It is not uncommon for matrimonial property settlements to provide that a payment to one spouse be made by a private company controlled by the parties or both of them. This is particularly common where the spouse retaining their interest in the company has little by way of funds or assets held in their own name.
Formerly, the Australian Tax Office (ATO) held the view that pursuant to section 109J of the Income Tax Assessment Act 1936 (ITAA 1936), payments made by private companies for the purposes of a matrimonial property settlement were excluded from the operation of Division 7A of the ITAA 1936 where orders were made directly against the company. This had the effect that such payments would not be deemed to be dividends paid to the spouse receiving the funds or property, and would therefore not be taxed as dividends.
However, following the recent decision of the Tax Commissioner in TR2014/5, from 30 July 2014, the ATO considers payments or property provided by a private company to a shareholder or their associate for the purposes of effecting a matrimonial settlement to be deemed dividends pursuant to Division 7A of the ITAA 1936.
There is still provision for the private company to apply franking credits to such deemed dividends. However, it is important to be aware that the tax consequences ordinarily applied to dividends will apply, despite the deemed dividend having been received as part of a matrimonial property settlement. This could have significant ramifications for the spouse receiving the dividend.
It is important to consider all possible tax consequences of matrimonial property settlements and to seek specialist advice prior to entering into any agreement.