The Australian Taxation Office (“ATO”) has recently released a controversial Draft Taxation Ruling TR 2013/D6 which outlines the tax implications of private companies paying money (or transferring property) in satisfaction of Family Court Orders. The Ruling is seen by many as a reversal of the ATO’s previously held position. And worse is the fact the ATO intend to have the Ruling apply retrospectively!
The primary issue is whether payments made by a private company in accordance with Family Court Orders are captured under the dreaded Division 7A (regarding deemed dividends).
Previously it was understood private companies could rely on section 109J which provided that Division 7A does not apply where a payment is made to discharge an obligation of a private company and the private company is required to make the payment under the terms of the Family Court Order on the basis that the payment was accepted as an arm’s length amount.
However, the ATO now take the position that the exemption does not apply because the “arm’s length” requirement cannot be satisfied.
The ATO acknowledge many Private Rulings previously issued were done so in contrast to this latest (public) ruling. Under the administration guidelines regarding Private Rulings the recipients will continue to be able to rely on their Private Ruling. However, anyone not holding a Private Ruling will be subject to the new interpretation and accordingly if their Returns have not been prepared in accordance with the new position (which is unlikely in most cases) amendments may be required.
We will continue to monitor the progress of the Ruling as it moves through the consultation and finalisation process, though we note now that this turn of events appears to strengthen the argument for obtaining Private Rulings when a potential contentious issue arises so that you can lock in your position before a (retrospective) change is made!
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