How COVID-19 tax concessions can affect a matrimonial property settlement?

Matrimonial property settlements can be challenging at the best of times. Add COVID–19 tax concessions into the mix and the challenges get bigger, especially in relation to the valuation of a business.

Most of us would be familiar with the instant asset write-off and temporary expensing COVID-19 tax concessions and the need to normalize the level of future maintainable profits (FMP) to determine the value of a business. Under the COVID-19 tax concessions a small business can claim 100% of the cost of an asset resulting in an immediate tax saving, instead of writing off the asset over a number of years.

For example, where an asset costing $200,000 has been written off 100%, the amount expensed each year to normalize the level of FMP is say $40,000 over 5 years. The normalization process should not stop here. Consideration needs to be given to the impact on the tax liability in future years as a result of the upfront tax deduction, otherwise the valuation may be overstated.

I am mindful of the Court’s view on notional tax adjustments, however, on this occasion the adjustment is real and is based on an actual event comprising the purchase of an asset and a realized upfront tax saving. It could hardly be considered notional.

 For illustration purposes, the upfront tax liability is calculated under the following scenario.

Asset cost                                                                       $200,000

Tax rate                                                                                 25%

Tax saving                                                                       $50,000

This compares to the normal tax saving (pre COVID-19) calculated below.

Asset cost                                                                        $200,000

Depreciation rate                                                                   20%

Annual Depreciation                                                      $40,000

Tax rate                                                                                25%

Annual tax saving                                                            $10,000

As you can see from the above, COVID-19 tax concessions result in a tax saving in the first year of $50,000 compared to $10,000 under the normal tax rules, which in real terms represents a bring forward tax saving of $40,000 (4 years of tax savings).

In practical terms this means that the business will have an additional tax liability of $40,000 in future years which should be recorded as a liability, thereby reducing the current value of the property pool. Obviously, the amount of the liability will vary based on the dollar value of the assets acquired and the normal life of the asset.                                 

If you need any assistance with a property settlement, please feel free to contact John or Renee for a no obligation and confidential discussion.