Divorce is a word that hits hard. It’s much more fun to talk of weddings, anniversaries, birthdays, and the building of families and fortunes. But the statistical truth remains, divorce is a reality that a significant percentage of people will have to face in their adult lives. The question is, how do you handle it—not only emotionally and psychologically—but financially?
The notion that there is a set formula for how divorce is managed in monetary terms is one of the great misconceptions. People who work from the anecdotal reports of friends can find themselves in very different circumstances when their own situation emerges. Many clients who come to The IF Group have not always been given the best advice by accountants and/or financial planners when it comes to the eventuality of separation / divorce. Here’s a scenario to be wary of.
One partner in a marriage has a significantly higher income than the other, through the running of a small, privately owned business. A conventional (and fully legal) strategy has been to “spread” the business income across the other partner’s, which diminishes tax liability for the higher earner, and in theory, increases household tax health and prosperity overall. There’s nothing wrong with this strategy in principle, and it certainly has been accepted by the Australian Tax Office in the past. But very practical problems can emerge in its execution.
For example, Partner A may well need to make Partner B a director of her company or business venture in order to legitimize the tax spread. This has often been recommended (and implemented) whether B has any direct involvement in the business or not. There’s no issue with this when the personal relationship is solid, but upon separation / divorce proceedings, the individual psychological, emotional, and community property issues are greatly compounded with an essential business problem—how do you disentangle someone from your source of livelihood when their official position offers them a distinct point of leverage in the settlement?
Let’s be honest, divorce can be a heartbreaking, high stress development well before the matters of money arise. If, on top of a dispute about finances, there’s also a question about responsibility and power within a business, serious tensions can emerge. What’s harder still, is that these problems can have the biggest impact on smaller businesses. Larger enterprises often have more protections in place, and can afford to arrange the legal framework for such an event. Many normally thriving smaller operations don’t. The result can be an economic paralysis that arises out of the marriage breakdown.
At The IF Group, one of the key things we do for clients often involves repairing the damage done by short-term financial thinking and planning in the past. We see the advice we provide, and the programs we set in motion, against a larger background of life and personal evolution. When it comes to tax strategies, we will not recommend “quick fix” solutions that are only right for today—because we’ve seen more than a few client tomorrows where circumstances have radically changed.
In the example provided above, we would counsel for instigating a clear-cut business agreement from the start of the tax dispersion strategy. This agreement would be of the exact same kind that would apply to business partners whether they were more personally involved or not. It would include an exit clause agreement, and outline a definite process should the personal relationship alter. In other words, we wouldn’t look at simply reducing tax in isolation, we would consider the health and future of the tax structure over time.
Would more holistic professional counsel and a broader frame of reference about financial matters solve all the problems created by a divorce? No, of course not. But the fact that there are so many things we can’t control is all the more reason to be prudent about the things we can.
It’s never negative, pessimistic, or a demonstration of lack of trust to be clear in matters of business. Short-term tactical approaches to personal finance have their place. But along with death and taxes being “sure things” in life, we can also list Change. Things happen. Today turns into Tomorrow. At The If Group, we want our clients to be ready for that Today too.