When there is a breakdown of a relationship, separated couples need to decide how to divide their assets and liabilities to bring their financial relationship to an end.
This is often referred to as the ‘clean break’ principle. In this article, we will explore the importance and benefits of having a formal property settlement following a separation or divorce.
It is just and equitable to do so
A property settlement is of particular importance for couples (married or in a de facto relationship) who mingled their finances, made significant contributions or had a financial dependency upon each other during their relationship. For those couples, having a property settlement is inevitable.
If there is a property registered in the parties’ joint names, there are usually two ways to sever the financial ties. Firstly, one party may choose to buy the other party out by making a lump sum payment to the other party. It is critical that whoever retains the property discharges the mortgage or refinances the mortgage into his/her sole name. Alternatively, the parties can sell the property and divide net sale proceeds.
If the parties jointly own a company/business, a transfer of shares and resignation as a director and/or secretary are often required. The exiting party should request indemnity clauses to protect them from any past, present or future liabilities associated with the company/business. On rare occasions, the parties may be able to maintain their respective shareholdings in the company/business and operate the company/business together as business partners.
Although de facto couples have largely the same rights as married couples under the Family Law Act, they need to meet one of the following gateway criteria in order to seek a property adjustment:
- The length of the de facto relationship exceeded 2 years;
- There is a child in the de facto relationship;
- The de facto relationship is or was registered under a prescribed law of a State or Territory;
- One party has made significant contributions and note having a property adjustment would result in serious injustice.
It brings certainty for the parties in the future
Couples with small asset pools are reluctant to seek a formal property settlement because there may be limited funds to distribute between the parties. Although it is not cost-effective for parties with a small asset pool to litigate, it is strongly recommended that they resolve their property matters by way of a financial agreement or consent orders.
For young couples whose financial positions are not stable, having a property settlement will bring certainty for them that if their financial position improves significantly in the future, the other party cannot apply to the court for a property settlement without first seeking to have the financial agreement or consent orders set aside.
Some couples may choose to do an informal settlement between themselves without engaging lawyers to formalise their agreement. This is risky because it does not extinguish the right of the other party to later apply to the Court for a property settlement. The Family Law Act provides a time limit for bringing such proceedings, either 12 months from the date of a divorce order becoming final or 2 years following the end of a de facto relationship. However, the time limits may be extended if they would cause hardship to the party or a child. If leave for filing out of time is granted, all of the assets owned by the parties at that time, including assets acquired post-separation, lottery wins and/or inheritance, will be available for division.
There are various tax benefits
Property transfers are generally subject to stamp duty. However, stamp duty is exempt when there is a breakdown of relationship. To satisfy the exemption, the property transfer must be in accordance with a Financial Agreement or a Court order under the Family Law Act. Court orders not only include an order made by the Court after a court hearing but also a consent order. A consent order is a written agreement that is approved by a Court without the parties going to Court.
Another tax benefit of having a property settlement is Capital Gain Tax (“CGT”) Rollover. Normally CGT applies to any change of ownership of an asset. A CGT Rollover means that the party who transfers the property to the other party to disregard the capital gain or loss that would otherwise arise. The party who retains the property will realise the capital gain or loss when they ultimately sell the property.
CGT Rollover is a double-edged sword, if the value of the property has increased significantly since the date of purchase and the receiving party intends to sell the property in the near future, he or she may be better off selling the property at the time of property settlement so that any CGT payable will be shared between the parties.
For information about property settlements or family law advice, please don’t hesitate to contact us on 03 9670 5000.
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from marshalls+dent+wilmoth and other relevant experts.