My company owes tax. How will that affect my divorce? - The Ex-Files

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Q: My wife and I have separated after being married for 20 years and are dividing our relationship property. I am an electrician, and about 15 years ago I set up my own business. I now employ seven electricians. The company has become very busy and profitable. My ex-wife has worked for the business for the last 10 years. She takes all the customer phone calls and inquiries and schedules the work. I handle the financial side of things.

I am ashamed to admit the company has not declared all income earned in the last five years. I wanted to use the extra cash to acquire some new company vehicles and undertake some renovations on our family home. I have been notified by the Inland Revenue Department that it intends to undertake an audit in the next month. The IRD will almost certainly uncover this unreported income and, therefore, in addition to the tax that is payable on the company’s income, there will be substantial interest and penalties.

When valuing the company for relationship property purposes, should the unpaid tax as well as any interest and penalties be taken into account in assessing the value of the company’s shares?

Also, my ex-wife’s solicitor has signalled that she intends to make a claim for unequal sharing of the value of the company on the basis that there are “extraordinary circumstances” because of the unpaid tax. What does she mean by this?

Unpaid tax

A: Yes, the unpaid tax and any interest and penalties will be taken into account in determining the value of the company shares. This is because those debts belong to the company; they are not personal debts which can be categorised as relationship or separate debts under the Property (Relationships) Act 1976.

To understand how unpaid tax, interest and penalties may affect the value of a business in a relationship property division, and when they may lead to an unequal division of property, read the full NZ Herald Ex-Files article here.

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