Many couples separate on good terms, which is great. The breakdown of a relationship can be difficult, however putting differences aside to move forward can be beneficial, particularly where children are concerned.
Ex-partners who remain on good terms may choose to make informal arrangements regarding the division of their property. However, the failure to legally document a property settlement can be unwise, particularly where the parties have acquired assets and / or liabilities, or where either have had their own assets prior to the relationship.
In most cases, even if you are a ‘happily separated couple’, there are many reasons to seek independent advice and have your financial affairs legally finalised. Following are some of these reasons.
Stamp duty concessions
The transfer of certain property, particularly real estate, is generally liable to stamp duty. However, certain exemptions from duty apply for transactions that are documented in a financial agreement or consent orders pursuant to the Family Law Act 1975 (Cth).
The exemptions are reflected in stamp duty legislation across different jurisdictions in Australia and can result in substantial savings. An informal agreement does not meet the prescribed requirements to obtain these concessions.
Understanding the tax implications of a proposed property settlement and structuring the division of assets accordingly can have a significant impact on the net result for both parties.
Capital Gains Tax (CGT) is the financial gain made on the disposal of an asset. It is assessable income and must be included in a tax return.
Although the transfer of a matrimonial home between a separating couple does not generally attract CGT under the main residence exemption provisions, CGT liabilities may be triggered when transferring assets such as investment properties, collectables and certain other personal items. The Income Tax Assessment Act 1997 (Cth) however provides roll-over relief pursuant to a financial agreement or consent orders made under the Family Law Act. This means that any CGT liability is deferred until such time as the asset is later transferred by the party acquiring it, although the asset will remain subject to the same CGT conditions as it was before the transfer.
A potential future CGT liability is an important consideration when negotiating a property settlement. Care should also be taken when dealing with companies and trusts where various transactions could raise CGT issues.
Although family lawyers do not provide financial advice, they can flag potential tax issues and recommend working with an accountant to ensure a property settlement delivers the most viable results and avoids, wherever possible, unexpected tax liabilities.
Claims on post-separation assets
An informal property settlement is not legally recognised as bringing the couples’ financial affairs to finality, even if negotiations have been put in writing. Not only is an informal agreement insufficient to obtain relief from stamp duty or relevant tax exemptions, the parties are unprotected against a range of potential issues down the track. These include a subsequent claim by either party on post-separation assets, income and inheritances. The parties are also left vulnerable should one of them become bankrupt and the joint ownership of assets has not been severed.
The failure to formally discharge obligations under a joint loan or guarantor arrangements can also leave a party in a precarious financial state.
An informal settlement may not preclude one party, particularly if his or her financial circumstances change, from applying for a different division of property through the Court at a later time.
Finalising your property division
Once separated parties have agreed on the division of assets and liabilities, and obtained independent legal and / or financial advice, the negotiations can be made legally binding through a financial agreement or by consent orders.
A financial agreement is a contract between the parties – each have certain rights and responsibilities and must perform their obligations according to its terms. Financial agreements are not approved or registered in Court but, provided they are properly prepared, and each party obtains independent legal advice, they are generally enforceable by a Court.
Consent orders are similar to financial agreements however a Court must approve the proposed orders. The parties to consent orders do not need to attend Court for the orders to be finalised.
Financial agreements or consent orders may provide for a range of matters concerning the division of assets and liabilities, including:
- the transfer of property from one party to the other;
- the payment of funds in exchange for the transfer of property;
- the sale of real estate or other property including terms regarding the appointment of an agent, method of valuation and distribution of surplus funds;
- the splitting of superannuation;
- requirements for paying out loans, credit cards and closing bank accounts;
- financial support (maintenance) of one spouse by the other; and
- any incidental issues.
We do not advise our clients to sign Binding Financial Agreements for a number of reasons.
Firstly they do not preclude the parties from taking proceedings against one another under the Family Law Act. A party may commence proceedings at any time within 12 months from the date of their eventual divorce. If proceedings are commenced, then the Court will look to the agreement and may or may not make orders in its discretion in accordance with the agreement.
Secondly, the agreements are all too frequently pulled apart on a number of grounds by the Court when such proceedings are commenced:-
- They often are not executed strictly within the terms of the Family Law Act.
- They may breach other statutory requirements of fairness. Even if technically,the execution is proven to be correct;
- The parties’ circumstances may have changed in way unforeseen that make it unfair not to make orders contrary to the terms of the agreement;
- The agreements are often pulled apart as breaching the laws of equity and contract;
- Often this is on the ground that there has not been full disclosure of each parties’ financial situation which ought, for their protection, be by the Family Law Courts “Financial Statement”; and
- They are only enforceable if the both parties have had competent legal advice- most of those wishing to overturn agreements do so on the basis that they were not properly advised as to the advantages and disadvantages of entering into the deed.
Thirdly, the agreements do not protect a party against the other’s trustee in bankruptcy if they become bankrupt within 5 years of the date of the agreement. And vice versa.
Fourthly, they may not protect a deceased spouse against a claim for further provision from their estate under the Succession Act 2006.
The above problems are overcome by entering into Consent Orders:
- They are final and once made neither party can commence proceedings for property settlement or spouse maintenance whether divorced or not;
- The forms set out disclosure to be included in the application so that no party can later say that full disclosure of financial information was not provided;
- The Court satisfies itself that the orders are just and equitable and properly executed. They cannot be pulled apart save in case of fraud;
- The orders are enforceable irrespective of the quality of the legal advice received by each party;
- Court orders unlike BFA’s are enforceable and unimpeachable against a trustee in Bankruptcy;
- They are proof against any action for further provision under the Succession Act; and
- The Local Court at Windsor has jurisdiction by consent to make the orders and generally return the orders once filed within 7-10 days, sooner if a magistrate is available.
For the above reasons, our professional indemnity insurers advise never to do a BFA when consent orders are available. As a matter of best practice this firm has never done them.
Generally, family lawyers will support a reasonable agreement reached between a separating couple. In doing so however, they will ensure their clients are fully aware of the implications of a proposed property settlement, flag potential taxation issues and address future matters that may not have been contemplated between the parties. The negotiations can then be recorded in a legally binding agreement that meets the requirements for stamp duty concessions and, where relevant, tax relief.