For accountants and financial advisors whose clients who are business owners and are separated but yet to finalise their property settlement, there are some issues you may want to help them avoid.
The most significant issue is the problems that occur when a property settlement rolls over into a new financial year. The potential implications include:
- An impact on business valuation
- Impact on plans for growth; and
- Continued contact required with the former partner/spouse to finalise tax and financial affairs
1. Potential impact on business valuations
In circumstances where property settlement negotiations have stalled, business valuations and other valuation of other assets can be affected. This can be more pronounced where there are business which are currently trading. As part of the process of resolving a property settlement, the value of an asset is highly relevant. When a financial settlement remains unresolved following mediation or needs to be determined by the Court, that is often the catalyst for needing an updated valuation to be prepared.
With a business, a settlement rolling over into a new financial year, means that further financial statements need to be prepared for the company and a further year of trading history may need to be considered. The settlement process may require a reassessment of the business’ valuation and the value can change based on the performance of the company over that financial year. If the profitability of the business has increased or decreased since separation, it may affect the division of the asset pool to both parties.
2. Potential ongoing contact to finalise tax related affairs
If a settlement is not finalised by the end of financial year, both parties may need to continue to have ongoing contact as part of disclosure requirements. If not yet finalised, both parties may need ongoing contact relating to business decision-making and income, distribution of income to other family members and/or business taxes. This means that there is no ‘clean break’ in a financial sense as the next financial year rolls around.
3. Potential impact on plans for growth
If your client is planning to implement a capital improvement, put money in or take money out of their business at some stage, there may be limitations on them doing so, or potential advantages or disadvantages to consider. At worst, if there is a lack of cooperation between the spouses, future plans may need to be deferred if a property settlement has not been finalised.
As part of ongoing obligations relating to disclosure, all information relating to the business needs to be provided until a settlement is in place. Needing to continue to provide this level of financial information to a former partner whilst they are in an ongoing negotiation can be frustrating. Whereas once a financial settlement is reached, your client will no longer need to provide this information.
It is for these reasons that business owners who are going through separation are in a unique situation. Whilst resolution of a financial settlement following a divorce is often emotionally charged and one which many people, at least initially, may want to avoid for as long as possible, as their trusted advisors it is important to remind them of the need to formalise a settlement so that come the end of the next financial year, they are better placed to focus on the future of their business.
As a family lawyer, it’s not uncommon for us to hear from our clients’ or their accountants that they would like to finalise their property settlement before 30 June. Depending on where they are in the process, sometimes this can be achieved but where groundwork has not already been done, sometimes it cannot be achieved. The key is starting early and approaching the problem solving exercise with a high level of cooperation and communication to hopefully achieve a mutually beneficial outcome for all involved.
As a trusted advisor, I wish to highlight to you the importance of working collaboratively with your client’s lawyer to achieve a tax-effective strategy for their settlement, and to improve the chances of it being finalised within the intended time frame. I also recommend being alert to your clients’ circumstances in terms of any potential or impending separation or divorce and to be ‘ahead of time’ in these requests where possible so we can help your client achieve the ‘30 June wrap up’ and move forward with their business plans.
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Phillips Family Law is an award winning Family Law practice serving clients across Australia and abroad. Regardless of where you are in your decision making process, we can make you aware of your options. To discuss your situation confidentially phone +61730079898 or secure a time by clicking here.