North Sydney Commercial Lawyers

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Gifts and tax – Estate Planning Update – Autumn 2013

Mary has asked her lawyer to prepare her will. She wants everything to go to her husband Scott, except her share portfolio which she wants to go to their daughter Stephanie.

The business assets which are to go to Scott are in fact held by the family company. The company also owns the listed company shares that Mary wants to go to Stephanie.

Scott and Mary each own 50% of the shares in the family company. It is suggested that Mary leave her shares in the family company to Scott on the condition that he makes the company transfer the listed shares to Stephanie. Mary executes her will accordingly.

The problem is that under Division 7A of the Income Tax Assessment Act 1936, providing Mary dies before Scott, Stephanie’s gift will come with a hefty tax bill because under s 109C, a private company is taken to pay a dividend to an associate of the shareholder if the company transfers property to that associate for less than full market value.

The definition of associate is very wide and certainly includes father and daughter. The amount of the dividend is the value of the shares at the time they are transferred, assuming the net assets of the company exceed its paid up capital by at least the amount of that value.

As the dividend cannot be franked, Stephanie will pay tax at her marginal rate on the gift.