The Australian Tax Office has issued a ruling clarifying its view of section 109J of the Income Tax Assessment Act 1936 (Tax Act).

Previously, if a property settlement was made to a spouse by way of a transfer of funds through a family company or by way of a transfer of a property owned by a family company, the transaction did not trigger a deemed dividend under Division 7A of the Tax Act as the payment to that spouse was made in satisfaction of a court order. This was within the scope of the exemption provided in section 109J.

As of 30 July 2014, such transactions will no longer satisfy the exemption in section 109J and the ATO will tax such payments or property transfers as a dividend paid to the spouse receiving the property or funds.

This change in the ATO’s interpretation of section 109J, greatly increases the cost of property settlements.

Example

Jane, Peter and the private company XYZ Pty Ltd through which they operate the family business are parties to proceedings before the Family Court.

Jane is not a shareholder of XYZ Pty Ltd.

An order is made by the Family Court that XYZ Pty Ltd pay to Jane the sum of $100,000.

This payment of $100,000 is a deemed dividend to Jane for the current financial year and she will be liable to pay tax on the amount.

The Court may order that the company franks the deemed dividend to reduce Jane’s taxation liabilities.