Australia: A broken marriage, transfer of property and a hefty tax bill

Last Updated: 21 February 2019
Article by Amanda Tully

You’ve been acting for your sister Ana in relation to the breakdown of her marriage to Chris. Ana has been cheating on Chris pretty much since they were married. You suspect Chris knew about it deep down, everyone else did, but pretended he didn’t to keep the family together. But he’d finally had enough and decided to leave her.

Ana and Chris own significant assets together comprising their main residence and some investment properties.

Ana owns all the shares in and is the sole director of Blue Steel Pty Ltd which owns an apartment in Coogee and also conducts a very successful modelling business.

Chris does some part time modelling for Blue Steel but otherwise spends most of his time at the gym. He does not own anything independent of Ana.

They come to an agreement that the children will live primarily with Ana, so she will get Chris’ interest in their main residence. Chris is keen to live in the Coogee apartment as it is not far from their main residence, so they agree that Blue Steel will transfer the Coogee apartment to Chris.

For some reason, an alarm bell is going off in your mind regarding the transfer of the Coogee apartment.

After thinking about it for a little while and googling ‘risks of transferring property from company’ you find an article published in the Law Society journal by a specialist tax lawyer. The article talks about the tax problem of transferring company property to an associate of a shareholder.

The article confirms that a payment or transfer of property by a company to an associate of a shareholder can be taxed as a dividend under the dreaded Division 7A provisions of the Income Tax Assessment Act 1936, unless the company was joined as a party to the proceedings, in which case section 109J ITAA 1936 applies to exempt the payment.

Feeling quite smug about your discovery, you phone Chris’ solicitor, Jake, about the problem. You cannot stand Jake. He is, quite frankly, an arrogant jerk that thinks he has 'the' answer for everything. Not long ago you heard on the grapevine that he was saying some quite nasty things about the ability of the lawyers in your firm and it really made your blood boil.

You tell Jake about the problem and suggest Blue Steel be added as a party to the proceedings and that an order be included that the Coogee apartment be transferred to Chris. Jake responds with ‘Yes of course I knew about that problem, I’ve been doing this a lot longer than you have, I just hadn’t gotten around to fixing it yet.’

You grit your teeth, thank Mr Know-It-All for his time, slam down the phone and call it quits for the day so you can go home and down a red.

The Sting

A few months later, on a Friday evening just before knock-off, your phone buzzes "It's Chris' solicitor, Jake," the receptionist says, "he needs to speak with you urgently".

Oh great, you think, what does that horror of a man want at this time of day?

"Well" says Jake as you answer the phone "you really did give some second rate advice about the transfer of the Coogee apartment to Chris, didn’t you?"

"I beg your pardon?" you say, your blood pressure rising "whatever do you mean?"

"I have a letter here from some tax lawyer," he says, "I’ll email it through and then you’d better contact Lawcover!"

A couple of minutes later, the email arrives in your in-box. You see it was written by the same tax lawyer that wrote the article you had relied on initially.

It says that the transfer of the Coogee apartment to Chris is taken to be a dividend of an amount equal to its market value, under Division 7A.

Hang on, you think, this can’t be right because we made Blue Steel a party to the proceedings.

But as you read further all feeling of hope slowly begins to drift away. You see that in 2015 the ATO issued ruling TR 2014/5 which reversed the position so far as transfers from a private company to an associate of a shareholder pursuant to Family Court orders go so that the transfer of property is taken to be a dividend of an amount equal to the market value under Division 7A. So, Chris has to add the market value of the Coogee apartment to his assessable income for the year and pay tax accordingly.

Well, you think to yourself, Jake is Chris’ solicitor, not me, so this is his problem. You quickly flick an email to Jake saying so and head home thinking that perhaps if he has any clue, he will consider the Commissioner’s discretion under section 109RB of the ITAA 1936 to disregard treating the transfer as a dividend under Division 7A. But you know you haven’t heard the end of it….

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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