Valuations for Family Law property settlements. Valuations are prepared as at a specific date based on circumstances and financial information known at that point, so it’s possible that valuations prepared a month ago or more may no longer be relevant - particularly for sectors which have been impacted more severely than others by COVID-19 (e.g. travel, tourism, hospitality, and entertainment).
This short-term volatility in the broader economy may not necessarily be reflective of a permanent diminution in the value of a business, and in fact, some industries are experiencing a rapid increase in demand at the moment - think of the toilet roll manufacturers, but also home rental providers such as gym equipment and home delivery services.
Therefore it is important to fully consider the nature of each business subject to a prior valuation.
In general terms, valuations which only rely on 2019 financial information are more likely to require updating as the 2020 financial year will no doubt be impacted to some extent through changes in demand or supply, business interruption via employee absences or remote working, and maybe cash flow issues where mitigation action cannot be taken in time.
A valuer may need to normalise inputs to moderate the effect of recent volatility in share prices or incorporate longer-term profitability outlooks into the analysis to ensure the business valuation is not unduly influenced by what is hopefully a short-lived period of uncertainty.
It is also worth noting that valuations undertaken in the current environment will probably take the form of limited scope valuations as physical site visits are unlikely to be conducted.
Tax & Accounting Implications
Over the coming months, there are a number of important tax ‘events’ that may trigger tax liabilities for parties (or entities within their group) including:
- 31 March 2020
- Lodgement of a tax return for certain companies and super funds; payment in this category will also be due by this date;
- Lodgement of a tax return for certain individuals and trusts (prior-year tax liability of $20,000 or more);
- 28 April 2020
- Compulsory employee superannuation guarantee payments to be received by employee funds by this date.
- 15 May 2020
- Lodgement of tax returns for all entities that did not lodge earlier and are not eligible for the 5 June concession.
- 21 May 2020
- Lodgement and payment of Fringe Benefits Tax (“FBT”) return (if lodged by payer)
- 28 May 2020
- Payment of FBT return if the employer is lodging electronically (ie. via a tax agent).
- 30 June 2020
- Minimum repayments are due on existing Division 7A loans.
- Trustee income distribution resolutions for the 2020 year required by Trustees.
The lodgement of returns may trigger tax liabilities for the parties and where the parties have an interest in a business impacted by COVID-19 or their personal financial situation has changed, they may have difficulty in meeting these upcoming tax obligations.
Where one or both of the parties hold an office as director in a private company, and the company has employees, they may be at greater risk of personal liability if the company experiences difficulties in making payment of compulsory superannuation guarantee obligations, PAYG withholding, and GST liabilities. If a director penalty notice (“DPN”) is issued by the ATO, the director will have a limited period of time to either pay the DPN in full or take reasonable action to wind up the company.
In the current environment, where the parties have shareholder loans owing to private companies, they may be required to make an actual cash payment of the minimum Div7A loan repayment as the private company may not meet the requirements to declare a dividend under section 245T of the Corporations Act.
Non-payment may result in a deemed Div7A dividend, or worse, in the event of insolvency of the private company, the shareholder taxed on the deemed Div7A dividend may also be required to pay back the loan to the trustee in liquidation.
There is some help at hand.
The ATO has released details of COVID-19 measures designed to assist taxpayers who are experiencing difficulty in meeting tax obligations.
The measures do not automatically apply so taxpayers seeking COVID-19 relief must contact the ATO either directly or via their agent to see if they are eligible for assistance. Tax obligations are still required to be met COVID-19 or not, and non-compliance by parties could have a significant impact not only on the net asset pool but also post-settlement where the issues are not addressed.
We strongly recommend that during these challenging times parties work together in respect of tax obligations as non-compliance could have significant and far-reaching personal consequences for each of them. We also suggest tax indemnities included in proposed orders be revisited in light of increased risk.
Tax obligations between the parties do not end when the Family Court issues final orders, and we are aware of an increasing number of matters where significant tax issues are being identified post-settlement and one of the parties is left dealing with a tax liability they didn’t anticipate so independent advice is critical at this time.
Bankruptcy and Family Law property settlements
What happens if one of the parties becomes bankrupt because he or she is no longer able to pay creditors and/or tax debts?
If one of the parties is made bankrupt, or petitions for bankruptcy, the majority of his or her property will vest in the Bankruptcy Trustee. Property that does not vest includes household items, superannuation, and tools of the trade and motor vehicles below certain values.
Subject to the value of the vested property, the Bankruptcy Trustee may decide to become a party to the proceedings.
If this occurs, the Bankruptcy Trustee, and not the bankrupt party, will make submissions regarding the vested property.
When making a decision regarding the distribution of property, the Court must consider the competing rights of the bankrupt party’s creditors, the bankrupt party (for a non-vested property) and the non-bankrupt party. Importantly for the non-bankrupt party, the Court can order the Bankruptcy Trustee to transfer vested property to the non-bankrupt party.
If one of the parties becomes bankrupt after orders for property settlement have been made, the Bankruptcy Trustee might apply to have the orders set aside pursuant to s79A or s90SN of the Family Law Act 1975.
Superannuation & SMSF Implications
Drastic market movements have seen significant changes to superannuation balances over the past few weeks, and future movements are difficult to assess. Unlike business valuations, superannuation is valued according to the value of the underlying assets on the day, which for most is listed investments.
This may have a number of impacts for individuals in the process of splitting superannuation benefits, and especially for those who have reached agreement on specific balances, rather then on a % of the benefit.
The result this may have for one party could be devastating, and we strongly encourage parties to work together to ensure a reasonable solution may be achieved.
For those with SMSFs, the ongoing cash flow implications where the property is held may also change decisions that are being made.
As more and more businesses are shut, new arrangements are being reached between lessee and lessor to try to keep enough cash coming through to meet costs. Parties will need to consider what this means for their circumstances in deciding which assets they may wish to keep.
It is important that all issues are considered prior to an agreement being reached, to avoid having to renegotiate in a potentially unpleasant situation.
RSM has specialists that are able to assist Family Lawyers and their clients.
For further information regarding how RSM can help, contact one of our specialists in our Family Law team.