Many couples separate on good terms, which can make the process easier for everyone involved. While the breakdown of a relationship can be difficult, putting differences aside and moving forward can be beneficial, particularly where children are involved.
Separated couples who remain amicable may choose to make informal arrangements about dividing their property. However, failing to legally document a property settlement can create significant risks, especially where the parties have acquired assets, liabilities or owned property before the relationship.
Even if you are a “happily separated couple”, there are many reasons to obtain independent legal advice and formally finalise your financial affairs.
Some of the key reasons are outlined below.
Stamp Duty Concessions
Transfers of certain assets, particularly real estate, are generally subject to stamp duty. However, exemptions may apply where transactions are documented through a financial agreement or consent orders under the Family Law Act 1975 (Cth).
Stamp duty legislation across Australian jurisdictions recognises these exemptions, which can result in significant savings.
An informal agreement between separated parties does not satisfy the requirements needed to access these concessions.
Taxation Implications
Understanding the tax consequences of a proposed property settlement is important. The way assets are divided can significantly affect the financial outcome for both parties.
Capital Gains Tax (CGT) applies to the financial gain made when certain assets are disposed of. This amount is generally treated as assessable income and must be included in a tax return.
The transfer of a matrimonial home between separating couples generally does not attract CGT where the main residence exemption applies. However, CGT may apply when transferring other assets, including:
- Investment properties;
- Collectables; and
- Certain personal assets.
The Income Tax Assessment Act 1997 (Cth) provides roll-over relief for certain transfers completed through a financial agreement or consent orders under the Family Law Act.
This means any CGT liability is deferred until the asset is later transferred by the receiving party. However, the asset continues to carry the same CGT history and conditions that applied before the transfer.
Potential future CGT obligations should be carefully considered when negotiating a property settlement. Additional care is also required when dealing with companies and trusts, as certain transactions may create CGT consequences.
Family lawyers do not provide financial advice, but they can identify potential taxation issues and recommend obtaining advice from an accountant. This can help ensure the property settlement achieves the best possible outcome and avoids unexpected tax liabilities.
Claims on Post-Separation Assets
An informal property settlement does not legally finalise a couple’s financial relationship, even where the agreement has been recorded in writing.
Without a formal agreement, the parties may remain exposed to future claims involving:
- Assets acquired after separation;
- Income earned after separation;
- Inheritances received after separation; and
- Jointly owned assets where ownership has not been properly addressed.
A party may also face financial risks if the other person becomes bankrupt or if joint loans and guarantees remain unresolved.
Failing to formally document a property settlement may also allow one party to apply to the Court for a different division of property in the future, particularly if their financial circumstances change.
Finalising Your Property Division
Once separated parties agree on how to divide their assets and liabilities, and each party has obtained appropriate legal and financial advice, the agreement can be made legally binding through a financial agreement or consent orders.
Financial Agreements
A financial agreement is a contract between the parties. Each person has rights and responsibilities under the agreement and must comply with its terms.
Financial agreements are not approved or registered by the Court. However, if they are properly prepared and each party receives independent legal advice, they are generally enforceable.
Consent Orders
Consent orders are similar to financial agreements but require approval from the Court.
The parties generally do not need to attend Court for consent orders to be finalised.
Financial agreements and consent orders can address a range of property settlement matters, including:
- The transfer of property from one party to the other;
- Payment of funds in exchange for transferring property;
- The sale of real estate or other assets, including arrangements for valuation, appointing an agent and distributing sale proceeds;
- Splitting superannuation;
- Paying out loans, credit cards and closing bank accounts;
- Financial support (maintenance) from one spouse to the other; and
- Other related financial matters.
Conclusion
Family lawyers generally support reasonable agreements reached between separating couples. However, they also ensure their clients understand the legal and financial consequences of any proposed property settlement.
This includes identifying potential taxation issues, addressing future risks and ensuring the agreement meets the requirements for stamp duty concessions and, where applicable, tax relief.
Recording a property settlement in a legally binding agreement provides both parties with greater certainty and finality for the future.