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COMPANY DEBTS and DIVORCE: WHO’s RESPONSIBLE?

PART ONE: COMPANY LOAN ACCOUNTS

Counsel Family Lawyers frequently advises clients who have borrowed money from their family company, often as a director of that company.   Sometimes these clients are the unwitting recipients of company loans.

The majority of Australian companies are small or medium enterprises with one or two directors. Many families operate their business through corporate and trust structures designed to minimise the taxation that they pay but often, only one half of the couple is calling the shots in relation to the company and the family’s finances and financial decisions.

These arrangements can result in unintended consequences if the couple separates.

The Courts will take the liabilities of each party into account when dividing property between separating couples. That is, the liabilities are deducted from the value of property to calculate the value of the ‘pool’ to be redistributed between them.

However, the Court is not bound to take this approach to all debts which each party says they owe. They may disregard part or all of a particular debt, if it is not genuine or likely to be repaid.

Directors have a duty to, amongst other things, not trade insolvent i.e. where a company is unable to pay its debts as they become payable.  As a result, it has become common for directors to ‘loan’ themselves money via the company, rather than pay themselves director’s fees or wages, which the company may have difficulty paying while also remaining solvent.

The ‘loan’ is not treated as a distribution of profit for tax reporting, or as taxable income in the borrower’s hands.

If these loans are not subject to a documented loan agreement and are not secured against property, the Court may not accept them as loans. Other relevant factors are any pattern of repayment and how the loan has been treated historically by the parties, and the weight the Court gives to the oral evidence of the parties or other witnesses at trial.

An unsecured ‘loan account’ with a business, which is frequently used to pay various expenses for you or your ex which would otherwise be paid from income, without documented loan terms, is particularly problematic.

Such arrangements may also be caught within Division 7A of the Income Tax Assessment Act 1936, leading to tax liabilities which are likely to be considered by the Court.

If you or your ex have entered into these arrangements, we can work with you and put you in touch with an accountant or tax expert who can provide you with the advice you need about the choices you need to make when separating.  Specifically you need advice from Counsel Family Lawyers and financial disclosure from your ex, in order to understand the impact on your family law settlement.

If you need further advice in relation to how best to manage your separation, how best to commence negotiating with your former partner and what your options are regarding your matter generally, you should contact our office to make an appointment on 9320 3900 or email [email protected].

The information in this blog does not constitute legal or financial planning advice and cannot be relied upon by you. If you require advice specific to your situation you must contact Counsel Family Lawyers for legal advice.  The contents of this blog are relevant as at 23 August 2017.  We recommend you obtain specific advice relevant to you and your family’s situation.

 

By James Moore and Caroline Counsel

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