Business losses, tax debts, gambling expenses - what property is affected by family law?
In family law proceedings, “property” is the term used to encompass every possible interest of value which the parties can own. This article will help you understand what family lawyers mean when we talk about property, the property pool, financial resources, assets and liabilities, wastage, and add backs.
Property is defined in section 4(1) of the Family Law Act 1975 as:
a. In relation to the parties to a marriage or either of them – means property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion; or
b. In relation to the parties to the de facto relationship or either of them – means property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion.
Sometimes, property can be used for the benefit of a person but isn’t actually owned by that person. In family law property proceedings, those interests can often be taken into account as a financial resource instead of actual property owned.
The property pool to be divided includes all property owned by the parties at the time of reaching the agreement (or ordered by a court at a final hearing), not separation. Given the delays of life, and the process of Court, it can often be a number of years since the parties separated before a settlement is reached, either by consent or ordered at a final hearing. It’s important to remember that property obtained after separation (even if purchased jointly with a new partner) may still be included in your property pool for family law proceedings.
The first step in determining what property orders should be made (if any) is identifying the property pool. This is usually done by the process of financial disclosure. All assets and liabilities owned by the parties are relevant and included in determining a just and equitable property settlement. (See our other articles about disclosure here.)
Some examples of types of property that is included in a family law settlement:
· Real property (owned in a family the parties sole name or jointly with others, like for example with a new partner or spouse);
· Personal property (motor vehicles, boats caravans etc);
· Liabilities (mortgages, personal loans, credit cards and pay later debts);
· Businesses;
· Inheritances;
· Compensation/insurance payouts;
· Redundancy payments;
· Trusts; and
· Assets that have been disposed of or wasted (sometimes).
Although property that you or your ex-partner owned prior to commencing the relationship or acquired post separation is included in family law proceedings, you or your ex-partner may be given some credit for your contributions for that property if the other party has not contributed to its value (see our other articles about the four steps process, including assessment for contributions.)
Real property and businesses
Real property (which includes real estate) that is purchased prior to the relationship, during or after separation is included as part of the property pool. Sometimes one party already owns a property prior to commencing a relationship and is the sole name on the title. This does not necessarily mean that after the parties marry, have children and then separate, that party then keeps the property. The family law courts have the power to make orders to adjust the property interests of parties, and orders that property is held on trust for another party.
Businesses can also be included as property for family law proceedings.
If neither party is seeking to retain the real property or a business (or cannot afford to, for example by refinancing the mortgage into their sole name), then the property or business will be listed for sale. The market will then determine the value and the sale proceeds then become part of the property pool to be divided between you and your ex-partner. If one of the parties is seeking to retain real estate or a business as part of the final property settlement, then you can:
a) Agree on a value; or
b) Have a single-expert witness prepare a valuation for the purposes of family law.
The single-expert witness will prepare a report that can then be provided to the Court, and the witness be cross-examined on the evidence at a final hearing if required to test the valuation.
If the Federal Circuit and Family Court of Australia has jurisdiction to make orders for a property settlement, then all real property including overseas property, as well as offshore businesses, should be included in the final settlement.
Personal property
Like real property, parties can agree to the value of cars, boats, trailers, caravans, household furniture, white goods, and any other personal items. If there is no agreement then the items can be valued.
While all property and liabilities of the parties are relevant and included as part of a final property settlement in family law, there are some exceptions. The most common of which is household furniture and personal items. This is because the value of these items, such as fridges and televisions, are what a prudent buyer would pay in an arm’s length transaction, aka at a garage sale (or on Facebook Marketplace). These items typically have a value that is much less than what they were purchased for and for that reason are generally either excluded from the pool or included with a small notional value.
Liabilities
The liabilities of the parties are included in the property pool, including liabilities incurred by one or both parties during the relationship and post separation. Generally, financial losses that are incurred by one or both of the parties in the course of a marriage should be shared between the parties, although not necessarily equally (Kowaliw & Kowaliw (1981) FLC 91,092 at [76,644]).
Taxation liabilities
In Snipper & James and Anor [2018] FamCA 7 the Court made orders for the wife to pay a portion of the husband’s tax debt, taking into consideration that the husband’s failure to pay tax allowed the wife to enjoy a handsome lifestyle. The Court found that the wife had received substantial benefit from the husband’s earnings. This decision was upheld on appeal to the Full Court.
In Commissioner of Taxation v Tomaras [2018] HCA 62 the High Court established that the Federal Circuit and Family Court (FCFCOA) of Australia can make orders that compel the Australian Taxation Office (ATO). This allows the FCFCOA to make orders reassign tax debts from one party to another.
HELP/HECS Debt
The Court will consider a number of factors in determining whether a HECS/HELP fee debt is included as part of the overall property pool, or if it is excluded. Some of those considerations include:
· Whether the debt was accrued during the relationship;
· Whether both parties benefitted from the debt (due to the party’s higher income earning capacity);
· Whether the debt will be paid (for example if a party is not anticipating to return to the work force and therefore not making any mandatory payments); and
· Whether the other party has a debt or had a debt that has been paid off.
Inheritance
Inheritances are not a special type of asset that are excluded from the property pool. However, if there are enough other assets in the pool for the Court to make just and equitable orders, then a recently received inheritance will remain the entitlement of the intended beneficiary (Bonnici & Bonnici [1991] FamCA 86 at [43]). When the inheritance was received is very relevant in terms of an adjustment of the pool in favour of the beneficiary. An inheritance that is received late in the relationship, or post separation, is a contribution of the beneficiary party unless there are specific circumstances, such as the other party making significant contributions to the care of the testator prior to their passing. (See our article about inheritances in family law matters).
Compensation/insurance payouts
When the Court is determining what orders to make, there is no general presumption that an award for damages for pain, suffering and loss of amenity should be excluded or quarantined (Williams [1985] HCA 52).
In Aleksovski (1996) FLC 92-705 the court considered the damages award received by the wife in the context of the parties’ contributions. In their joint judgment Baker and Rowlands JJ said at 83,347:
“In our opinion in most cases, a damages verdict arising from a personal injury claim is a contribution by a party who suffered the injury. It should not be considered in isolation, for the reason that each and every contribution, which each of the parties makes to the relationship must be weighed and considered at the same time.”
“This policy would not be in place unless the parties had made the decision to contribute to the premiums.”
Redundancy payments
Redundancy is not considered property until an offer for redundancy is accepted. Once a party has accepted a redundancy, it is considered property of the parties and it will be assessed against the contributions and future needs of the parties. See for example Burke & Burke [1992] FamCA 85 where the Court said that the redundancy payment was “clearly ‘property’ within s 79” as evidenced from the funds received by the husband.
In I & I [2004] FMCAfam 203 the husband received a redundancy a number of years after the parties had separated, but before the parties had finalised a property settlement. The Court included the redundancy payment as part of the property pool and took the wife’s non-financial contributions into consideration, including her contributions as parent and homemaker during the relationship and post separation as in-direct contributions to the redundancy that allowed the husband to focus on his employment.
Trusts
Whether an interest in a trust is considered property or a financial resource depends on the party’s level of control over the trust that legally owns the property.
In Woodcock & Woodcock (No 2) [2022] FedCFamC1F 173 the Court held that the husband’s interests in a discretionary trust were property as defined in s 4(1) of the Family Law Act 1975.
Wasted assets
In certain circumstances, property that no longer exists can be notionally added back into the property. Add backs are the exception and not the rule and the decision as to whether an add back is ultimately included in the property pool is a decision for the trial judge at the final hearing.
There are three categories of circumstances in which the Court will consider notionally adding property back into the pool:
a) The sum of funds spent on legal fees;
b) Premature distribution of funds (such as a partial property settlement);
c) Wastage.
The Court in Kowaliw & Kowaliw (1981) FLC 91,092 at [76,644] provided that liabilities of the parties should be shared unless:
a) One party has embarked upon a course of action designed to reduce or minimise the effective value or worth of matrimonial assets; or
b) One of the parties has acted recklessly, negligently, or wantonly with matrimonial assets, the overall effect of which has reduced or minimised their value.
Section 106B of the Family Law Act 1975 gives the Court the power to set aside or reverse a transaction if the purpose of the transaction was to defeat a property settlement claim.
In Wotton and Anor [2010] FamCA 194 the husband transferred a total of £100,000 to his half-sister on the day that he and the wife separated. The husband claimed that he was assisting his half-sister financially. The transfers were set aside under s 106B, Austin J said at [72] “…the subject transactions involved a disposition of money by the husband to a third party, and the disposition had the likely effect of defeating the wife’s entitlement to the proper property adjustment orders as between she and the husband by significantly diminishing the matrimonial pool available for distribution between them.” The funds were brought back into the pool and the Court made orders for the husband’s half-sister to pay the £100,000 to the wife’s solicitors.
You should obtain your own, independent legal advice as soon as possible if you suspect that your ex-partner may transfer or dispose of property.
If you have any further questions about family law property matters, , please contact us to make an appointment.
