Our accountants partner with Sage Family Lawyers to support our clients with family law matters. In this article, co-authored by Giorgia Maiorana , we explain what you need to know about the tax and legal implications in the event of a relationship breakdown, and what you can do to protect your business.
For business owners, separation can be one of the most financially disruptive events of their lives, and the business is often right in the middle of it. Understanding what is at stake for your business is the first step to protecting it. If you are well informed and get advice early on, about the potential implications, this will assist you avoid unnecessary tax headaches later.
What's Actually at Risk in a Divorce Settlement?
When a relationship breaks down, there is a legal process that applies to dividing matrimonial assets. For most people, those assets include the family home, savings, and superannuation.
For business owners, your ownership stake in the business, the value of company shares, goodwill, loan accounts, unpaid entitlements, trust distributions and entities you control may very well form part of the asset pool. Company structure and shareholder agreements may also be affected.
The impact goes beyond your personal finances.
The Tax Side of Divorce & Nightmare Scenarios
Capital gains tax (CGT).
When business assets or shares are transferred as part of a settlement, CGT may be triggered.
CGT rollover relief may be available where the transfer is made pursuant to a court order or formal agreement. If the rollover applies, CGT is generally deferred until the receiving spouse later disposes of the asset.
Not seeking advice on your eligibility CGT rollover relief may be an expensive decision.
Trusts
The position in relation to trusts and relationship breakdown CGT rollover relief is more complicated. The nightmare scenario:
- Assets move from the trust/company structure to a spouse;
- The transfer is not covered by a court order or financial agreement;
- Rollover relief is unavailable; and
- CGT is triggered immediately.
It is important to obtain advice early.
How to Protect Your Business
Financial agreements (colloquially referred to as pre-nups)
A financial agreement is an agreement that sets out how assets will be divided in the event of a separation.
A financial agreement can be entered into at different stages of the relationship, including in contemplation of a marriage or de facto relationship, during or after the breakdown of the marriage or de facto relationship.
For business owners, financial agreements, if drafted carefully, may be an important document to protect business interests and provide clarity around how the parties are to manage their financial affairs if they were to separate. If the financial agreement is drafted correctly and the parties receive legal advice as to its effect and the advantages and disadvantages, then the financial agreement is likely to be binding and enforceable.
Shareholder agreements
A well-drafted agreement can include pre-emption or buy-sell clauses that reduce the risk of a former spouse becoming involved in ownership or control. These provisions are useful, but they need to be considered alongside family law advice.
You're a Business Owner and You’re Already Separating. What Now?
The first step is to understand what your business is worth. Different methods exist, and the approach taken can have a significant impact on settlement negotiations.
The most important thing is to make sure your tax adviser and your family lawyer are working together. Decisions about how assets are divided have both legal and tax consequences, which can last for many years.
Some of the most common mistakes business owners make include:
- Settling too quickly without understanding the tax implications,
- Not getting an independent business valuation before negotiating,
- Treating the whole process as a purely legal matter, overlooking the taxes.
Getting Divorced? Get Advice Early
Separation is hard enough. Don’t let it become something where your business, trust structure and tax position all get dragged in as well.
The right advice can help you understand what’s at risk, what tax issues could arise, and how to avoid making decisions that create bigger problems later. Whether you’re planning ahead or already separating, getting your accountant and family lawyer working together early can make a real difference.
Speak to our Tax and Accounting Team
BlueRock’s tax and accounting team works alongside Sage Family Lawyers to support business owners through separation. Together, we can help you navigate the tax, valuation and structuring issues before they become settlement problems.
