PKF Australia

Accountants and Business Advisers

Brangelina no more

Brangelina no more

Posted 23 Sep 16

By Natalie Irvine

As Brad Pitt moves out of the Hollywood Hills mansion and Madame Tussauds separate Jolie from Pitt at the London Wax Museum, the same is echoed in many Australian families.

Family breakdown is a stressful and difficult time, tax implications will often be furthest from the separating couple’s priorities. However, given the current highest individual marginal tax rate of 46%, it is important to consider the potential tax exposure as part of the Financial Agreement between estranged spouses. Failure to do so may likely result in losing close to half of the settlement to the ATO.

Consideration should be given to general Capital Gains Tax exposure on asset disposal. There is a roll-over available to defer capital gains arising from the transfer between estranged spouses. The availability of the rollover is subject to various conditions being met. The roll-over also extends to assets held in private companies or trusts instead of being held individually.

Outstanding loans between related entities should also be reviewed and extinguished (where possible) to achieve a ‘clean break’ between parties. Often, the extinguishment may give rise to a deemed dividend to the borrowing spouse. Division 7A exposure should also be considered where assets are transferred by a company pursuant to a family court order. Failure to do so may result in a surprise tax bill. A solid tax indemnity clause included in the agreement may assist parties in recouping the tax liability if any.

It is therefore vital to review the asset transfers and related party loan clean-up amongst other tax considerations to mitigate further negative surprises.

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