Corporate structures and complications in family law settlements

Man and woman sitting on a sofa signing a divorce agreement.

The decision of Pavlic & Pavlic [2023] FedCFamC1A 54 is a recent example of the problems that can arise when corporate structures aren't properly understood or dealt with in final property settlement orders.

In this case the husband was the sole director of a company through which a building business traded. The husband and wife were equal shareholders of that company. 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% of the sale proceeds to be paid to the wife and the other 43% 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 in this way would likely trigger unintended personal tax liabilities which would upset the intended proportional division of the net assets.

When finalising the terms of orders or a financial agreement for clients with complex corporate structures, it is imperative to consider and obtain advice about possible tax implications and to 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 in family law matters, it is important to be cognisant that a company is still a separate legal entity. When drafting final property settlement orders or clauses in a financial agreement, particular care and attention must be paid to:

  • who will retain the company and whether a party's shareholding in a company needs to be transferred to the other party;
  • the resignation and appointment of officeholders of a company, including whether the constitution of the company needs to be amended to allow it to operate as a sole director company;
  • whether any assets of a company are being transferred to the personal name of a party, and if so, whether this may trigger Division 7A issues and how a transfer of the asset/s can occur in the most tax effective manner;
  • how any loan accounts between a company and the parties should be dealt with;
  • how retained earnings in a company are accounted for in the parties' schedule of assets and liabilities where they may result in a large tax debt which won't crystallise until the issue of a dividend and whether it is necessary to issue such dividend to effect the settlement (such that the liability will accrue and should be taken up in the schedule of assets and liabilities); and
  • if a cash payment is to be made to a spouse from the company, how this payment can be made in the most tax effective manner (for example, are there any loan accounts to wash out as part of the settlement).

The above matters are just some of the issues that may commonly arise when undergoing a property settlement involving a corporate structure, and there may be further matters to consider when trusts and other entities are involved. Each matter and asset structure will be different and requires its own careful and detailed consideration.

If you need assistance in relation to your property settlement involving a complex corporate structure, please do not hesitate to contact one of our experienced family lawyers.

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