When a marriage or relationship breaks down, there comes a point in time where the parties must deal with dividing and separating their assets and severing financial ties. When working out a property settlement, the Court considers the contributions, both financial and non-financial, made by the parties to the marriage or relationship.
Financial contributions are amounts of money contributed to the acquisition, maintenance or improvement of assets at the beginning, throughout and after the relationship.Contributions can be made directly (such as a lump sum payment against the mortgage) or indirectly (such as contribution of your weekly earnings to household expenses). Typically, direct contributions to the assets are a matter of history and are in most cases readily calculable. Indirect financial contributions made to the acquisition of property can pose a difficulty when ascertaining the weight that should be placed in their favour.
An indirect contribution typically involved in a family law matter is where one party’s income is paid directly towards the acquisition of property (repaying mortgage) and the income of the other party has been used for daily expenses, thus relieving the mortgage-paying spouse of responsibility for those daily expenses and so making an indirect contribution to the acquisition of property.
As outlined in section 79(4)(a) of the Family Law Act 1975, the Court must assess the direct and indirect contributions to the acquisition, conservation or improvement of the property. Financial contributions also include inheritances or gifts, compensation payments, pensions or the use of other financial resources towards the acquisition and maintenance of the assets. The Court must consider the contributions made by the parties which they currently hold and also the property which they have disposed of prior to separation or prior to the proceedings commencing.
The Court will consider what each party brought to the relationship as well as the contributions made during the relationship and (in some cases) after separation.One of the things to keep in mind when assessing financial contributions to a relationship, particularly lump sum contributions, is that recent contributions to the relationship are generally weighted more favorably than older contributions, that is to say older contributions become more blended between the parties to the relationship as time goes by.
- Termination payments;
- Gambling winnings;
- Proceeds from investments; or
- Any other matter in which finances were derived during the relationship. See the drop downs below for more information.
Other financial contributions can include:
How a lotto win is treated at settlement depends on the circumstances of the parties’ relationship when the winning ticket was purchased. There are a number of contrasting decisions by the Courts, dealing with different scenarios. Here are some examples:
ZYK and ZYK (1995)
The parties had been married for two years when the husband had a lottery win of $95,000.He had been in a syndicate before the marriage and the wife had no involvement in the lottery purchase. The Court found that it was ‘part of the husband’s general practice’ to hand all his money to the wife who had ‘practical control of the family finances’. The lottery ticket was purchased by the husband from money he had from time to time.The Court found upon the husband handing the money to the wife she applied it ‘so that it formed part of their property’.Therefore the purchase of the ticket has come from the shared joint incomes of the parties.The winnings were used by the parties for joint purposes and therefore were treated as a joint contribution.
Farmer v Bramley (2000)
In this case, the husband won a lottery prize of $5 million, 18 months after separation. The parties had lived together for 12 years, however, at the time of separation, there were no assets of any significance and so had not effected a formal financial settlement.
Throughout the 12 years of the relationship, the wife provided for the husband when he was suffering from a heroin addiction, supported the husband financially during the relationship whilst he studied and, at the time of the Hearing, the child of the relationship resided with the wife solely and was not supported by the husband.
Taking into consideration the wife’s significant financial and non-financial contributions throughout the marriage, the disparity in the parties’ financial circumstances, the wife’s ongoing care of the child without any financial assistance or support from the husband and the future needs of the wife, the Court made an adjustment and ordered that $750,000, or 15% of the winnings, be made payable to the wife.
Eufrosin v Eufrosin (2014)
Here, the wife purchased a lottery ticket six months post-separation and won $6 million. The husband contended that the wife used funds from a business that had been run primarily by him (and other of his family members) during the course of the marital relationship to purchase the ticket. The court held that even if that was accepted, the argument which proceeds from it ignored the reality of the parties’ post-separation lives.
The parties had put in place a system whereby regular withdrawals of funds were made by each of them from what was formerly a joint asset, and those funds were applied by each of the parties individually to purposes wholly unconnected with the former marital relationship. At the time the wife purchased the ticket, some six months after separation, the parties had commenced the process of leading “separate lives”, including separate financial lives.
The Court held that the source of funds should not “determine the issue” of how a lottery win should be treated. What is relevant, is the nature of the parties’ relationship at the time the lottery ticket was purchased. At the time the wife purchased the ticket, regardless of the source of the funds, the “joint endeavour” that had been the parties’ marriage had dissolved; there was no longer a “common use” of property. Rather, the parties were applying funds for their respective individual purposes
However, as a consequence of the husband’s greater financial needs post separation, notwithstanding the court making a finding that he made no contribution to the lottery winnings, an adjustment was made in his favour because of his greater financial needs by way of an adjustment of $500,000 to the husband from the wife.
Elford v Elford (2016)
In this case, the parties largely led separate financial lives. They commenced living together in 2003, married in 2007 and separated in 2012. In 2004, less than a year into the relationship, the husband won $622,842 in a lottery.These winnings, together with t
he husband’s savings were deposited into a term deposit in his sole name.The Wife argued that the lottery money should be treated as a joint contribution by the parties as their marriage was a ‘joint endeavour’. The Husband argued that the winnings should be treated as his sole contribution.
The Court stated that it was not only the nature of the parties’ relationship at the time the lottery ticket was purchased that set this case apart from so many of the decided lottery winning case, it was also the manner in which the husband and the wife conducted their financial affairs after those winnings were received by the husband.
The Court noted that the parties kept all their financials and assets separate for the entirety of their relationship.They maintained separate bank accounts and did not even have a joint bank account.The wife stated that this was ‘what he wanted’, even though she was unhappy about it.
The Full Court dismissed the wife’s appeal that she was entitled to a greater share of the property pool, which consisted mainly of lottery winnings. The Court upheld the trial judge’s decision that the winnings were not a ‘joint endeavour’ but rather that the husband had made the sole contribution to the winnings.
So, you can see that it really does depend on the particular circumstances of each case.
During a marriage or relationship it is common that parents of one or both of the parties will help by providing financial assistance or care of the children. The help provided by parents may be taken into account in assessing how property is to be divided.
What happens when financial assistance has been provided by parents?
Often parents of a party to a relationship provide financial assistance such as:
- Providing a lump sum amount for example $200,000 to help the parties to buy a house;
- Paying periodic sums to help the parties meet their weekly living expenses;
- Providing accomodation to the parties for a period of time enabling the parties to save money;
- interest free or low interest loans to the parties;
- Providing security for the parties to obtain a loan to buy a house;
- Making monetary distributions from trusts that are controlled by the parents.
The financial assistance provided by parents is not usually a problem until the parties to the relationship or marriage separate. When parties separate questions arise as to how the parents’ financial contributions are taken into account. There is no simple answer to this question and the following will need to be taken into account:
- Was the financial assistance a gift to one of the parties or both of them;
- How much was provided by the parents;
- When was the financial assistance provided;
- Did the parties have any agreement with the parents about the financial assistance.
Usually, financial assistance provided by parents is considered to be provided for the benefit of the party who they are related to. For example if a wife’s parents provide $200,000 to help the parties to buy a house then the $200,000 is considered a contribution made by the wife if the parties separate. This may increase the share that the wife receives in the overall property settlement.
Things parents should consider when providing financial assistance include:
- Will the financial assistance be a gift or a loan to be repaid;
- Having a loan agreement drawn up if the financial assistance is a loan to the parties;
- Having the parties provide security for the loan to be repaid;
- Carefully consider the effect of distributions from a trust to the party who is their child;
Parents or parties should obtain legal advice prior to parents of either party providing financial assistance. Our Melbourne family law team can provide advice to the parents or the parties about the financial assistance to be provided by parents and the best means of protecting such assistance if the parties were to separate.
Gifts from family members
In family law matters parties often receive gifts during their relationship or marriage. Gifts can include:
- Monetary gifts. For example a gift of $50,000 from a family member that was applied towards the purchase of a property, or a gift of $10,000 from a friend that was applied towards landscaping the front garden of the property, or a gift between spouses to discharge debt; or
- Indirect gifts. For example, a member of a party’s family renovating the property or providing housing for the parties rent-free.
When dealing with gifts, the first step for the Court is to determine ownership of the gift or in other words which party was the intended recipient of the gift. Therefore, an argument can arise as to whether the gift was intended for one party or for both of the parties. To determine this, the Court will need to consider the evidence provided by the parties. If a gift is made to both parties by a relative of one party, it is open to that party to argue that the gift was a contribution made by them and it was intended that they benefit from the gift (given their relationship). If, however, it is found that the gift was intended for both parties the gift may be regarded as an equal contribution of both parties.
The Court will then also need to consider whether the gift was a gift or a loan intended to be repaid by one party. It is common in family law matters for parties to argue a gift was a loan by one person intended to be repaid by the parties.
Once the Court has determined which party was the intended recipient of the gift the Court will then take into account when the gift was received, the quantum of the gift and how it was applied, the duration of the parties relationship and the quantum of the asset pool (among other factors) to be divided, when considering what, if any, percentage adjustment should be made to the recipient of the gift.
If you or the other party received a gift during your relationship and would like to discuss your family law matter with one of our qualified family lawyers please contact Armstrong Legal for a no-obligation appointment.
Inheritances are also taken into account in property settlements. However, the amount that a former partner/spouse may receive depends on the individual circumstances of each relationship. Inheritances that one or both parties have received before, during or after separation often become the subject of much dispute in property settlements. Not surprisingly, the party that has received an inheritance often wants the inheritance to be excluded from the assets available for division or to receive significant recognition for how the inheritance has helped the parties acquire their assets. As stated above, assets inherited or acquired through the use of an inheritance will not be excluded from the calculation of how assets are to be divided.
If and how the inheritance is taken into account depends on the circumstances of each relationship including:
- When the inheritance was received. For example was it received at the start, middle or end of the relationship;
- The value of the inheritance. For example was it $20,000, $200,000 or $2,000,000;
- How the inheritance was applied to the relationship. For example was it used to pay down a mortgage, buy a car or used for a holiday;
- Was the inheritance gifted to one or both of the parties;
- Whether the parties had the use of the inheritance during the relationship. For example a party may have inherited a beach house in Apollo Bay, Victoria but cannot use the beach house until that party’s mother passes away;
- Whether the inheritance is jointly owned with another party. For example a party may inherit a house in Canterbury, Victoria with their siblings.
Circumstances such as the above when looked at together with the circumstances surrounding the whole of the relationship will determine if none, some or all of the inheritance is taken into account in a property settlement.
It is important to note that an inheritance that a party may receive generally does not form part of the assets for division in a property settlement. However, there may be some circumstances where an inheritance that is not yet received by a party to a separation may be taken into account. One of these circumstances is where a person has left an inheritance to a party to a relationship and cannot change their Will due to illness such as dementia. Even if it can be established that a party may receive the benefit of an inheritance in the future and this inheritance should be taken into account in a property settlement, there is still the question of if the other party should receive any it in the property settlement.
If a person wants to leave an inheritance to another person but is concerned about what will happen with the inheritance if the person receiving it separates from their partner/spouse, then consideration may be given to the party receiving the inheritance to entering into a financial agreement with his/her partner/spouse about how the inheritance is to be dealt with if the parties were to separate. For further information about this please follow the link to Financial Agreements.
The treatment of inheritances in family law property settlements is complex and advice should be obtained from family lawyers who specialise in family law. If such advice is needed please contact Armstrong Legal, Melbourne to make an appointment with a member of our experienced family law team.
Superannuation is considered an asset when dividing property after separation. It is not often the case that each person in the relationship has the same amount of super, due to differing incomes or periods of time in the workforce. This will sometimes result in one person having to transfer some of their superannuation to their former partner as part of a property settlement. This process is commonly referred to as superannuation splitting.
A superannuation split cannot be performed at the request of the separating couple. It can only be performed if Court Orders or a Financial Agreement have been made between the parties. However, because of the strict legal requirements that superannuation funds abide by, the orders must be approved by the superannuation fund before they are made. This process is called “procedural fairness”.
After the amount of super that is to be split has been agreed by the parties, lawyers prepare draft orders that detail the amount of money to be transferred out of the fund, and sometimes, the process by which that amount is to be calculated. Other important details are required, including the proper name of the superannuation fund, and the details of the member of the superannuation fund. These draft orders are then sent to the superannuation fund in the procedural fairness process.
The superannuation fund must respond to the lawyers within 28 days, to advise whether they approve the draft orders, or whether they require changes to be made. The Court will not make any orders until the lawyers can show that the superannuation fund has approved a draft.
Some superannuation funds are not splitable. This is sometimes because the amount in them is too low to split, and sometimes because of other rules of the particular fund. The procedural fairness process ensures that the Court doesn’t make orders that can’t be carried out by the superannuation fund because the fund is unsplittable, or because the draft orders don’t comply in some other way with the rules of the fund.
After orders are made for a superannuation split, the orders must be sent to the superannuation fund so they can implement them. Usually, the superannuation fund will then write to the intended recipient of the superannuation split to ask them how they wish to receive the funds, most commonly:
- By rolling the amount over into a different superannuation fund (for example, that person’s own existing superannuation account);
- By starting a superannuation account with the superannuation fund that is performing the split (sometimes compulsory, for example, with Military Super);
- By cash payment – but only if the recipient has reached their preservation age, and is no longer working full time. Preservation age is currently between 55 and 60 years, depending on the date of birth of the recipient.
Some funds charge a fee to perform a superannuation split. This fee may be shared by both the member of the fund and the recipient, or may be split between both of them. Some funds do not charge a fee.
There are some scenarios with superannuation that are more complex. These may include superannuation pensions that are already in the payment phase, or defined benefit or self managed superannuation funds, that may require a different approach. As splitting superannuation is not a straightforward process, legal advice is highly recommended in any scenario where a superannuation split needs to occur.
Most people have superannuation entitlements (more commonly referred to as “super”) in one or more superannuation funds. Vicsuper, PSS, Sunsuper and Australian Super are examples of funds that people can have super with which are managed by the fund itself. Employers are obligated to pay super for an employee and these payments are known as employer contributions.
People who are self-employed may also voluntary pay into a superannuation fund referred to above. Some people may decide to set up and manage their own super and this is known as a self-managed superannuation fund.
When parties separate the super of each of them are taken into account in working out how their assets are to be divided. Super of one party can be divided. This is known as “superannuation splitting”. One party may receive a set percentage (eg. 50%) or a set amount (eg. $100,000) of the other party’s super.
There is no set formula about how super is to be divided. Many factors need to be considered including:
- The value of each party’s super;
- The type of fund;
- How payments or other contributions to the super have been made;
- If the super is a self-managed superannuation fund, is an asset of the fund used to assist in the operation of business;
- Is the super part of an overall financial or estate planning strategy;
- If the super can be accessed immediately;
- If there are any taxation consequences arising from any proposed superannuation split.
Superannuation splitting can only happen through a court order or financial agreement. In addition the Trustee of the fund must agree to the proposed superannuation split. It is important to note that a superannuation splitting order does not necessarily mean that a party will receive a cash payment. Super can only be paid to a person if they have met all conditions required by the specific fund.
How super is to be divided after separation is complicated and it is important to obtain advice from family lawyers who have experience in dealing with family law and superannuation splitting.
A compensation payment received during the course of a relationship will be taken into account by a Court in determining a Property Settlement between the parties. However, a right to pursue a compensation claim, or claim which has not yet been finalised, will not be included. This is because such claim cannot be given a monetary value and it is difficult to determine the prospects of success of such application. It is also possible that the party who is pursuing a compensation claim may later decide to discontinue their application.
In respect to the former; being a compensation payment received during the course of the relationship, the Court will consider this as a financial contribution made by the party to whom the compensation was awarded. This does not mean that a party who received a compensation payment during a relationship will receive a refund of these funds in the property settlement. Indeed, contributions, both financial, non-financial and as homemaker and parent, are all weighed against one another by a Court in order to determine a fair outcome between the parties. Thus, the contribution made by one party by way of compensation payment, will be assessed as against contributions made by the other party such as parenting or homemaker duties. The weight given to be attributed to a compensation payment will also vary depending on a number of factors including when the compensation payment was received and how the compensation payment was utilised by the parties during the relationship. In addition, the party who did not receive the compensation payment may also have indirectly contributed to the award particularly if they can demonstrate that they assisted the other spouse with his or her day to day care, took the other spouse to medical appointments or assisted the other spouse with the preparation of court material for their compensation claim.
Finally, in addition to assessing the respective contributions of both parties made during the relationship, the Court is also required to look at the parties’ respective future needs. Here the Court is required to look at issues such as:-
- Can both parties’ support themselves financially into the future?
- What are the parties’ respective incomes and is there a substantial difference?
- Are there any medical conditions or impairments which may affect one party’s ability to engage in meaningful employment?
- Is there a significant age disparity between the parties?
- In cases where there a
- re children, who will be the primary carer for the children into the future?
It is important to know that there is no “one size fits all” mould to be applied to family law property settlements. For this reason, it is important to obtain independent legal advice that is tailored to your specific circumstances.
Capital Gains Tax
Capital Gains Tax is a tax that is required to be paid when there is a capital gain. The tax liability can be triggered, for example, where an investment is sold for a profit. Assets that incur Capital Gains Tax can include some artworks, houses, land and shares.
In family law proceedings, parties often are required to transfer or sell assets in order to make a payment to the other as part of a property settlement. On paper, it might appear that a couple holds a large sum of assets though it is important when negotiating “the deal”, or the final arrangements for a property settlement whether finalised by Consent Order or Financial Agreement, to consider whether the value attributed those assets might be affected by potential tax liabilities arising from realising the value by selling or transferring the asset.
Capital Gains Tax is calculated by adding the capital gain to the individual’s assessable income. Therefore, if one party has a high income then the rate of tax paid on the gain will be higher than a person with a low income. As such, it is important to clarify which party will be responsible for any tax liabilities arising from the sale or transfer of assets.
As family lawyers, we are not experts in Capital Gains Tax and we often collaborate with accountants and other relevant professionals to calculate the potential tax liabilities and seek advice as to tax effective strategies for disposing of, or dealing with assets to effect a property settlement between parties. It is good practice to ensure that any draft Consent Orders or Financial Agreement be provided to your accountant for advice as to the possible tax consequences.
If you have any concerns with the possible tax consequences of a family law settlement, please do not hesitate to contact one of our experienced Family Lawyers at Armstrong Legal.
WHERE TO NEXT?
Taking the next step and contacting a family lawyer can be scary. Our lawyers will make you feel comfortable so you can talk about your situation. But first, ask yourself, Do I really need a lawyer?