We’re still friends, why do we need a ‘legal’ property settlement?
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.
Former 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.
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. The following are some of these reasons.
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 in certain circumstances 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. For example, many people do not consider the Capital Gains Tax liability if an investment property held in one party’s name is sold and the proceeds divided equally without funds set aside to meet this liability. This could leave either you or your former partner dealing with the entirety of the liability rather than a fairly apportioned amount. 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 and/or financial planner 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. This may 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 by the 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 usually 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;
- a declaration of interest in 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.
Your family lawyer will endeavour to ensure you 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 you and your former partner. The negotiations can then be recorded in a legally binding agreement.
If you or someone you know wants more information or needs help or advice, please contact us on 03 8415 5600 or email firstname.lastname@example.org.