• Marriage or relationship breakdown – dividends and deemed dividends

    This fact sheet discusses when an amount is taxed as a dividend or a deemed dividend when it is received from a private company because of a marriage or relationship breakdown.

    Attention

    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.
    End of attention

    When do these rules apply from?

    Apart for one exception, these rules have always applied and you have always needed to include an amount in your assessable income as explained in this fact sheet.

    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.

    What is a Family Law obligation?

    For the purposes of this Fact Sheet, a Family Law obligation arises when a private company pays money or 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.

    When does an ordinary dividend arise 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 2014, the private company makes the payment of $250,000 to Justine.

    The payment of $250,000 is an ordinary dividend to Justine for the 2014 tax year.

    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 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.

    End of example

    When does a deemed dividend arise 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 tax year.

    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 2014, 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 2014 tax year.

    End of example

    What amount must be included in your assessable income if you receive an ordinary dividend?

    If you have received:

    • an amount of money, it is the amount of money which you must include in your assessable income.
    • property, it is the market value of the property that you must include in your assessable income.

    What amount must be include in assessable income if you receive a deemed dividend?

    If the private company has a distributable surplus less than your deemed dividend you include the amount of the distributable surplus in your assessable income.

    If the private company has a distributable that is equal to or more than your deemed dividend, you include the amount of your deemed dividend 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 2014 tax year.

    End of example

    Find out more

    Division 7A – Distributable Surplus

    End of find out more

    Can I claim a franking credit?

    Yes, you can claim a franking credit regardless of whether you receive an ordinary dividend or a deemed dividend 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 example

     

      Last modified: 03 Sep 2014QC 42283