Property

Separation can take a toll on your financial wellness. Assets and property are built over time with hard work. It becomes challenging to reach a consensus on the division of property amongst couples. Property, for the purposes of the Family Law Act, includes the family home, any investment properties, cars, shares, furnishings and superannuation.

Property Settlements

Most separating couples find it challenging to come to a consensus on the division of property amongst each other. The property includes things such as the family home, any investment properties, shares, cars, superannuation and furnishings.

An equitable division of property and assets may be the rule, but this never practically happens. Each case has its own facts that determine the specific outcomes.

For couples who were married and for De Facto couples whose relationship ended on or after the 1st of March 2009, the following options are available for you to create a property settlement:

  1. By formal agreement, Consent Orders or a financial agreement
  2. By informal agreement between the two of you
  3. By Order of the Court

By Formal Agreement

There are two options to make an agreement legally binding where parties are able to reach an agreement in respect to property settlement. They include:

  1. Consent Orders: This document is drafted by a solicitor and filed with the court. Both parties sign the agreement then send it to the court for filing.
    1. The Registrar approves the Orders and seals them, then sends the Orders to the parties by mail. In cases where Consent Orders are approved by the Court, Orders are made with no need for either party to actually attend court.
  2. Financial Agreements: a solicitor can draft a document similar to other types of contracts, that sets out the agreement. Each party signs this in the presence of a solicitor, after obtaining legal advice. The document is legally binding once it is exchanged between the parties.

Informal Agreements

These agreements are reached between two parties without being finalised legally. This approach is usually taken because there could be a chance of reconciliation and the arrangements are intended to be only temporary, or in some cases, the parties simply do not wish to pay legal fees to obtain a formal agreement.

It is crucial that before there is any division of property, you speak to our solicitors first, as there may be implications in the future if the agreement is not formalised and you do not divorce. This course of action is only recommended in cases where there are little or no assets. However, you should still speak to us before any division occurs.

By Order of the Court

In some cases, an element of urgency arises or parties cannot reach an agreement concerning property settlement. If either of these are the case, a Court application is required.

In cases where there is no urgency, the court encourages the parties and their solicitors to attend a mediation.

If an agreement is reached and Orders are drafted and signed, the Registrar can then make the Orders by consent on the same day as the conference.

If no agreement can be reached and it is left up to the court, the court will determine the property settlement by following these 5 steps:

  1. Identifying the existing legal and equitable interests that each party has in property and, having regard to those interests, whether it is “just and equitable” to make an Order adjusting those interests
  2. Identification and valuation of the assets, liabilities and the financial resources of both parties. Full disclosure of all the assets and liabilities by both the parties is mandated, this will set the parameters of the dispute. The court identifies all the liabilities.
  3. An assessment or evaluation of the various financial and non-financial contributions that each party has made in the relationship, from the date of cohabitation to now. 
  4. An assessment of the various “economic factors” under Section 75(2) of the Family Law Act. This allows the court to then adjust the percentage entitlements of either party (at Step 2) either upwards or downwards, depending on the weight given to each of the factors.
  5. An overall consideration as to whether the Orders are “just and equitable”. The count takes into consideration many other aspects, like did one partner lose some years of their career by shouldering more responsibility for child care.

Property disputes

A property dispute is a disagreement, conflict or misunderstanding surrounding property-related transactions. Such disputes relate to:

Property disputes may have significant consequences for the parties involved, as property is the single largest financial investment for most people. Resolving your property dispute effectively and quickly is essential to protect your quality of life.

Financial Agreements

Financial agreements are a means for de facto or married couples to opt out of the court’s jurisdiction to deal with financial matters and instead enter into a type of contract for the division of assets and spousal maintenance.

Financial agreements may be entered into before marriage, during a marriage or after divorce.

Documenting Your Agreement

Upon separation, a division of your property pool will be affected. Division of the property pool is achieved in a number of ways, including:

1. by coming to an agreement between yourselves and informally dividing up the assets;

2. if you agree on arrangements for property division, you may formalise your agreement by:

(a) Applying for a consent order; and/or

(b) Entering into a financial agreement; or

3. If you cannot agree on arrangements for property division, you may apply to the court for financial orders which relate to property settlement and spousal maintenance.

If you go with option 2(b), the following need to be followed to make your financial agreement binding:

  1. It has to be in writing and signed by all parties to the financial agreement;
  2. The parties to the agreement must not be a party to another financial agreement concerning spousal maintenance or property settlement matters;
  3. The financial agreement has to state the relevant section of the family law legislation;
  4. Before the financial agreement is signed, the parties must receive adequate advice from their independent lawyers, including advice with respect to:
    1. The advantages and disadvantages of that particular party entering the agreement
    2. The effect of the agreement on the rights of that party;
    3. Whether or not, at the time when the advice was provided, it was to the advantage (financially or otherwise) of that party to enter into the agreement;
  5. The parties need to each receive a statement from their legal practitioner that sufficient advice was provided, and a copy of that statement has been exchanged with the other party; and
  6. The financial agreement cannot have been set aside by a court or terminated.

Maintenance

In cases where one party lacks the financial capacity to meet their needs, spousal maintenance is crucial to ensure a reasonable quality of life. Payments from one spouse to another can alleviate the financial pressure caused by relationship breakdowns.

Spousal maintenance can be defined as the financial support of a partner who cannot financially support themselves. An order for payment can be on a lump sum, periodic or third party basis.

An application for spousal maintenance can be made any time after the date of separation but must be made within twelve months of a divorce order. Where leave has been granted, the requirement to apply within twelve months may be waived. For de facto relationships, an application must be made within two years of separation, with no exceptions.

Generally speaking, spousal maintenance is a short term measure designed to allow the other party to develop the financial capacity to live independently and without support. 

Spousal maintenance is an obligation. The Court has the power to order spousal maintenance if the applicant is not able to meet his or her own reasonable needs; and the respondent has the capacity to pay or to contribute to those needs.

When faced with an application for spousal maintenance, the Court will consider the following:

The Court will also consider (amongst other things) all the issues set out in s 75(2) of the Family Law Act 1975. These considerations include:

The liability of a party to pay for the financial support of their spouse will depend on their capacity to contribute to the reasonable needs of that party. However, after satisfying a need and ability, Australian Courts can refuse spousal maintenance if they consider it proper to do so.

When determining an application for spousal maintenance, the court will have regard to:

  1. the reasonable expenses of the applicant
  2. the applicant’s income is to meet expenses

The Court will also have regard to child support being paid or reasonably payable.

Moreover, the Court does not, however, have regard to an income-tested pension.

Furthermore, when determining an application’s reasonable needs, the Court will also consider their ability to earn an income. An applicant who cannot earn an adequate income may be given an order or opportunity to maintain themselves and to enter a training course to enable the applicant to obtain an adequate income.

When a party is unable to financially support themselves, the Court must then determine whether the other party has an ability to assist with financial support by having regard to the following:

  1. income of the respondent;
  2. reasonable expenses of the respondent; and
  3. what remains after the respondent meets their own expenses.

When considering the respondent’s ability to pay spousal maintenance, the Court will not make an unreasonable order that requires the applicant to resort to their own capital.

The Court does not need to ensure that a party to a marriage retains the same standard of living during the marriage. Nonetheless, the Court will have regard to the standard of living and will make orders accordingly, if the respondent’s wealth permits it.

If a long term application is sought, the Court will also consider the entitlement of that party to property settlement. Usually, the result of a final determination of property will remove the need for spousal maintenance.

A person in a marriage is obliged to pay spousal maintenance to the other party where the paying person can do so, and the person receiving the financial support is unable to adequately support themselves for the following reason of:

Bankruptcy and third parties

Typically, family court proceedings involve two parties, namely married or de facto couples in a property related matter or two parents in a parenting matter. More parties may join parenting proceedings in particular circumstances, such as grandparents or others concerned with the care, welfare and development of the child or children.

In property matters, third parties can also be joined as parties to the proceedings in a number of circumstances. Examples of third parties include:

What type of orders can the Court make against a third party or creditor?

The third party can be directed to do something in relation to the property of one or more of the parties to the relationship.

Conditions that are to be applied if making an order involving a third party:

Under Australian Family Law, the Court is to only make an order if (among other considerations):

  1. It is reasonably necessary to effect the division of the parties’ property;
  2. It would not foreseeably result in the debt not being paid in full;
  3. The third party is given procedural fairness;
  4. In all the circumstances it is just and equitable; and
  5. Other matters taken into account which may consist of, inter alia:
    1. Tax implications
    2. Impact on social security
    3. Economic, legal and general capacity of the third party to engage in proceedings and to comply with the order

Corporations and trusts

Families commonly use a family trust to hold income-generating assets and distribute that income to beneficiaries, who are often family members. The beneficiaries are set out in the trust deed and normally include classes of beneficiaries connected to those named persons.

In a family trust, the trustee has the discretion to determine which beneficiary will be distributed income, and the appointor of the trust has the discretion to remove and appoint trustees. It is often the case that one party holds the position of both appointor and trustee (or director of the corporate trustee) and will therefore have the power to control the assets of the trust. Often, the trust’s assets are assets which, but for the trust, would otherwise be property of the parties.

Taxation considerations

Tax and duty consequences of parties retaining or disposing of assets as part of a property settlement in Family Law are very important. It is essential for all parties to receive financial and tax advice before finalising any property settlement to ensure that everyone walks away with what they intended and to avoid any surprises down the track.

Generally, the major tax issues in family law matters are:

Capital gains tax (CGT)

CGT is payable on the net capital gain made on the transfer, sale or disposal of property to another person. This also includes real estate, leases, shares and different types of rights.

The following is exempt from CGT:

Stamp duty

Whether stamp duty is payable for the transfer of an asset is different for each state and territory.

Normally, properties and motor vehicles in Victoria are not subject to stamp duty if the transfer from one party to the other is pursuant to a Financial Agreement under the Family Law Act or a Court Order.

This is different where, for example, one party owns a private company and transfers a car owned by the company to the other party. Stamp duty is payable on the transfer by the party who keeps the car.

Income tax – deemed dividends

In some cases, a party may be “deemed” to have received a taxable dividend which will determine the income tax payable by that party. This could happen with the transfer of an asset, the transfer of cash or forgiving a debt owed to a private company to a party to the relationship.

A deemed dividend can take place where a private company pays a shareholder or an associate of a shareholder, or the private company forgives the debt of a shareholder or an associate of a shareholder. An associate of a shareholder includes the relative or partner of, or trust or company controlled by the shareholder. “Payment” can also include the transfer of property or giving a guarantee and meeting guarantee duties.

The party that receives the benefit is the one taxed at their full marginal tax rate.

For instance, if your former partner owns a company and the company pays you money (not part of employment or contract), the amount you received is deemed as a dividend that is considered when calculating your income tax that you are liable to pay.

Trusts can also have deemed dividend consequences.

Of course, there are exclusions, exemptions and marriage breakdown concessions to the deemed dividend provisions. A dividend is franked when your income tax calculations take into account the tax already paid by the private company or trust so you are taxed at a lower rate rather than your full tax rate.

Goods and services tax (GST)

In the same example where one party owns a private company and transfers a car owned by the company to the other party – the party receiving the car will not pay GST on the transfer.

However, the company might have to pay GST on the transfer if the company claimed the GST on the purchase of the car as a credit. Since the car changed its “purpose” from being an asset of the company to private use, the company can no longer retain the benefit of having claimed GST on its purchase.

A lot will depend on whether the asset is an enterprise asset or a private asset.

Property orders

A financial order is a set of orders made by the Court relating to the division of property or money and can include orders for payment of spouse or de facto partner maintenance. Property orders fall under this broad category and relate to how your property, income, financial resources and debts should be shared between you.

The Court may make a financial order based on an agreement between the parties or after a court hearing or trial. When a financial order is made, each person affected must follow it.

Australian Family Law sets out the general principles the Court considers when deciding financial disputes after the breakdown of a marriage or a de facto relationship. The general principles are the same, regardless of whether the parties were in a marriage or a de facto relationship. The way your assets and debts will be shared between you will depend on the circumstances of your family. 

Superannuation

Superannuation splitting law

Superannuation is treated as a different type of property under the superannuation splitting law. It lets separating couples value their superannuation and split superannuation payments, although not mandatory.

Splitting does not convert it into a cash asset. It is still bound by superannuation laws.

Options for splitting superannuation

Separating couples can either: