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Do not forget tax liabilities (contingent or otherwise) in your property settlement

It goes without saying, that in any family law property settlement, it is extremely important to bring to account all tax.

The problem is, that many times we see people come to a settlement and either wrongly take into account future tax or do it in a way that is not legally correct or provides them with no protection.

For example, if distributions from a Trust is to be made to a party during the current financial year, but Tax Returns are not yet lodged, then that money has already been spent by the Family Unit. If the parties then subsequently separate and a deal is done before the end of the next financial year, it is still important to bring to account the tax incurred from such distribution as the benefit of the income has been enjoyed by the parties to the relationship.

In relation to other tax imposts, such as Capital Gains Tax, remember that the Family Court will only take up Capital Gains Tax if it is necessarily incurred pursuant to the terms of settlement – in other words, if a property has to be sold to meet a payment to the other party or if it is inevitable that it has to be sold to meet such payment, then the Capital Gains Tax can be taken up with the appropriately drafted Orders.

In a lot of other situations, it will not be possible to directly take into account tax by deducting it from the asset pool. Tax imposts or future tax are not liabilities. They impregnate assets or sit there as contingent liabilities to be incurred by a party when lodging their Tax Return in the future. In those situations, it is extremely important (if doing a property settlement deal today) to at least work out an estimate as to what those taxes are and where they will come from. It may be that the tax impost is substantial greater on one party than the other and then the percentage division should be adjusted to make sure that the Order is still just and equitable.

In other cases, it is important to look at how payment or funding is taking place under any property settlement Order. If one party is to pay the other party substantial money, then the other party is entitled to receive those monies tax free – it is a property settlement or a spousal maintenance Order –they do not pay tax on those monies. Therefore, the party who has to find that money to pay to the other party, may incur a future tax liability by taking a dividend, taking a distribution or selling property which may trigger a tax liability. Take into account the money that is needed to pay that tax liability (and therefore adjusting any property settlement) is important. Also, never forget that further monies need to be accessed by a party who is paying tax to actually pay the tax debt. That money itself also needs to be calculated so that it is taken into account in any overall property settlement.

About the author

Brett Hartley

Accredited Family Law Specialist

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