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A popular question among Family Lawyers is ‘how can I protect my client from adverse tax outcomes in property settlements?’. There is unfortunately no definitive answer to the question.
What family lawyers can do is to assist their clients in minimising risk from adverse tax consequences by ensuring appropriate independent advice is obtained in relation to inherent and contingent tax liabilities within entities in the family group and in relation to proposed orders. Where serious non-compliance is identified or
reasonably suspected, the only answer may be voluntary disclosure with the ATO. What many people don’t recognise is that non-compliance with tax obligations may carry a criminal penalty, exposing not only the client but in serious circumstances, such as tax evasion, also their advisers. Something as simple as signing a declaration on a tax return where the taxpayer knows the contents are incorrect is a criminal offence.
Where the tax outcome of a proposed transaction is uncertain (and significant), and there is no clear precedent, it may be advisable for parties to obtain a private binding ruling from the ATO, particularly where the proposed transaction impacts on the rights or obligations of a third party. Recent case law has demonstrated that in certain circumstances a third party may be required to be bound to an order, or additional steps taken after orders have been issued by the court, to give effect to transactions from a tax perspective. Remembering that just because a transaction is effective from a family law perspective, does not mean it will have the same effect from a taxation perspective.
In the recent AAT decision in The Beneficiary and Commissioner of Taxation [2020] AATA 3136, the former wife was assessed on a distribution of income from a trust controlled by the husband despite the orders requiring her to relinquish her interest in the
trust. The trustee was not bound to the Family Court orders and the wife had not provided written notice to the trustee, so from a tax perspective, the orders were not effective.
The decision in this case highlights the importance of understanding the power of the Family Court to alter the interests of third parties as demonstrated in Commissioner of Taxation v Tomaras & Ors (2018) HCA 62, and the right of the Commissioner to the taxation of the parties post settlement as demonstrated in Commissioner of Taxation v Rozman [2010] FCA 324. These issues become particularly apparent (and important) where complex tax issues may arise from transactions proposed that involve transfers between, or payments from private company’s or trusts within a family group, or the proposed assignment of loans, UPE’s or debts.
Independent taxation advice in complex matters is essential. The taxation implications of property settlements will be dependent on the facts and circumstances of each case and unfortunately, with the popular use of discretionary trusts and private companies within private groups, the risk exposure of adverse taxation consequences very high.
How can RSM help?
If you are concerned about the tax exposure in your client’s family law matter, reach out to one of RSM's Family Law tax specialists for assistance.
