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 parties were married in 1973 and they separated on a final basis in January 2010.
- There were five children of the marriage, with two being deceased at the time of the trial, and the surviving three aged respectively 42 years, 41 years and 39 years.
- When the parties married, the husband owned a 25 per cent shareholding in a company. That company had been formed by the husband’s parents in 1960. The husband’s parents each held a 25 per cent shareholding, with the husband’s and his sister’s 25 per cent shareholding each being held on trust for them by the husband’s parents.
- In about 1969, the company constructed the Business N at Town 1 (“Business N”).
- At the time of trial, the husband was still in control of the company and involved in the operation of Business N.
- The orders required the husband to pay or to cause the company to pay the wife the sum of $2,980,639.28 within four months and otherwise declared the parties to be the sole owners of all other property and superannuation interests in their respective possession.
- The orders followed upon findings that the parties’ net assets, inclusive of superannuation, were worth slightly in excess of $10,000,000.00 (at –). The primary judge also determined to notionally add-back to the husband’s existing property interests two separate amounts of $340,000.00 and $93,585.20, which he had spent after separation (at , –). The primary judge concluded the parties’ contributions should reflect an entitlement of 60 per cent in the husband’s favour (at ), but then found that an adjustment in the wife’s favour under Section 75(2)(o) of the Family Law Act 1975 (Cth) (“the Act”) was justified on account of the husband’s conduct, which was quantified at $140,620.00 (at ).
- Consequently, the wife was entitled to assets and superannuation with a net value of $4,316,141.28 and, allowing for the property interests she already retained, it was necessary for her to receive a cash adjustment of $2,980,639.28 (at ).
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.
The Wife’s Appeal
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.