In this article we delve into a common theme we are seeing in property settlement matters, that being where the tax system is used as a weapon by one party to continue to coerce and control their victim by lumping them with thousands of dollars in tax debts. It is also increasingly common for perpetrators of financial abuse and coercive control, to take advantage of the structure of their business in an attempt to create new liabilities in the asset pool, hide assets and thereby decreasing the net value of their business.
It is unfortunate that we are continuing to see an increase in situations where the tax system and company structures are being used by a perpetrator to continue to perpetrate financial abuse against victims.
The following are some of the examples of where company structures or the tax system is used as a weapon by one party to perpetrate ongoing financial abuse to victims, which is becoming increasingly common, when negotiating property settlements:
a. A party operating their business out of a trust and the trust is paying distributions to a bucket company or other family member (on paper only).
The Husband will generally be the sole beneficiary of distributions from the Trust which operates his company. However, an easy way to move income and reduce the income tax payable, is to create a bucket company and distribute income to third parties of the marriage.
In most of these situations, the shareholder/s of the bucket company are third parties to the marriage, and usually family members of the Husband. By ownership of the shares in the bucket company, the third-party family members own the income/assets the bucket company owns.
When distributions are paid to family members from a Husband’s business operating out of a trust, this is generally done on paper only, for tax reduction purposes (i.e. the distributions go to the family member on the tax return ‘on paper’ who are generally paying tax at a lower marginal rate, but in reality, the money goes to the Husband).
However, there are situations where the funds distributed on paper to family members who “own” the bucket company, will be physically paid to the third party, to attempt to make the distribution of income appear legitimate, but then the funds will be circulated back to the Husband immediately or conspicuously, at some later stage.
b. The creation of fake liabilities on the business’s balance sheet in order to skew the business valuation and cause the business to have a lesser value or a negative value.
We regularly come across loans on balance sheets of business’s that are not legitimate. When we ask for disclosure of these said loans, we eventually find out that they do not exist.
Sometimes business valuers will take all liabilities on the balance sheet at face value and unfortunately do not investigate these loans thoroughly and ask for evidence of their existence.
Therefore, when the business is valued, these fake liabilities will cause the business to have a lower value or a negative value.
c. Pressuring their ex partner to continue taking distributions from the trust their business operates out of, on paper only.
Many of our clients are pressured following the breakdown of a relationship, both by their ex-partner and their lawyer, to continue to take distributions from the trust, for tax reduction purposes. The purpose of splitting distributions from the trust is solely to save the Husband from paying tax at a higher marginal rate, and enjoying the benefit of that increased income for himself.
We have had lawyers suggest to us that it is ‘wastage’ for our client not to continue to receive distributions from the trust, because the result is an increase in tax payable by the Husband.
This is another way the tax system is used as a weapon to continue to abuse and coercively control victims, and guilt them into doing something for fear that if they don’t, they may look bad in court.
We regularly remind our clients that they are not required to continue to take distributions from the trust on paper, especially if they are not receiving the money. It would be a different situation if the Husband was proposing that the distribution being paid to our client on paper, was to actually be paid. That proposal is never made as the Husband has generally already spent the money, subject of the distribution from the Trust.
In every circumstance we have come across, it is the Husband’s intention to make the distribution to our client on paper only, and they do not intend to physically pay the distribution to our client.
d. Advising their accountant that their ex-partner pulled $X out of the business in order to create an overdrawn beneficiary account in the company’s balance sheet.
We are seeing the tax system being used as a weapon more and more often in this respect, as a scare tactic, to attempt to pressure our clients into agreeing to a financial settlement.
How it works is that the Husband instructs his accountant that there have been certain beneficiary loans in favour of our client (i.e. that our client has received money from the business, which creates an overdrawn beneficiary account in our client’s name). The Husband may provide evidence of the physical transfers of the money from the business, but not necessarily evidence that our client has actually received the money. The Accountant takes the Husband’ instructions at face value and records the beneficiary loans in favour of the wife, accordingly, sometimes for hundreds of thousands of dollars.
If the valuer similarly takes all beneficiary accounts recorded in the books at face value, and does not question them, does not ask questions or seek appropriate disclosure from the parties, as evidence of their veracity, then these beneficiary loans can skew the business valuation by creating liabilities owing to the business by the parties. If there are other shareholders of the business who are not a party to the marriage this can skew the valuation by creating an additional liability, owing by the parties to the marriage, when working out the parties interests in the business.
e. Claiming they don’t own 100% of the business and their family members who are listed as shareholders of the business own part of the business.
We have seen this more than once, where the Husband only owns, for example, half of the business, and his ‘business partner’ or family member owns the other half of the business, even though they have absolutely no connection to the operations of the business.
Sometimes the company may have originally been set up this way. Alternatively, the Husband may transfer half of the business to his ‘business partner’ or other family member post separation.
The purpose of this exercise is to avoid the entirety of the business value being included in the pool. For example, if the Husband only owns 50% of the shares in the business, he will propose to include only 50% of the business value in the asset pool to be divided with our client.
f. Transferring funds to family members in “repayment of a loan” to hide income or creating loans on balance sheets that are owing to family members.
These transactions are easy to uncover because the paper trail of the transfers from the Husband to the family member usually do not exist or do not line up with the loan that is being asserted to exist or the alleged loan agreement between the Husband and the family member is conveniently created post separation, whilst the parties are negotiating their property settlement.
Again, these can have a negative impact on the business bank account and therefore the business valuation, if appropriate investigations are not completed to uncover these transfers to family members for fake loans.
g. Holding off paying dividends from companies or receiving distributions from trusts.
This is another way the tax system is used as a weapon against victims.
The Husband will do this to hide income created by his business, to support the narrative that he is receiving a minimal income from the business.
We have observed this in extreme circumstances where third party business owners, or trustees of a trust in which the Husband is a beneficiary, who are family members of the Husband, have aided in hiding dividends or distributions that the Husband as beneficiary of the Trust is entitled to be paid. The distributions may be made at the latest possible time, and only on paper, and the physical transfer from the trust to the Husband will be delayed until after the property settlement with our client is finalised.
These situations are difficult to spot without careful analysis of the financial statement and tax returns for a business and trust. Issuing subpoenas may at times be necessary if full and frank financial disclosure has been requested but is not forthcoming from the Husband’s solicitor.
h. A party paying excessive PAYG contributions to the ATO towards their over estimated taxation bill at the end of the financial year.
But another way that the Husband will use the tax system as a weapon is for the Husband to pay excessive PAYG contributions to the ATO towards their estimated tax bill, in order to hide money.
This is very commonly overlooked due to the ATO issuing bills and charging interest if PAYG contributions are not paid quarterly, when the payments are required by the ATO.
In these circumstances, it is crucial that the appropriate financial disclosure is requested in order to calculate the PAYG contributions paid over and above the likely tax the party will be paid that financial year, based on their income in the previous financial year.
The overpayments to the ATO for PAYG contributions are generally paid back to the party following the filing of their tax return for each financial year. This acts as a perfect place for parties to “hide” money.
Real life example of the tax system being used as a weapon
A recent news report identified a woman who escaped a physically and financially abusive relationship only to find that she had large tax debts against her name when applying for centrelink benefits. In this situation, there had been a business registered in her name with tax debts of $155,000, further to this, she had centrelink debts because of the income she had received (on paper) from that business registered in her name.
The husband in this matter had unbeknownst to her, created a business in his wife’s name, and was paying distributions from the trust to the wife on paper, but in reality, the money went to the Husband. While the wife did not receive any actual income from the trust, this created a liability under her name which the ATO pursued payment of from her.
Although the above news report did not mention if the wife had signed taxation returns for herself or the trust declaring the income had been distributed to her, it is possible the Wife signed the trust tax returns without knowing what they were. We are seeing this more and more often in our matters.
It is vitality important that you understand what you are signing if documents are being placed in front of you to sign. If you are unsure, take the documents to your accountant or other professional, pending what documents you are being asked to sign and seek advice from a professional.
Company structures & Tax system used as a weapon to hide money
The above situations are some of the more common examples we are seeing regularly, but there are many more ways a party can attempt to hide money by using company structures and the tax system as a weapon against victims.
We understand the reference of the word Husband throughout this article may seem biased, but the reality is we have only seen this type of behaviour by the Husband in a property settlement, and the statistics show that women are much more likely than men to experience coercive control and financial abuse.
Contact Us
It is vitally important that you seek guidance from an experienced family lawyer when trying to navigate situations such as the above.
It is unfortunate that some business valuers are failing to pick up a lot of these issues when valuing business’s and we are required to engage shadow experts to uncover these issues and put them to the business valuer.
At Barton Family Lawyers, we know the signs to look for and we work a long side financial and accounting experts who assist us regularly to uncover all sorts of fake liabilities, misleading accounting exercises and sham transactions employed by a separated party, in an attempt to reduce our client’s property settlement entitlement.
Contact us to book an initial consultation with one of our experienced family lawyers to discuss your matter further.
