Facing a Grey Divorce or Separation?

Q: We have used income splitting as a legitimate tax minimisation strategy for many years. What happens now that we are separating?

Income splitting, whether via a trust or through a company, is a legitimate means of minimising your family’s collective tax liability. Upon separation, the continuation of an income splitting practice is a decision you and your former partner need to resolve. Most people, for several reasons, would not see this as being a practicable long-term solution. The Court also has a duty to sever all financial ties between parties, which makes Orders regarding an ongoing income splitting arrangement likely problematic. For this reason, it is usual for one (1) party to retain the entity through which income is split and for the other party to relinquish their interests in it.

If a party relinquishes their interest in the entity through which they have historically received income and it is intended that that party no longer receive any funds from the entity, the Court will have regard to that in determining whether a property settlement is just and equitable and also in assessing whether a party has an obligation to pay their former partner spouse maintenance. In determining either of these matters, the Court can have regard to a party’s “true” income that is available to them or their income earning capacity, which may include income that was previously split or distributed to another party. It is important to remember however this is only one (1) consideration in the determination of a just and equitable property settlement and/or a spouse maintenance application, and each matter will need to be determined on the individual circumstances and merits of the case.