Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 80

ATO ruling affects assets after divorce

Individuals hold their assets in a variety of entities, such as companies, trusts or other types of arrangements. In the context of family law, divorcing spouses often funded their divorce settlements using assets held by private companies. This was because family law settlements did not attract tax in the way normal commercial transactions might.

However, on 30 July 2014 the Australian Taxation Office (ATO) issued a final public ruling making it far more difficult for spouses to use income and other property held in a private company to fund property settlements tax-free. Instead, payments made from private companies will now be considered ‘dividends’ and subject to personal income tax. Depending on the marginal tax rate of the spouse involved, a tax of up to 49% of the gross figure could be payable, reducing a divorce settlement by almost half. The difficulty applies to all couples, regardless of whether their companies have $100 or $1,000,000 worth of assets.

In addition to the increased cost of divorce, some commentators have warned that the need to fund a divorcing spouse’s tax bill could convert a 50-50 settlement into a 60-40 settlement or worse, resulting in an obvious inequity between the parties. Further, for those companies that are already struggling financially, the need to make a large payment to a divorcing spouse and also fund that spouse’s new tax bill could have dire consequences for the company’s success.

To reduce the tax liability, parties might choose an alternative way to divide their assets upon divorce. For example, it might be possible to provide the divorcing spouse with another asset, such as a property or a motor vehicle, or a spouse might be paid from a non-company entity, such as an individual or a trust, by using the company’s assets as security. Alternatively, a company restructure might enable a spouse to receive shares in the company instead. In this regard, a spouse can take advantage of the Capital Gains Tax (CGT) rollover provisions and defer any tax payable until another CGT event occurs (such as selling the asset to someone else). However, divorcing spouses must ensure that such a restructure does not contravene any of the ATO’s anti-avoidance rules.

Unfortunately, not all divorcing spouses will have these options available and in such circumstances, the extra tax liability must be considered early on and apportioned appropriately between the parties. A good understanding of the tax ramifications of any property settlement will be key to ensuring the after-tax split between the parties is not a nasty surprise. Accordingly, it will be important for divorcing spouses to receive specialist advice from experienced family lawyers and in some circumstances, accountants.

 

Sarah Hendry is a Solicitor at Foulsham & Geddes Solicitors and Attorneys. This article provides general information and does not constitute personal advice.

 


 

Leave a Comment:

RELATED ARTICLES

Consulting on the side? Don't fall into these tax traps

Are you paying tax by not starting a super pension?

Most people (and the ATO) do not know their super tax

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Latest Updates

Investment strategies

Finding income in an income-starved world

With term deposit rates falling, bonds holding up but with risks attached, and stocks yielding comparatively paltry sums, finding decent income is becoming harder. Here’s a guide to the best places to hunt for yield.

Economy

Fearful politicians put finances at risk

A tearful Treasury chief, a backbench rebellion, and crashing bonds. What just happened in the UK and why could Australia’s NDIS be headed for the same brutal fiscal reality?

Shares

Investing at market peaks: The surprising truth

Many investors are hesitant to buy into a market that feels like it’s already climbed too far, too fast. But what does nearly a century of market history suggest about investing at peaks?

Shares

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Investment strategies

Will stablecoins change the way we pay for things?

Stablecoins have been hyped as a gamechanger for the payments industry. But while they could find success in certain niches, a broader upheaval of Visa and Mastercard's payments dominance looks unlikely.

Infrastructure

An investing theme you can bet on for the next 30 years

Investors view infrastructure as a defensive asset class rather than one with compelling growth prospects. These five tailwinds for demand over the coming decades suggest that such a stance could be mistaken.

Investment strategies

A letter to my younger self: investing through today's chaos

We are trading through one of history's most confounding market environments. One day, financial headlines warn of doomsday scenarios. The next, they celebrate a new golden age. How can investors keep a clear head?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.