If you are navigating a separation, the end of financial year can present additional headaches. The pain is compounded if you’re in business with your spouse.
Family businesses represent 67 per cent of all Australian businesses (KPMG Australian Family Business Survey 2021). And in Australia around four in ten marriages fail. When that happens, the estranged couple will generally sell the business, remain in business together, or allow one party to retain the business.
Separating couples will inevitably seek advice about how to unravel their business interests. However, some of those decisions could be less than ideal for the individuals who are uncoupling.
A combination of accounting and family law expertise is required to protect the business and ensure neither spouse suffers unintended financial consequences.
To that end, if you are separating from your spouse or life partner and do not want to remain in business with your ex, here are some important considerations which may save you from tax and legal headaches.
1 Do you need an independent accountant?
Just as you will have your own family lawyer, you may decide to appoint your own, independent financial adviser rather than rely solely on the business accountant you share with your former spouse.
2. Beware the long-term tax implications of business loans
When small businesses are being utilised to reduce tax payable across a family unit, there are often loans reported to both parties. Those loans can have significant long term tax implications as there are particular requirements about how they get repaid, the interest, and so on.
If you’re going through a separation, you may want to finalise those loans so any associated tax issues are dealt with in the separation process.
The party who is keeping the business will not want to be lumped with the tax implications of those loans if they’re not dealt with properly, particularly in small businesses.
And the person who is exiting the business – typically the woman in a heterosexual relationship – might need those loan accounts to be cleared (at least on paper) in order to remove themself from the business. For this person, this may result in unintended income tax debts raised and compromise their future eligibility for an income tested pension and their entitlement to child support.
3. Understand how ASIC will view your resignation as a director
As part of the separation, one party may need to resign as a director or shareholder of the family business. If shares are being transferred, this could have tax implications.
Generally speaking, family lawyers try to have any resignations or transfers coincide with the end of financial year so there is no liability being carried over to the new financial year. That said, before resigning seek advice from an accountant in case there are consequences with ASIC.
4. Don’t sign anything without your accountant’s approval
Because of the way small businesses are often set up, if one party was to sign and lodge documents with the ATO it could have a flow-on effect to the other party. When a couple is no longer in a relationship, they may no longer be looking to do things in a family-focused manner. It can become an “every man for himself” scenario.
Never sign any document prepared on behalf of your former spouse without your accountant’s review. Otherwise, you might not understand in full what you’re signing and agreeing to.