What happens to a family business after a couple separate?

Written by Catherine Leis of Mellor Olsson Lawyers


It is not uncommon for people in a relationship to go into business together. Sometimes, they started the business together, with one spouse having a trade or skill that generates the business income while the other performs the administrative tasks that keep the business running. Some spouses are involved in a business with other family members and parents. When such a couple separates, both the spouses and their family members will often be concerned about the ongoing viability of the business.


What are some of the common dangers?

If the spouses are particularly hostile to each other, employees may become concerned about their employment and being unwittingly drawn into the conflict.

There is also the potential risk that one spouse might try to hide income of the business, prevent the other spouse from accessing income and information of the business, or deliberately run the business down. This can increase agitation and hostility between the spouses and prolong the legal process, while injunctive orders are sought to ensure a person does not improperly deal with business assets and forensic analysis of all transactions is undertaken.

Injunctive orders can also be obtained to ensure the business structure is not altered in any way which would affect the rights of a spouse. An example might include the removal of a company trustee which the former spouses were both directors of and replacing it with a company trustee where just one of the spouses is a director. Such orders can inadvertently affect the rights of third parties in larger family businesses and so the Court must consider whether an injunctive order will deprive a third party of an existing right or will impose a duty which they would not have otherwise had to perform.

Due to the complicated nature of company and trust structures often implemented within family businesses, specialist accounting and family law knowledge is required to ensure the business remains viable and that neither spouse suffers significant and unintended financial consequences upon separation.


Issues to consider when one spouse leaves the business

In a partnership or company structure, the partnership agreement or shareholders agreement might trigger a buy/sell arrangement.

Careful drafting of a partnership agreement or shareholders agreement with a buy/sell arrangement upon separation could provide comfort and certainty to the partners and shareholders of a larger family business who are anxious about its future. A buy/sell arrangement might have the advantage of crystallising the value of the asset, provided the process is transparent, and the asset properly valued. However, there is always a risk that a spouse who thought it a good idea when they entered the initial agreement, might object to it later and seek an injunction to stay and/or overturn the arrangement if it had not yet been affected or if it had, orders to set aside the transaction.

Most family businesses distribute income via a discretionary trust, commonly referred to as a family trust. A spouse beneficiary may have an unpaid present entitlement (UPE), which is a distribution of income from the trust that has not physically been received by the beneficiary. On settlement of their family law matter, the UPE can be assigned to the spouse who takes over the trust with no tax consequence or the spouse who owns it might want it paid to them. Orders can be sought by either spouse that a UPE be paid at any time after separation. The trustee of the family trust might be concerned that the business is not currently in a position to pay it. How a trustee should deal with a UPE or any other entitlement of the family trust should only be undertaken after obtaining specialist advice from both a family lawyer and accountant.

Whilst there are exemptions from some tax consequences pursuant to a genuine restructure of a family business, some transfers of assets between a family company and an individual spouse might trigger unintended tax consequences.

A spouse may be the director of a company with retained tax losses, which in fact, is an asset to that company. A specialist family lawyer, together with a specialist accountant, will be able to ensure the property settlement is structured to take advantage of retained tax losses.

If a spouse has a loan to the family company and owes the company money, that debt will also need to be dealt with in property settlement orders to ensure it doesn't affect the assessable income of the spouse upon exiting the company.

A recent Family Court case, Commissioner of Taxation v Tomaras [2018] HCA 62, determined that a tax debt of one spouse can be assigned to their ex-spouse. This is relevant for a family business where one spouse is leaving the business with a tax debt and no future income to pay it, while the other will carry on the business and benefit from the income.

There are a number of complicated factors which must be taken into account when a couple separate and choose to end their business association with one another.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Family Business in Divorce
Catherine Leis

Catherine is a specialist family lawyer based in South Australia.
She has particular expertise working with regional clients undertaking a separation and in advising clients and working with their advisers on how to split Self Managed Superannuation Funds benefits in the event of a relationship breakdown.


T: 08 8414 3425



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Published by, Christine Weston
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Australian Nationally Accredited Mediator and Divorce Coach


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This article has been republished by Divorce Resource with the kind permission of the author.


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