Business Ownership and Divorce

How does divorce impact a business in Australia?

A Business In A Divorce
Valuation
Protecting Business Assets
Tax Implications
Court
Timing
Ongoing Joint Ownership
Takeaways

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A Business In A Divorce

When one or both parties going through a financial settlement has an interest in a business, it is usually relevant to both how their property should be divided and their incomes going forward.

This requires a good understand of commercial issues, including being able to identify the entity through which the business is operated, understand the nature of the business, and consider how it should be valued.

Sometimes an interest can be pretty clear (for example, a shareholding in a private company). Other times identifying who in fact owns a business can be really hard (for example, when one spouse is a beneficiary of a trust but has worked in a business with “control” for years prior to separation).

This also extends to partnerships and sole traders.

Valuation

Valuing a business is a very case by case exercise. There is no set formula or methodology.

You have to consider a number of different factors from the outset – what is the interest in property getting valued, what documents do we have to use to value it, are those accurate, what is the relevant date, what is the tax position, do we need to value stock, property, plant or equipment, is the owner’s remuneration market (I could go on…)

One big variable is methodology. Some businesses are valued based on their net tangible assets, which is simply the net value of the property of the entity. Others are valued based on discounted cash flow, which is sort of a point in time valuation of income the business will make in the years to come; this can be appropriate for businesses who have one major contract. Often, businesses (especially profitable ones) are valued based on a capitalisation of future maintainable earnings. This is when a normalised “profit” figure is adopted and then a multiplier is identified based on risk, market, control, or any other number of factors.

Protecting Business Assets

I often hear that if your business is owned through a family trust, or similar, your spouse cannot make a claim against it in your divorce. This is usually wrong, and if you want to protect your business from a claim by your spouse the only effective way to do that is through a “pre nup” or Binding Financial Agreement.

Tax Implications

Divorce can have significant tax implications. You generally get rollover relief on the transfer of property from capital gains, but the consideration and treatment of things like Division 7A liabilities and Unpaid Present Entitlements in trusts is complicated, as things that existed on company/trust balance sheets, often for years, that were not controversial, suddenly need to be dealt with. I find increasingly often we need to work as a team with accountants and financial experts to ensure these things are considered in a commercially astute way, either jointly or unilaterally.

Court

An interest in a business is ultimately a source of income or a type of property, like any other form of income/any other kind of asset.

In Court proceedings, if the parties cannot agree on the value of the business, or the appropriate remuneration for the owner, or the income that can be derived from a business going forward, the Court (of its own motion) or the parties (jointly, or on application by one of them) can apply for an Expert to be appointed to give an opinion about the issue in dispute. This is very common when there is a business.

Timing

Do be mindful of the timing of the dispute. This is a huge factor in lots of my cases involving business assets. It is very hard to manage:

30 June (end of financial year);
When can your accountant do your financial returns for that year;
When can you get an expert to express an opinion about value, or other matters, based on the 30 June financials;
When can the Court accommodate a hearing so the valuation opinion is still current.

Ongoing Joint Ownership

The Court typically has an obligation to ensure the settlement imposes a full and complete severance of the financial connection between the parties, which goes against them continuing to own a business together.

In some cases (usually by agreement, I admit) we do deals where one party continues to receive a dividend/distribution, or retain a shareholding, or even be an employee pursuant to an employment agreement for years after separation or indefinitely. If you’re considering this you really have to get competent and comprehensive advice as it’s hard to implement in a way that protects you.

Takeaways

If you have or your spouse has a business, you need a family lawyer who understands commercial and tax issues;
Consider experts, both to express opinions and provide “shadow” style advice;
Work out all the things you need to know and how you are going to prove them, often:
1. What is the proper market wage for the owner;
2. What is the value of the business;
3. What is the income the business will produce now and in the future;
4. How does this factor into my overall financial settlement;
Don’t overlook latent tax liabilities as these can massively impact the effect of a settlement in a favourable or unfavourable way;
But overall, create a term with your advisors and ensure you trust that the people looking after you are confident to know all the pitfalls and opportunities.

Business Family Lawyers

Lots of cases, particularly high net worth divorce cases, now are really complex business disputes where the parties happened to be married/defacto. Family lawyers who practice on those cases need to have a high level of commercial acumen and experience. If this applies to you, or you would like to discuss your particulars, get in touch below.

Adam Bak

Family Lawyer

Adam joined the firm in 2006 and became a Partner in 2013. Having built his reputation as one of our best litigators, he has been recognised for several years as one of Canberra’s preeminent family lawyers. He is regularly referred new clients by people he has acted both for and against previously. Adam’s approach is assertive and proactive. He is outcome focused and not afraid to tackle apparently insurmountable challenges. He avoids inefficient letter writing battles wherever possible and is skilled at taking control of situations and setting the agenda.