We’re still friends, why do we need a ‘legal’ property settlement?

Many couples separate on amicable terms or may put aside their differences sufficiently enough to resolve matters between them pragmatically.  They may then choose to make informal arrangements regarding the division of their property.  However, the failure to legally document a property settlement is almost always unwise for many reasons, not least of which is that either party remain open to pursue an outcome through the Family Court.

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) or Family Court Act (WA).

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.

Taxation implications

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 taxation payable upon financial gain made by obtaining and disposing of an asset.  It is essentially assessable as income and must be included in a tax return.

Although the transfer of a family 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 pursuant to the family law legislation.  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 entities in which parties have an interest, including 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 an optimum result 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 if their circumstances change, including should one of them become bankrupt, if finality has not occurred on a formal basis.

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 does 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 before signing, 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 provided a joint application if filed in the prescribed form.

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 entitlements;
  • requirements for paying out loans, credit cards and closing bank accounts;
  • financial support (maintenance) of one spouse by the other; and
  • many incidental issues.

Conclusion

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. Unless there is reason not to, the outcome of those negotiations should then be recorded in a manner that ensures it is a legally binding agreement and that takes advantage of all concessions and rollover relief available of tax and duties.

If you know someone who needs help and would like to have a confidential and free 15 minute telephone consultation, then please arrange for them to call us on 08 9221 5775 or email enquiries@klimekwijay.com.