Common issues relating to property settlement

Every case is different, and the Court ultimately has discretion as to how to deal with particular issues in each case.  There are general rules or guidelines though which can be applied to predict how the Court typically deals with particular issues as follows:

• One party has the majority of the assets in their name – the first step in a property settlement case is to identify the parties existing interests in property.  If one party has an asset in their name, they would typically have control of that asset, including the use of it and the income it generates, until the Court alters those interests.  There are a number of ways the use of income from, and even ownership of, a particular asset or assets can be altered on an interim (preliminary) basis.  This can occur either by agreement or by Court order.  The most obvious examples of this are orders for an interim payment, or exclusive occupation of a property.  

• One party has the majority of the debt in their name – The Court can order the substitution of one party for the other in relation to a debt.  Unlike the interim transfer of assets though, the Court is typically more reluctant to alter the interests of parties in debts.  The reason for this is that such an order would typically affect the rights of a third party, namely, the person or entity who the debt is owed to.  This generally requires them to be joined as a party to the proceedings.  

It is often easier, and more cost effective, to look at other ways to deal with debts, such as entering into arrangements or applying for orders which will see some debts (the debts in your name) serviced or repaid in priority to others, or orders requiring the other party to indemnify you in relation to particular debts.

• What is the value of the family business – The value of a family business can either be agreed, or determined by an expert.  It is typically comprised of the assets of the business, and the good will (if any).  

A common issue that arises is whether there is any good will associated with the business, and whether that good will is commercial or personal in nature.   If it is found to be commercial (which is often the case) its value would usually be included as an asset to be divided between parties.  If it is found to be personal in nature, it would usually be excluded from the asset pool, but taken into account at ‘step 3’ of the property settlement process. 

• How does the Court deal with loans owed to family or friends – The Court has a discretion to discount or ignore ‘debts’ that are vague, uncertain or unlikely to be enforced.  There are many examples of this, but the most common are loans from family members or friends, which are often not formally documented.  

To maximise the chances that a family loan will be treated as an actual debt, you need to be able to show firstly, that there was an advance of funds, and secondly, those funds are repayable.  The most obvious way to do this is with a bank statement showing the advance referred to as a ‘loan’.  Loan agreements are also useful for this, particularly if they are entered into at the time of the advance and their terms are complied with.   

Even if an advance is not treated as a ‘loan’ by the Court however, it would usually be treated as a contribution by the party who the advancer intended to benefit.  This may mean the ultimate outcome is not significantly different than it would if the loan had been included as a liability.   

• How does the Court deal with tax liabilities – Tax liabilities, or contingent liabilities, are repeatedly neglected by parties entering into property settlement negotiations.  This can have a significant effect on the overall fairness of the deal reached.  These can range from things as simple as failing to consider an upcoming income tax liability or liabilities arising from implementing the settlement, to contingent capital gains tax on an asset a party retains or other contingent tax liabilities associated with a business or entity they are to retain.  The major issue with these liabilities is identifying them early and taking them into account in a property settlement.  Failure to do this can undermine the fairness of an agreement reached.

In very general terms, if a liability is owed, the Court will typically include it in the asset pool.  If the liability may arise in the future, but its exact value is uncertain, the Court can either discount it or take it into account in a general way at ‘step 3’.  If the liability is too remote or uncertain, the Court can simply ignore it.

• How does the Court typically treat interests in trusts or companies – In very general terms, if an entity is controlled by a party and they have an ability to benefit from it, it (and all the assets it owns) will usually be treated as their property.  But that is not the end of the story, as the origin of the entity and/or its assets may be highly relevant to that party’s contributions, and therefore their overall entitlement.

• How does the Court treat interests in intergenerational family businesses or farms – As with trusts or companies, the first step when dealing with an intergenerational business or farm is to look at who owns it, or controls the entity that owns it.  That is not usually the end of the story though.  

A common scenario in family businesses or farms is where they are controlled or owned by a parent of one of the parties to a marriage or de facto relationship, but where one or both parties work in the business or the farm for less than commercial rates, on the basis that one or either of them will eventually receive it, or part of it.  This scenario can routinely lead to claims in the Family Court, as the farm or business is often the only major asset potentially available for division.

These scenarios can be very complicated and involve a close review of the historical documents surrounding the arrangement, including financial statements, tax returns, deeds and other accounting files.  It is very important to get specialist legal advice early in these cases, as the Court’s powers are very broad and far reaching.  

• One party had greater assets at the beginning of the relationship - It is quite common that when parties begin living together one has significantly greater assets than the other.  These ‘initial contributions’ will typically be treated as a ‘contribution’ by the party that owned them at the beginning of the relationship.  The weight to be given to these initial contributions will depend upon a number of factors including:

  • How much they were worth at the commencement of the relationship, and what they ultimately rendered;

  • What they were used for, whether they remain in the asset pool now, or whether they can be traced to a significant assets remaining in the asset pool; and

  • The various contributions made by both parties throughout the relationship, including contributions as a home-maker / parent.

Generally speaking, the weight to be given to an initial contribution will be ‘watered down’ to a greater or lesser extent over time, having regard to the above matters (among others).   

• One party received a significant gift or inheritance during the relationship – In very general terms, an inheritance or gift received by a party from their family would typically be treated as a contribution on their behalf.  An exception to this may be where there is evidence the donor intended to benefit both parties. 

Similar to initial contributions, the weight to be given to gifts or inheritance will depend on their value, what they were used for, and the multitude of other contributions made by both parties during the course of the relationship.  Generally, the later a gift or inheritance is received, the more weight it will carry when assessing contributions.

• One party received a significant gift or inheritance after separation -  despite what many people think, gifts or inheritance received after separation do not automatically form some separate or protected category of asset.  That being said, provided there are adequate other assets to satisfy a fair outcome, the Court would typically want to see the party who received the gift or inheritance retain it as part of their property settlement.  This is the case regardless of whether the gift or inheritance is received before or after separation.  Although in practical terms, if it has been intermingled with other property, such as being applied towards a joint mortgage, it may be difficult to separate or extract.

• Redundancy / termination payments and long service leave – Once a redundancy or termination payment has been received or is imminent, it becomes property, and is usually included in the asset pool.  It would, however, be treated as a contribution by the party who received it.  The weight to be given to that contribution would usually depend upon a number of factors including whether it was ‘accumulated’ during the relationship, and whether the other party could also potentially have a redundancy payment in the near future. 

Annual leave or long service leave is not typically treated as an asset.  The assumption is that a party may use that leave for what it was intended, namely, to have a holiday from work.  Like a redundancy payment though, if the leave is ‘cashed in’, it then becomes cash, and is property.  Again, it would be a contribution by that party, and the same factors would usually apply in assessing the weight to be given to that contribution.  

International property issues

If parties have assets in more than one country, there can often be issues regarding:

• Access to information in different countries;

• Enforcement of orders or agreements in different countries; and

• Whether there is an advantage or disadvantage to have the matter dealt with in one country or another (typically referred to as issues of ‘forum’).

Points one and two above are too extensive and varied to deal with here. There are a number of treaties or agreements between Australia and other countries regarding the reciprocal enforcement of orders and agreements. There are many countries though where there are no such treaties or agreements. The options available for enforcement and gathering information will depend upon the country or countries involved.

Point three above, relating to issues of ‘forum’, is often very important. Different countries have different laws governing how financial issues are dealt with on the break down of a marriage or de facto relationship. A party to the same marriage or de facto relationship might receive a completely different property settlement depending upon which country deals with the matter.

The way the Australian Court looks at this is to examine whether Australia is the ‘clearly inappropriate forum’ (or when dealing with New Zealand, which country is the ‘most appropriate forum’).

Factors which affect whether the Australian Court will deal with the matter include, but are not limited to:

• Where proceedings were first commenced, and how far they have progressed;

• Where the property is situated, and whether the Court’s orders, if made, could be enforced;

• The parties’ connection with each jurisdiction, including where the parties reside, or are citizens or residents for tax and other purposes, and/or where the parties spent most of their relationship; 

• Where the likely witnesses reside; and

• Whether there is a particular advantage or disadvantage to one party or another in having the proceedings heard in Australia or elsewhere

If you believe there may be more than one potential forum in which your family law dispute can be heard, you should seek advice from the family law specialist immediately.  In these situations, timing can have a dramatic effect on the overall outcome.