Testimonial: Untangling the financial web

Understanding financial statements and their underlying supporting documents can feel like interpreting a foreign language, but they contain a wealth of important information for property settlements.

RSM’s multidisciplinary Family Law Support team are experts in untangling the financial web in family law matters. Whilst the characters in our case study below are fictional, the support provided by RSM is not and the assistance and financial advice we have offered has resulted in fantastic outcomes for our clients.

The case...

Pam and Jim Halpert were married for 15 years and met at work, Dunder Mifflin Paper Co. Pam and Jim moved interstate so that Jim could pursue his sports marketing business, Athleap, that he started with a friend from university.

Whilst the business flourished their marriage sadly crumpled. Over their relationship, they accumulated their marital home, a holiday house, a significant share portfolio, multiple cash deposit accounts, a self-managed superannuation fund and Jim’s 30% interest in Athleap.

Pam, having spent the significant portion of their marriage raising their kids Cece and Phillip, had left the finances to Jim to control and whilst she had signed tax returns and other documents over the years she did not have a thorough understanding of their complicated financial position.

Pam was also worried that their accountant, Jim’s good friend Kevin Malone, had sided with Jim and was no longer acting in her best interests.

Pam engaged a fantastic lawyer who consulted RSM’s multidisciplinary Family Law Support Team to assist with determining the asset pool and to ensure any settlement was tax effective.

Jim moved money regularly between their 20+ bank accounts, Pam had issues tracing the funds and was concerned that Jim was intentionally hiding funds from her.

As part of their settlement discussions, Jim said that their asset pool was $1m and suggested that he would assume the loans that Pam owed to the Family Trust and Pam could receive the holiday home purchased in their company tax-free with a value of $500,000.

The RSM team reviewed the most recent set of financial statements for the Halpert Family Group and the asset pool schedule prepared by Kevin the accountant and discovered that he had, whether erroneously or intentionally:

• Ignored the implications of Division 7A when distributing from the family trust to a company;
• Changed the historical balance of a loan account owing to Pam from the family trust so that Pam now owed money back to the family trust;
• Completed some creative accounting journal entries to transfer assets offshore;
• Distributed funds over a ten year period from their family trust to a company which was specifically listed as an excluded beneficiary in the trust deed resulting in significant tax exposure implications;
• Included in the asset pool a substantial contingent tax liability on the retained earnings of a company in the Halpert Family Group;
• Left the value of their large share portfolio at their original cost which was significantly below market value;
• Revalued the interest in Athleap to 30% of the value of its retained earnings; and
• Colluded with Jim to set the distribution policy for the family trust in the current financial year even though Pam is the sole Director of the Trustee.

How did RSM help?

The RSM team conducted a forensic tracing exercise on the multiple bank accounts within the Halpert Family Group.

They identified that Jim had been withdrawing $2,500 cash once a week for the past year, they also identified $150,000 of transfers outside the asset pool which did not result in the acquisition of an asset or reduction of a liability within the Halpert Family Group.

The CAANZ accredited Business Valuation Specialists within RSM also undertook a valuation of Jim’s 30% interest in Athleap, which after consideration of minority interest discounts resulted in an uplift in its value in the asset pool by $1.5m.

They also determined the current market value of the share portfolio, adding another $1m to the asset pool.

The taxation specialists at RSM provided advice and services on the best way to resolve the Division 7A and trust distribution issues, and assisted with an application to the commissioner to correct the prior year errors.

RSM’s taxation specialists also provided advice to Pam’s lawyers in relation to the tax implications of forgiving loans and the transfer of property out of a company in family law matters in relation to the proposed transfer of the holiday house to Pam.

RSM liaised with Kevin the accountant to uncover the reason for the historical change in Pam’s loan account balance, the reasons for the journal entries that moved assets offshore and supporting calculations for the uncrystallised tax on the retained earnings of a company in the Family Group.

What was the outcome?

Through their work, RSM were able to provide an accurate net asset schedule that the lawyers could rely on at mediation.

RSM attended the mediation between Jim and Pam, and provided supporting evidence that resulted in the original offer to Pam of $500,000 increasing to $3.2m comprising cash, their marital home, shares and her superannuation balance.

RSM’s taxation specialists assisted to ensure that the negotiated settlement was implemented in the most tax-effective manner.

Pam, having enjoyed the relationships and advice she received from RSM, transferred her super fund balance to her own self-managed superannuation fund with RSM and was assisted with setting her long term financial goals and investments by RSM’s Financial Services team.

How can the RSM Family Law team help you?

By marshalling all the individual specialists typically involved in the successful settlement of family law matters into one team, RSM offers family law practitioners, from firms big or small, an alternative end-to-end service that could potentially deliver superior client outcomes. Contact your local RSM family law expert today.