A preliminary guide to common issues asked by couples who are separating.
The act of leaving a spouse is always difficult. And almost always the financial aspect of the separation is a key discussion point.
We have detailed a few financial and tax related things to go over for couples who are intending, or who have, separated.
There are other matters (of course) relating to your estate planning, succession and legal affairs. These are not going to be discussed in this paper.
Using your existing accountant
An accountant has a conflict of interest
An accountant is ethically bound to “pick a side” when a family starts divorce proceedings. So your accountant cannot act for you and your former spouse when you formally commence divorce proceedings. (1)
The time leading up-to separation takes a while. It often takes many years. And an accountant will often try to help couples over a “rough patch”. So it is possible that your accountant has been aware of an ongoing issue and continued to help you both.
This does not mean that your accountant can continue for you both.
If your accountant is assisting one side (and it is not you) the rejection can be painful. It should not been interpreted that way. It is rarely a personal insult against one and a vindication by another.
Even when your accountant (or former accountant) has indicated that they no longer act for you – you were still their client at some stage. Your accountant, while they helped you, must have always acted in your best interests.
When you do decide to formally separate you should formally let your accountant know – so put it in writing.
If the accountant has chosen to act for you only, the benefit is that you do not have to “train” a new one.
An accountant will rarely act dishonestly
The likelihood of an accountant entering into deceptive conduct with your former partner is also low. The financial compensation needed to induce an accountant (or any professional advisor) to act dishonestly needs to be very large. Most couples separating simply do not have the financial capacity, or inclination, to pay such an obscene amount of money.
It is typically cheaper, and more certain, to deal honestly with your former spouse than to corrupt professionals.
If you are concerned that your former accountant is being deceptive: simply get another accountant to review the information presented. The worst acts we have seen might be that information is presented poorly (but correctly). This might have meant that an uneducated user did not fully understand the material presented.
Any quality accountant or will be able to interpret the financial information presented and identify any concern. It should not be a stumbling block.
If your accountant has chosen to assist you it is important that you focus on using that person. Allow your accountant to produce information and details professionally and quickly to your former spouse under the direction and guidance of your legal team.
Your current accountant is sometimes viewed as a trusted source and will often be well placed to explain financial matters. However such a role should be done under the guidance of your lawyers – do not let the accountant do “side negotiations” and interfere with your legal strategy.
Accessing your accounting records
If your accountant is conflicted they will probably be professional and let you know, in writing, that they are unable to assist you. However this does not mean you should be treated poorly. In fact many divorcees will engage another accountant for the divorce and then reconnect back to their accountant once the divorce is complete.
Importantly your financial records that were prepared by your accountant at your request belong to you. (2) To access your prior financial records you simply need to arrange for a new accountant to write to the former accountant and ask for a copy.
If an accountant does not provide this information a complaint can be lodged with the relevant professional body.
If your accountant has elected to represent you and not your spouse it is best practice to instruct them (under the guidance of your lawyers) to provide any information requested that is relevant to your former spouse. This information will ultimately be provided (it belongs to them) and a co-operative approach on your part should reap returns later on.
Accessing your tax records
You can also approach the Australian Tax Office and lodge a “Copy of Tax Document Request” to access ATO documents you have prepared for your tax history. (3)
So if you are concerned about what you are witnessing there is always a way to cross check.
Accessing your company records
If you are not sure on your shareholding and directorships this should be answered by your former accountant or your former spouse.
If the answer is not clear, or if you are uncertain of the response – government agencies can help. The Australian Securities and Investments Commission (4) can produce a detailed listing of the directorships and shareholdings that a person holds via ASIC Connect.
Likewise you can also approach Landgate (5) for details on property holdings and The Department of Finance (6) for land tax records.
There is no public record of who has and has not accessed these documents.
Understanding your tax and financial records
If you do not properly understand your financial records you are not alone.
In the event of a marital breakdown, with emotions, it is sometimes difficult to seek clarity from a former spouse or a former accountant as to the reports. Sometimes you are potentially better placed to seek an explanation from an independent professional advisor who can then explain the information and their potential concerns (if any). A professional business, accounting or tax advisor can also frame questions in a way to another business advisor (or accountant) in such a way that you should get a clear answer.
The worst position that we, as a practice, have ever seen is that another advisor might provide a direct answer to a direct question. They might not raise an issue even if it is relevant. They might even be limited by the action of the matrimonial lawyers.
Our practice has never seen a professional Chartered Accountant in practice lie to a former client.
If your accountant is remaining with you: do not get that person “to talk sense” into your former spouse. Offer the opportunity for your accountant to meet with your spouse’s representative (who might be the lawyer, accountant or somebody else) and explain the structure of the finances.
Your legal team will be best situated to answer this question. However from experience we often see a confusion about financial information in the event of a marital breakdown.
The main residence exemption
Taxation law allows you to real estate free of capital gains tax if it is your home. (7) However taxation law also allows your tax “home” to be somewhere other than where you live. (8)
When you enter into a financial settlement it is important for both parties to expressly state which home is to enjoy the main residence exemption. This is a complex area of law and a couple can only have one home enjoy the main residence exemption. (9)
At a later point in time, and you have a Tax Office audit, you can then refer to the financial settlement and use that as proof that the exemption was claimed for the house in question.
Again – advice on this matter is under the direction of your matrimonial lawyer.
The tax status of assets
If assets are transferred during the settlement then an understanding of the tax history of those assets is critical. For some assets the subsequent sale to a third party will trigger a tax liability. So getting evidence of the tax history prior to settlement is important.
In some instances getting a tax history of assets after settlement is not possible.
There are over 50 sections in taxation law that provides tax relief for the transfer of an asset. This covers superannuation, capital gains tax and trading stock.
As a general guide assets transferred from one spouse to another under a court order do not generate a capital gains tax event. (10)
The tax outcome of assets
In some instances the value of assets disclosed to you will be reduced for the taxation liability. And your lawyer is best placed to answer whether that approach is acceptable in your instance.
However if the assets include a tax calculation you are likely to be entitled for detailed workings on how those calculations where performed. These workings can then be double checked if you are unsure or you would like a second opinion.
If you are doing the calculations for another it is prudent to provide a professional opinion at the same time as you provide the tax calculation. This proves good faith on your part and proves that you are being fully transparent.
Reduced turnover and profitability
If you are undergoing a separation the chances are that it is affecting your work efforts. And, for lots of reasons, we have often seen the profitability of businesses falling when the owners undergo a separation. And, in some extreme instances, we have seen some people contemplate a delay or a reduction to their income while they are separating.
The reasons for a reduced profits in a business or trade are endless. And it is important that the rationale or evidence given to support the reduced turnover is clear and direct.
At times somebody will ask for independent verification of the reasons. There is a growing area of accounting typically referred to as “forensic accounting” where experts will bury into the financial reports and data files of a business to understand and uncover evidence of hidden assets. The ability of these people to identify reasons varies from advisor to advisor. And without exception we have never seen a forensic accountant enter a business premises and be warmly welcomed by the staff of the remaining spouse. It is disrupting and upsetting to the staff.
Further – the job of the forensic accountant is difficult. They are often looking for information that does not exist in a hostile environment. And the value they might ultimately provide will be assurance that the information initially shown is correct (this is sometimes not warmly welcomed either).
If you can avoid the need for a forensic accountant and if you can keep dealings amicable you probably should (under the directions of your legal team). Good evidence to look at demonstrating the fallen profitability will include copies of Business Activity Statements, current financial reports and extracts of loan statements.
Again your legal advisors should be directing the use of accountants and forensic accountants to ensure you get a co-ordinated approach.
Tax deductibility of divorce payments
If somebody makes a financial payment to their spouse the cost is typically not connected to the production of income. Generally the cost of the financial settlement is to end a relationship. So a matrimonial payment is not directly connected to the purchase of an income producing asset.
Taxation law requires that for a payment to become tax deductible it must be connected to the production of taxable income. (11) So, generally, the cost of a financial settlement to a spouse is not tax deductible and the interest on any monies borrowed is not tax deductible. Likewise any monies paid to a spouse as a result of financial settlement is not tax assessable.
If you think you are going to end up making a payment to your former spouse get tax advice quickly before you make the offer. If you have the capacity to make it tax effective (and sometimes this can happen) the structuring of the payment should be clear as part of the offer.
And importantly good quality tax advice is needed for a large dollar transaction like a matrimonial settlement. Insist that the advice given by your tax professional is documented and provides a clear summary of the outcomes.
What you typically do not want to do is to make an offer for a financial payment to your former spouse and then make an additional offer so that the payment can be done tax effectively.
Likewise if you are receiving a payment under a settlement – give you former spouse clarity on how you payment is structured. Typically if you are receiving a cash payment you will want confirmation that the payment made to you is free of tax. If you receive payments that are taxable (like a trust) distribution you should understand how that will impact you.
If an offer is made, and the offer includes transferring an inherent tax profile of assets the offer should clearly articulate the tax profile. The tax profile could be documented or outlined in an opinion by a tax professional.
We have often seen financial settlements reached, in principal, between a couple and then become re-opened once the tax consequences of the transaction are discovered.
Child maintenance payments
The transfer of monies to support a child is not tax deductible. (12) Likewise the receipt of monies through child support is not tax assessable. (13)
If you negatively gear assets or salary sacrifice income to superannuation your Child Support Payments are unaffected.
There is a current perception that self-employed people can reduce their child support obligations. This should be discussed with your legal team.
As a business we do not offer advice in this area. And the penalties for misleading on Child Support are significant.
There is potential for a person to legitimately transfer an asset to a trust that provides child support. This is referred to as a “Child maintenance trust” and it can be very tax effective.
Spouse maintenance payments
The tax treatment of spousal maintenance should be addressed upfront. If the income will arise from say, a trust distribution, then that income will be taxable to the spouse and the income generated will incur tax. (13)
If the obligation to pay spousal support is met by a single lump sum payment – the payment is typically capital and not be taxable to the spouse.
Under no circumstance should the tax treatment of spousal maintenance be left for discussion after the event.
Ongoing financial commitments
Many couples who have combined finances. These items could include health insurance, income protection benefits and even a gym membership.
You should document all joint payments that have a mutual benefit to both parties. And at an early stage in the proceedings seek an understanding with your partner that these payments will either continue, or they will be separated by a certain time period and then cancelled.
If you provide certainty and clarity to your spouse you are more likely to create a quicker conclusion – however that is always done under the direction of your legal team.
At times we have seen the inadvertent closure of say, a health insurance policy, which can have a devastating impact on a former spouse.
If you are a director of a company you are entitled to seek detailed current financial information about the current operations of that business. (14)
If you are a shareholder with more than 5% interest you are entitled to ask for financial reports. (15)
Regardless of your access rights and your spouses – a business strategy should be considered for separating couples. It is not good business practice to bring a matrimonial settlement before operating staff in a business.
And staff member of a business should never be put them in conflict over what they should and should not produce to a former spouse.
The business strategy should be presented to your respective legal teams.
Simply getting divorced does not allow you to access your superannuation monies. The only way you can access superannuation monies (and not incur a tax penalty) is if you are over a certain age (called a preservation age) and potentially also being retired. (16)
If you and your spouse are members of a self-managed superannuation fund you cannot exclude your former spouse from decisions or ignore their attempts to transfer monies from the SMSF. Likewise your spouse cannot do the same to you.
In general a separating couple has three options. They can
1 Arrange to split the superannuation monies so that both persons will have separate amounts as agreed by them. If this is a SMSF typically one person will want to leave the SMSF.
2 Defer the decision to another time but protect both members. This is rare, but would be done by, say, a SMSF holding a large asset that cannot be easily split.
- Simply leave the superannuation balance untouched and deal with differences in other asset splits.
Irrespective of the approach your legal team suggest – the level of superannuation money communicated between you and your former spouse must be at market value.
Cost of a divorce
Legal and accounting costs relating to a divorce are generally not tax deductible unless they are paid for tax advice. (17) Sometimes the fees relating to the property matters might become part of the tax cost base of the asset for capital gains tax. (18)
The transfer of property as a result of a divorce might be exempted from stamp duty. (19)
Detailed advice on potential stamp duty should be sought.
Managing your living costs
A marital breakdown inevitably creates a large financial upheaval. And a big part of that is finding ways to deal with your new, most likely higher, cost of living.
You might want to consider using technology to give you an understanding of your new cost of living that will ultimately help you forecast your new living costs and prepare a budget. The governments MoneySmart team has an app “Track My Spend” (20) that if free and can help you focus on your lifestyle costs.
Understanding your loan positions
If you are uncertain as to how much money you owe and to who – obtain a copy of your credit report. It will obtain the following information
- Your details (name, date of birth, address and drivers license number)
- Names of joint applicants
- Details of credit cards you hold
- Details of debts that were unpaid and are now upto date
- Details of any debts that are over 60 days where debt collection activity has started
- Details of bankruptcies, judgement debts and insolvency agreements in your name.
- Your repayment history
- For each credit liability the type of credit product, the limit and the opening and closing date of the account.
You can obtain a copy of your credit report for free from a couple of commercial credit reporting agencies. (21) Of course you should also approach your banks for detailed information.
In some instances a family have structured a family dynasty with an express objective of protecting the dynasty to the bloodline of later generations. At Westcourt we work with a lot of families who simply want to protect the ongoing business so staff are safe.
Typically these families will choose a time to formally “introduce the wealth” to an incoming spouse of the next generation. Communication of a protection against a spouse after they have split is difficult.
Your legal team is better placed to review structures like bloodline trusts (or legacy trusts) and provide strategies on how they should be treated.
Westcourt Family Business Accountants has one goal – to make family owned businesses great. We help business families across generations cut red tape, provide certainty, increase wealth and help successfully transfer a family legacy (business financial and cultural) to the next generation.
With technical excellence in taxation as represented by national representation on the Tax Institute SME Technical Committee’s together with a sole focus on business families we are well placed to assist families deal with significant life events – including matrimonial breakdown.
Level 2, 116 Roe Street Northbridge WA 6003
This is general advice only. Personal legal and tax advice should be sought before making a decision.
1 – Chartered Accountants Australia + New Zealand Accounting Professional and Ethical Standards para 220.1
2 – Chartered Accountants Australia + New Zealand Guidance Note N1 “Books and Records and Ownership”.
4 – www.asic.gov.au
7 – section 118-110 Income Tax Assessment Act 1997
8 – section 118-145 Income Tax Assessment Act 1997
9 – section 118-170 Income Tax Assessment Act 1997
10 – section 126-5 Income Tax Assessment Act 1997
11 – section 8-1 Income Tax Assessment Act 1997
12 – section 26-40 Income Tax Assessment Act 1997
13 – section 51-50 Income Tax Assessment Act 1997
14 – section 198F Corporations Act 2001
15 – section 293 Corporations Act 2001
16 – Schedule 1, Superannuation Industry Supervision Regulations 1994
17 – section 25-5 Income Tax Assessment Act 1997
18 – section 110-25(3) Income Tax Assessment Act 1997
19 – Sections 128 – 133 of the Duties Act 2008