As family lawyers we often work with accountants and financial planners to find tax effective options for our client to structure their property settlements. We work closely with accountants to identify tax issues and quantify the tax which may be payable, so that liability or anticipated liability, may be taken into account as part of a property settlement where appropriate.
In Rodgers & Rodgers  FamCAFC 68, the Full Court considered whether it was appropriate to deduct the total future tax payable by a company owned by the husband and wife in determining the value of the parties’ net assets to then be divided between them as part of their final property settlement.
The parties’ assets included real property, chattels, an investment trust and a successful tourism business that was operated through a company/trust structure
At the first hearing, the Trial Judge determined that the net value of the property of the parties (including their superannuation interests) was approximately $4.9 million. However, the Trial Judge refused to take into the total future tax payable by the company through which the parties’ ran their business (a business which the husband was to retain as part of his final property settlement).
Instead, the Trial Judge considered that the husband would be responsible for the tax in determining if any adjustments needed to be made to the parties’ respective property settlement entitlements to account for their ‘needs’ in the future and to ensure a fair settlement for each party. In doing so the Trial Judge stated that, “… the business has been able to manage this payment to date. It is a matter I take into account in assessing any adjustment that may otherwise be made in the wife’s favour”.
The husband appealed the property settlement orders made by the trial Judge on the basis that the Trial Judge should have taken the tax liability into account in calculating the net assets to be divided between the parties. The tax liability related to:-
- A total amount of tax based on a series of Division 7A loans within the company that were outstanding at the time of the trial;
- an assumption put forward by the husband that each of those loans would be repaid within their seven year term by declaring dividends to effect the repayments.
The Full Court agreed with the Trial Judge’s approach in so far as they considered it was appropriate and within the Trial Judge’s discretion to:
- Exclude the tax liability from the calculation of the parties’ net asset position at trial; and
- Consider the potential tax liability to the company as a matter relevant to the husband’s future financial circumstances in making any adjustments in this regard.
However, the Full Court allowed the appeal as they considered that the Trial Judge had made an error in arriving at her decision because:
- There were sufficient calculations and historical evidence before the Court in relation to the way in which the company had previously been meeting Division 7A commitments that provided some indication of the “dollar effect” of the tax;
- the Trial Judge decided not to take the future tax liability into account in the calculation of the parties’ net asset position at trial, it was important that the matter be given proper consideration as part of the parties’ ‘needs’ in the future to ensure a just and equitable outcome; and
- the Trial Judge did not give proper consideration to the “impost” or the “management” of the tax to be borne by the husband going forward.
Phillips Family Law regularly deal with complex property settlement matters which include consideration of future tax liabilities and work closely with accountants to achieve the most tax effective outcome for clients. Please don’t hesitate to contact us if you have any questions about how future tax liabilities may be treated in the event of a settlement.