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The recent decision of Pavlic & Pavlic [2023] FedCFamC1A 54 is an example of the problems that can arise when corporate structures are not properly understood or dealt with in final property settlement orders.
In this case, the husband was the sole director of a company which operated a building business. The husband and wife were equal shareholders. The trial judge determined the parties’ property interests should be divided 57/43 in favour of the wife. While neither party challenged this percentage adjustment, in effecting the property division the trial judge made orders to sell the company and realise its market value, with 57 per cent of the sale proceeds to be paid to the wife and the other 43 per cent to the husband. No distinction was drawn between the company, the parties, and their respective assets and liabilities.
On appeal, the Full Court held the trial judge was not empowered to make an order compelling the parties to strip the company of assets by distributing its money between them in portions that did not match their equal shareholdings. The Full Court noted that if those orders were implemented, the division of corporate funds would likely trigger unintended personal tax liabilities that would upset the intended proportional division of the net assets.
When finalising the terms of orders or a financial agreement for family law clients with complex corporate structures, it is imperative that practitioners consider and obtain advice about possible tax implications and structure the settlement in a way that ensures no unexpected tax consequences arise. Even though the assets of a company can effectively be treated as property of the parties to a marriage or de facto relationship, a company is a separate legal entity.
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