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ATO Revisits Tax Laws Affecting Property Settlements


On 13 November 2013, the Australian Taxation Office (ATO) issued a draft Taxation Ruling (TR13/D6) under which the ATO proposes to reinterpret its own rulings that had previously been used to provide an exclusion from certain tax consequences for property settlements.

The draft ruling by the ATO will effectively stop the use of section 109J of the Income Tax Assessment Act. This section had been used to exclude transactions such as the transfer of money or other property from a private company to a spouse as part of a property settlement.

The current draft Taxation Ruling alters this position considerably and is inconsistent with many private rulings that have been issued by the ATO since 2004.

The ATO’s draft determination proposes to change this position and provides that payments (or transfers of property) to a spouse from a private company will be considered as a distribution of the company’s profits and subject to tax like an ordinary dividend.

This effectively means that when distributing retained profits or property owned by a company, the spouse receiving the benefit of any payment from a company will be assessed to pay income tax on the amount received.

This may disadvantage any spouse receiving property or funds from a company as a result of a property settlement. They will now need to factor in the taxation consequences of receiving those funds or property and the tax that they will have to pay as a result. This will have a major effect on property settlement negotiations for parties at the end of a relationship.

In our view, they place an unnecessary and significant burden on parties who simply wish to finalise their property settlement matters in circumstances where they have used companies for business or asset protection purposes.

The draft ruling states that, while the ATO will not actively audit these matters, if a person’s taxation affairs are audited and examined for any other reason, the ATO will enforce its view under the draft ruling. This will not apply to holders of private rulings from the ATO, as they can rely upon a private ruling for protection from any reassessment.