Divorce can be a tough time that impacts almost every part of your life. For entrepreneurs and small business owners, it adds another layer of complexity. Juggling emotional and financial challenges while keeping your business thriving isn’t easy. This article aims to help you understand how divorce affects your assets, especially when they’re tied to your business, and offers practical tips to keep everything running smoothly by understanding the benefit of proper asset management and trusteeship.
Breaking up is hard to do. Beyond the emotional and financial turmoil divorce creates, there are a number of issues that need to be resolved. One of the most critical concerns for business owners is what happens to the family company, as the performance of various companies can be significantly affected by divorce.
For couples with assets tied up in a company, the tax consequences of any settlements paid from the company need careful consideration. Settlements paid out by a corporate entity can sometimes be treated as taxable dividends and taxed at the relevant spouse’s marginal tax rate. In the context of fund management and private family companies, effective investment strategies and management practices can lead to financial success, ultimately paying dividends to shareholders.
If you are receiving assets from a corporate entity as part of a property settlement, it’s essential to understand the tax implications prior to the settlement. Failing to do so can result in a sizable portion of the settlement going to the ATO instead of your pocket.
Understanding the financial and tax implications, including earnings from corporate financial performance, is crucial for business owners going through a divorce. Consulting with both your financial advisor and tax professional can help you understand the best course of action. This can involve structuring settlements in a way that minimises tax liabilities while ensuring both parties receive a fair share.
Outside of tax and financial issues, it’s crucial not to lose focus on keeping the business running efficiently. The emotional strain of divorce can take a toll on your ability to make clear business decisions. Delegating responsibilities and relying on trusted team members can help manage business continuity by overseeing and handling various types of assets.
Additionally, enlisting the help of a virtual financial advisor, if you're in a position to do so, can be one of the best strategies for ensuring your business's survival during this challenging time. This allows you to focus on sorting out your personal affairs and prioritising your mental health while still keeping your business on track.
A spouse’s interest in superannuation is considered a marital asset and can be split as part of the retirement breakdown agreement, which involves managing retirement plans and pensions. However, superannuation cannot be paid directly to a spouse unless they are eligible to receive it (they have met a condition of release). Instead, it can be rolled over into the spouse’s fund until they are eligible to receive it.
A court order or superannuation agreement is required to give effect to the agreed split in the SMSF assets according to relevant laws or to execute a rollover eligible for the CGT rollover concession. This is particularly important where your superannuation fund holds property.
If you have an SMSF and both spouses are members, it’s important to get advice to ensure all administrative issues related to the funds are addressed. In cases where the divorce is not amicable, remember that the SMSF trustee is required by law to act in the best interests of the fund and its beneficiaries. Anything less can result in fund members seeking compensation for loss or damage.
In a divorce, assets are split based on various factors such as earning capacity, maintenance of children, the involvement of family members in the business, and the assets held pre-marriage. Many couples don’t enter their marriage with an equal view of how assets and income should be attributed until something goes wrong.
If there is a disparity between the income levels of each spouse, there are benefits to evening out how income flows through to the family. For instance, topping up your partner’s superannuation if they earn less than you can offer substantial financial benefits, exceeding expected outcomes due to superannuation’s preferential tax rates.
Similarly, evening out taxable income can spread the tax burden more evenly, impacting overall profits and financial stability. Good planning in this area can make a significant difference in your overall financial health and stability, especially during a divorce.
While navigating a divorce, taking practical steps to safeguard your business is paramount. Here are three essential actions to consider:
Legal agreements: Draft legal agreements that clearly define business ownership and the division of assets in the event of a divorce. This can help deal with responsibilities and interactions, prevent disputes, and protect your business interests.
Financial transparency: Maintain transparency in your business finances. This includes keeping personal and business expenses separate and ensuring accurate financial records are kept. Transparency can simplify the division of assets and reduce conflicts.
Professional advice: Seek professional advice from financial advisors, tax experts, and legal professionals who specialise in business and divorce matters. Their expertise can guide you through complex financial and legal issues, ensuring you make informed decisions.
Beyond safeguarding your business, it’s essential to build a strong foundation that can withstand personal challenges. Here are some actionable tips:
Diversify income streams: Explore diverse income streams to reduce reliance on a single source of revenue. This can provide financial stability during uncertain times.
Focus on innovation: Continuously innovate and adapt your business to changing market conditions. Innovation can enhance your business’s resilience and competitiveness.
Nurture client relationships: Invest in building strong client relationships and offering exceptional services. Loyal clients can provide stability and support, even during challenging periods.
Divorce can be emotionally draining, impacting your ability to make sound business decisions. It’s vital to address your emotional well-being while managing your business. Here are some strategies:
Seek support: Lean on friends, family, or a professional therapist for emotional support. Talking about your feelings can help you process the emotional aspects of divorce.
Practice self-care: Prioritise self-care activities such as exercise, meditation, or hobbies that bring you joy. Taking care of your mental and physical health is essential for maintaining your business’s success and ensuring you make sound decisions regarding money and financial transactions.
Set realistic goals: Set achievable short-term and long-term goals for your business. Breaking down tasks into manageable steps can reduce overwhelm and keep you focused.
If you or someone you know is facing the emotional challenges of divorce or struggling with mental health issues, remember that you are not alone. Many organisations are available to provide support and guidance:
Divorce is undoubtedly a challenging experience, but with careful planning and the right support, you can navigate it successfully while safeguarding your business. Remember to assess the financial and tax implications, seek professional advice to understand how to pay for super benefits or manage expenses during a divorce, and prioritise your emotional well-being. By taking these steps, you can ensure your business remains resilient and continues to thrive even during personal trials.
For personalised guidance and tailored solutions, consider consulting with our tax experts and other professionals who specialise in business and divorce matters. We’re here to support you every step of the way.
Remember, the details in this article are general and may not apply to everyone. Dealing with tax implications during divorce and dividing assets can be complex, so seeking professional guidance and support is crucial. It's advisable to consult with your adviser before acting on the information provided. The information shared is accurate as per our knowledge at the time of publication. For personalised advice, feel free to reach out to us at Trekk Advisory. We're here to assist you.