less any applicable franking credits). The Ruling is a reversal of the position previously taken by the ATO in Private Binding Rulings and is contrary to section 109J. The ATO states in the Ruling that a company may only be subject to an order under the Family Law Act because it is not at arm’s length to one or more of the matrimonial parties and that a matrimonial cause does not involve any ‘dealing’ or ‘bargaining between the parties to the proceedings. In our opinion this statement is inherently flawed as:
- family law property settlements are litigious, requiring the parties to act and conduct negotiations (i.e. ‘dealing’ and ‘bargaining’) through their lawyers. The Court Orders are a reflection of the position presented to the Family Court by the parties after protracted ‘dealing’ and ‘bargaining’; and
- the private company that is subject to a Family Court order is usually at arm’s length with the recipient of that payment.
Until section 109J is amended by legislation to clearly state that it does not apply in the context of Family Court orders, a contrary interpretation is misguided.
While the Ruling applies both before and after the date of issue, the Ruling will not apply to orders made before that date to the extent the Ruling is less favourable to a taxpayer than the Commissioner’s previous practice.
For more information on these issues please contact:
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
M +61 407 478 592 | T +61 3 9611 0110