With one in three Australian marriages ending in divorce and the median age of divorce being 45 for men and 43 for women¹, divorce is typically occurring during the prime wealth accumulation period of people’s lives.
It is in this period that businesses are established, investments are made and complex financial structures are formed.
It is common for one spouse to control the finances whilst the other “non-financial” spouse has little to no involvement beyond signing trust resolution statements, dividend statements and taxation returns each year. This results in a significant imbalance of knowledge when the parties try to finalise their financial matters through a property settlement.
Our goals when acting as a financial advocate are to ensure our client receives their fair share of the genuine asset pool and the settlement is structured appropriately to provide protection from unintended taxation and other consequences.
Here are some key questions to consider when you are, or you are acting for, the non-financial spouse.
Is the asset pool correct?
Are all of the assets of the parties included in the pool, have all liabilities been identified and have all associated entities been included correctly? A review of the structure of the group can assist to identify opportunities and risks. For example, are there any unpaid trust distributions owing to the client that can be called upon, conversely does the client owe money to an associated company or are there any unidentified Division 7A issues.
Has the asset pool intentionally been reduced?
Has the ex-spouse deliberately disposed of assets, run down businesses, attempted to conceal assets or divert funds? Any funds withdrawn from the pool should be quantified.
Has the business been valued appropriately?
Business valuations are usually prepared from the financial information obtained from the external accountant and the spouse in control of the finances. As a business can be the most valuable asset in an asset pool it is critical that the valuation is carefully reviewed to ensure that it is factually correct, the methodologies used are appropriate and the report is objective.If any issues are identified a suitably qualified Business Valuation expert (such as a CAANZ Business Valuation Specialist) can be engaged to review and provide a critique of the business valuation.
Have all accounting issues been identified and addressed?
It is all too common for the party in control of the finances to unilaterally instruct the external accountant, making decisions in relation to the group without due consideration of the effect on their ex-spouse. Common red flags for further investigation are:
- Unsigned or back dated agreements
- Adjustments of prior year balances or tax returns
- Altering the way in which related party loans are accounted for
- Changes in distribution patterns
- Bringing forward expenses
- Deferring income
Have all taxation issues been identified and addressed?
Almost all Family Law matters we are involved in contain issues with Division 7A loans. It is essential that Division 7A issues are appropriately addressed, any additional tax liabilities are quantified and if necessary voluntary disclosures are made or requests for the Commissioner’s discretion are submitted. It is also important to identify any current year tax payable and to attempt to quantify any future contingent taxation liabilities that may arise due to the current structure of the group.
Is the negotiated settlement tax effective?
It is important to identify the most tax effective manner to facilitate and protect the agreed settlement. Some issues to consider:
- Are the parties eligible to access the Capital Gains Tax marriage breakdown roll-over relief?
- Will the transfer of a property out of a company or associated trust fall foul of Division 7A, will it be treated as a dividend or trust distribution for tax purposes?
- Do the parties have any prior year carried forward tax losses?
- Who will keep the main residence and will the full main residence exemption apply?
- Will GST apply on any transfers of property?
- Are the transfers of dutiable property eligible to access the relationship breakdown concessions?
- Are any loans being written off and will this trigger the commercial debt forgiveness rules?
- Have the appropriate taxation indemnities been included in the proposed orders?
Case Study: $50,000 to $1 m
RSM’s Litigation Support team were recently engaged as a financial advocate to assist with the property settlement between two parties who owned one significant business interest. Our client had not been involved in any financial matters relating to the business. Substantial profits had been made since commencement yet there were no significant assets in the pool except for the business and a mortgaged former home. Our client was presented with an offer of $50,000 prepared by the parties’ external accountant who advised that their asset pool was minimal with significant taxation liabilities. Our client was concerned that their ex-spouse had depleted the asset pool and overstated the true liabilities of the parties.
Our team assisted in this matter by:
- Undertaking a review of the complex group structure
- Liaising with the external accountant and financial adviser
- Drafting the assets and liabilities of the parties
- Tracing physical cash distributions of the business
- Reviewing disclosure documents and affidavits of the ex-spouse raising areas of concern
- Attending mediation and presenting an alternative view to the external accountant on the taxation liabilities of the parties
- Providing advice on the most tax effective manner to divide the asset pool
In conjunction with a dedicated and thorough legal team, our client ultimately accepted an offer of approximately $1 million in addition to avoiding the costs, uncertainty and emotional turmoil involved in progressing the matter to trial.
¹(NATSEM Issue 39, December 2016)