Divorce is stressful enough but add the additional element of a family business to the mix and the complications can be magnified, especially when an amicable arrangement can’t be reached by the warring couple. As trusted business advisors, Mazars are well versed in supporting clients through the challenges of a divorce including the best way to reach an acceptable resolution that won’t trigger tax issues for either party down the track. In this article, we answer some of the commonly asked questions received when a family business is caught amid a divorce.
What are the consequences of divorce in family businesses?
It does depend on the structure of the business, how amicable and agile the couple are and the level of involvement of both partners. We have seen the consequences be catastrophic when both partners have a role in the enterprise and have to work together on a daily basis. This situation is often made worse when the parties are not prepared for the additional tension.
In larger family controlled businesses, we typically see a partner who is predominately involved. That partner often becomes the ultimate controller of the business. It is quite common for the non-active partner to take a sideline position in order for the business to continue and maintain profitability and value.
What can happen if things don’t go as smoothly or if there is antagonism in the mix?
If this business is not managed well and divorce proceedings get in the way, there could be adverse financial implications. Ultimately this can lead to liquidation and financial loss of the business for both parties. The focal point should be to keep the business in a stable and profitable position especially until a settlement is reached.
Typically, how are businesses or assets divided up in the event of divorce?
Firstly, the business value will be evaluated by an expert. Lawyers and accountants work together towards a mutually agreed value. Once decided, the percentage that each partner is entitled to is agreed by the partners and/or their lawyers. If an agreement is not achieved, legal proceedings will need to take place however, this is an expensive alternative.
What is your advice on the tax considerations partners should think about when getting divorced?
Initially, tax considerations are the least of the issues when it comes to divorce. Given that the State and Federal governments understand the complications and issues associated with divorce and subsequent family property settlement, Stamp Duty and Capital Gains tax (CGT) issues are set aside for the purposes of establishing who is going to get the benefit of which assets. However, it should be clear to both partners that there are taxes that will emerge over a period of time that have nothing to do with the divorce proceedings. Those taxes invariably become CGT. Later down the track, if one partner decides to sell their asset, the CGT liability will revert back to the original cost of the asset and not the ones established at the family property settlement. This is often forgotten by the couple.
What are your tips to manage a business during a divorce?
Partners need to stay focused on the assets and must work together to maintain the value of those assets until a settlement is reached. A detailed report on all aspects of taxation should be compiled. Both partners should be made clear on the tax position post settlement. Inevitably, the partners will at some stage sell assets that were part of the family pool and be subject to CGT liability. The partner who sells the asset will now have a CGT liability to pay which is often forgotten.
What to do if you are heading into a divorce
Often partners would have sought expert advice in the past, whether it be business or accounting advice. That expert who has had foremost knowledge and experience working with the partners and their business should identify potential independent professionals to help the couple come to an amicable property settlement. This is because that said expert is not an independent party and therefore should not act on either partners’ side. This can become an expensive exercise, so it is important that the professional teams work together to try get the best for their clients and not themselves. In doing so, there will be an understanding that in the overall scheme of things, arguments over values and figures may not be worthwhile when taking into account the whole family business pool value and the costs of engaging expert, independent advice.
If you have any queries regarding how to best manage your business during a divorce or if you require independent advice please contact the author, your usual Mazars advisor or our tax specialists via the details below.
Author: Kim Hanrick
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