A dividend or a deemed dividend may arise when a payment of money or a transfer of property is made by a private company to a shareholder or their associate because of a marriage or relationship breakdown. This dividend or deemed dividend must be included in the shareholder or their associate’s assessable income.
Apart from one exception, these rules have always applied. The one exception is where the Family Court requires the private company to pay money to a spouse who is not a shareholder. In that circumstance, the rules only apply where the obligation to pay the money was imposed by the Family Court on or after 30 July 2014.
Throughout this fact sheet, a reference to:
- a marriage includes a de facto relationship
- a spouse includes a former spouse and a party to a de facto relationship
- an order of the Family Court includes a consent order.
See also:
- TR 2014/5 Income tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate)
- Marriage or relationship breakdown and transferring of assets
Family law obligation
For the purposes of Division 7A, a family law obligation arises when a private company pays money or transfers other property to a person because of a marriage or relationship breakdown.
The payment or transfer of property may arise because of an order of the Family Court that is made against either:
- the private company
- one of the parties to the marriage.
An ordinary dividend under a family law obligation
An ordinary dividend arises in any circumstance in which a private company pays money or other property because of a family law obligation to a spouse who is a shareholder of the private company.
Example 1:
Mal, Justine and a private company are parties to matrimonial property proceedings before the Family Court. Mal and Justine are both shareholders of the private company. The Family Court makes an order requiring the private company to pay Justine $250,000.
On 30 April 2015, the private company makes the payment of $250,000 to Justine.
The payment of $250,000 is an ordinary dividend to Justine for the 2015 tax year.
End of example
Example 2:
Tim, Helene and a private company are parties to matrimonial property proceedings before the Family Court. Tim and Helene are both shareholders of the private company. The Family Court makes an order requiring the private company to transfer a rental property with market value of $1,000,000 to Tim.
On 30 April 2015, the private company makes the transfer of the rental property to Tim.
The market value of the rental property ($1,000,000) is an ordinary dividend to Tim for the 2015 income year.
End of exampleA deemed dividend under a family law obligation
A deemed dividend arises in any circumstance in which a private company pays money or other property because of a family law obligation to a spouse who is not a shareholder of the private company.
Example 3:
Sam, Martha and a private company are parties to matrimonial property proceedings before the Family Court.
Martha is not a shareholder of the private company.
The Family Court makes an order for the private company to pay Martha $100,000. On 30 June 2015, the private company makes the payment of $100,000 to Martha.
The payment of $100,000 is a deemed dividend to Martha for the 2015 income year.
End of example
Example 4:
Max, Denise and a private company are parties to matrimonial property proceedings before the Family Court. Denise is the sole shareholder of private company.
The Family Court makes an order for the private company to transfer a rental property with market value of $500,000 to Max. On 30 June 2015, the private company makes the transfer of the rental property to Max.
The market value of the rental property ($500,000) is a deemed dividend to Max for the 2015 income year.
End of exampleIf you receive an ordinary dividend
If you are a shareholder of a private company and have received a payment of money from that private company under a family law obligation, you must include in your assessable income the amount of money received
If you are a shareholder of a private company and have received a transfer of property from that private company under a family law obligation, you must include the market value of the property in your assessable income.
If you receive a deemed dividend
If you are the associate of a shareholder of a private company and have received a payment of money or a transfer of property from that private company under a family law obligation, and the private company has a distributable surplus that is equal to or more than your deemed dividend, you include the amount of your deemed dividend in your assessable income.
If you are the associate of a shareholder of a private company and have received a payment of money or a transfer of property from that private company under a family law obligation, and the private company has a distributable surplus less than your deemed dividend, you include the amount of the distributable surplus in your assessable income.
Example 5:
Assume the same facts as example 4 except the private company has a distributable surplus of $300,000.
As the distributable surplus ($300,000) is less than the market value of the property ($500,000), only $300,000 is included in Max’s assessable income for the 2015 income year.
End of exampleSee also:
Franking credits
You can claim a franking credit regardless of whether you receive an ordinary dividend or a deemed dividend received as a result of marriage or relationship breakdown, provided the private company has franked the dividend.
Example 6:
Assume the same facts as example 5 except the private company franks the deemed dividend such that Max becomes entitled to a franking credit of $90,000.
Max must include the following in assessable income:
- a franked dividend of $300,000
- franking credit of $90,000.
Max is also entitled to claim a tax offset of $90,000.
End of exampleSee also:
Adjustments to the cost base
Adjustments need to be made to the cost base (or reduced cost base) of shares held in a private company for capital gains tax purposes, where:
- a capital gains tax event happens in relation to those shares;
- the shares were held at a time when the private company paid a dividend (or was taken to pay a deemed dividend) in respect of a transfer of property; and
- that transfer of property arose because of a family law obligation.
A family law obligation is one which arises from an order of the Family Court (including a consent order).
See also:
- TR 2014/5 – Income tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate)
- Capital gains tax
- Marriage or relationship breakdown and transferring assets
When an adjustment to the cost base (or reduced cost base) is to be made
An adjustment is made to the cost base (or reduced cost base) of shares only when the reason for the dividend (or deemed dividend) is a transfer of property by the private company arising from a family law obligation. These cost base (or reduced cost base) adjustment rules have applied in this way since 1 July 1997.
Example 7
Tim, Helene and a Private Company are parties to matrimonial property proceedings before the Family Court. Tim and Helene are both shareholders of the Private Company. The Family Court makes an order requiring the Private Company to transfer a rental property with market value of $1,000,000 to Tim.
On 30 April 2014, the Private Company makes the transfer of the rental property to Tim.
The market value of the rental property ($1,000,000) is an ordinary dividend to Tim for the 2014 tax year.
On 30 June 2015, Tim sells his shares to a third party. For capital gains tax purposes, an adjustment is made to the cost base (or reduced cost base) of the shares because the transfer of property was the cause of the ordinary dividend.
End of exampleDifferent cost base (or reduced cost base) adjustments
Different cost base (or reduced cost base) adjustments arise depending upon whether or not the recipient of the transfer of property is a shareholder of the private company.
Where the recipient of the transfer of property is a shareholder, the following adjustments are made:
- the cost base (or reduced cost base) of the shares are reduced by the fall in their market value caused by the transfer of property from the private company to the shareholder; and
- the cost base (or reduced cost base) of the shares are increased by the amount of the dividend assessed to the shareholder because of the transfer of property.
Example 8
Assume the same facts as Example 1.
The adjustments made to the cost base (or reduced cost base) of Tim’s shares are:
The cost base (or reduced cost base) is reduced by $500,000 being ½ of the value of the rental property at the time of transfer. NB: ½ of the value is used as Tim held only ½ of the shares in the private company; and
The cost base (or reduced cost base) is increased by $1,000,000 being the amount of the ordinary dividend assessed to Tim because of the transfer of the rental property.
End of exampleWhere the recipient of the transfer of property is not a shareholder of the private company, the adjustment to cost base (or reduced cost base) of shares is only the fall in their market value caused by the transfer of property from the private company.
Example 9
Assume the same facts as Example 1 except that Tim was not a shareholder of the private company and Helene held 100% of the shares in the private company. The adjustment made to the cost base or reduced cost base of Helene’s shares is as follows:
The cost base (or reduced cost base) of Helene’s shares is reduced by $1,000,000 being the value of the rental property at the time of transfer. NB: 100% of the value of the rental property is used as Helene held all of the shares in the private company.
End of exampleThe cost base (or reduced cost base) of shares held by other shareholders in the private company is also adjusted; it is reduced by the fall in the market value caused by the transfer of property from the private company.
Example 10
Assume the same facts as Example 1.
The adjustment made to the cost base (or reduced cost base) of Helene’s shares is a as follows:
The cost base (or reduced cost base) is reduced by $500,000 being ½ of the value of the rental property at the time of transfer. NB: ½ the value is used as Helene held only ½ of the shares in the private company.
End of exampleNext step:
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