Do the words Div 7A, UPE or s100A make you feel nervous and uneasy? These are all very real sections of the Tax Legislation that lurk in the background of any separation or divorce proceedings that involve structures such as a company or a trust or combination of both.
The good news is that there is power in working alongside a professional who understands both the intricacies of accounting structures and the complexities of a marital breakdown. With the right support and advice, the tax challenges your client may face, could be transformed into planning opportunities.
Where it can take time (even years!) to reach a final position where parties are ready to settle and act on their Orders, this can be a really good opportunity to consider discretionary trust distributions (and any associated UPEs) and payments of dividends (to ensure Div7A compliance) across multiple financial years.
This approach helps smooth tax liabilities across the financial years, rather than having to manage the tax issues in one financial year where rates may be as high as 47 per cent, effectively eroding the family asset pool, before either party received their settlement.
An example could be that there is a business held within a company and the shareholder is a family trust. In this example, Fred wishes to retain the family trust, while Mary wishes to retain the company. The Capital Gains Tax (CGT) provisions allow for any capital gain realised from the transfer of an asset under a marriage breakdown to be disregarded if the transaction is structured correctly and completed in the appropriate manner.
However, does Mary really wish to be a shareholder of the business in her individual name? An example of a planning opportunity here is to cease payment of any dividends in the financial year that the shares are transferred to Mary’s name. Mary may then wish to transfer the shares from her individual name to a new family discretionary trust that Mary controls.
While this may trigger a capital gain at the market value of the shares in the company, it means Mary can have the capital gain in a financial year where she doesn’t take a dividend. In the financial year after the capital gain is realised, the dividends can continue from the company to the new family trust – providing better asset protection and flexibility in distributions by looking at planning opportunities.
Similarly, if there are Div7A issues within the company, these may be able to be addressed across multiple financial years by paying the appropriate dividends from the company to the family trust, which are then distributed to both Fred and Mary. This allows each party to use their individual marginal tax rate, rather than the situation where the family trust distributes it to one party that could be then taxed at the highest marginal rate.
During a separation or divorce there are tax considerations embedded within accounting structures that need to be addressed but with some careful planning, these taxes can be managed effectively ensuring that your client can retain a higher family asset pool balance whilst also creating opportunities for their financial future.
If you have any clients that are navigating divorce proceedings and could benefit from a review of how the assets may be divided in the most tax effective manner, please contact your local William Buck advisor we’re here to support you and your clients through this challenging time.
If you’d like to get in contact with one of our Divorce and Separation specialists, click here.
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