Consideration of how a property adjustment will take place is critical to determining whether the division of property is just and equitable. This means that attention must be given to the source from which a payment is made. A common example is a payment from a private company (of which a spouse is a shareholder) to the other spouse (as an associate of the shareholder spouse). Hidden in a payment such as this, is a potential tax issue, with the payment from a private company to an ‘associate’ of a shareholder (being a spouse) inadvertently triggering the deemed dividend provisions under Division 7A of the Income Tax Assessment Act 1936.
A payment from a private company to a spouse is a common occurrence under a family law property settlement, given the way family groups often structure their wealth, with having little or no realisable private assets. Depending on how the cash is raised, including through the sale of property by the company, there may be multiple tax consequences.
In Lacey & Lacey  FamCAFC 73, the Full Court was asked to determine the following question (ground 2):
That the [primary judge] erred by making the Orders which [her Honour] did on a final basis, as, in the absence of evidence regarding the taxation implications of the Orders sought, the [primary judge] could not determine if the Orders were Just and Equitable.
The background in Lacey was as follows:
The payment to the wife in the sum of $2,980,639.28 triggered the application of Division 7A, given that the Wife was an ‘associate’ (Section 109C of the Income Tax Assessment Act 1936) of the shareholder husband.
This meant that the wife paid tax on the payment of $2,980,639.28, as the payment from the company to an associate is a ‘deemed divided’, and as such, the tax consequence was not taken into account in the overall adjustment.
In relation to ground 2 of appeal, the Full Court noted that the Trial Judge was aware of the potential CGT and Division 7A tax consequences, but not with precision. At para 313 of the Trial Judgment, the Trial Judge said
‘I was provided with absolutely no evidence about any taxation consequences of assets owned by [the company] being disposed of and I cannot take into account matters about which the parties provided no evidence.’
The Full Court also said that:
At : From the wife’s point of view, and this was more the thrust of this ground of her cross-appeal, her receipt of cash from the company would probably be deemed as a dividend in her hands, and trigger a taxation liability under Division 7A of the Income Tax Assessment Act 1936 (Cth), because the husband is the sole shareholder in the company and, as his former spouse, she would be characterised as an “associated entity”.
At : Just as the imposition of capital gains tax liabilities would lessen the husband’s share of the parties’ property interests, the probable Division 7A taxation liability that would be imposed on the wife would lessen her share of those property interests.
At : Again though, no evidence was led at trial about this liability, and thus this adds to the submission that the primary judge could not be satisfied that the order was just and equitable.
At : It must be said though that the parties were at least partially responsible for leading the primary judge into this error, because neither of them presented any evidence as to the taxation consequences of the orders that were being sought by each of them. Additionally, it does not sit particularly well from the wife’s point of view, for her to pursue this ground of appeal, when the impugned order was in similar terms to the order that she sought, yet she presented no evidence of the taxation consequences of making that order.
At : Nevertheless, because the error is legal rather than factual, the wife is not precluded from raising or relying upon the error in the cross-appeal.
The outcome of the Appeal saw the matter remitted back to the then Federal Circuit Court of Australia for re-hearing, given the nature of the error, as the form of the property settlement orders and the tax consequences would substantially affect the whole of the property adjustment process.
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