Property Five-Step Test
When a married or de facto couple separates, their assets should be divided in accordance with the Family Law Act 1975 in a formalised property settlement. The Federal Circuit and Family COurt (FCFCA) has wide latitude under this legislation to portion the asset pool according to the particular circumstances of the separated couple. A property five-step test is used to determine each person’s entitlement at settlement, assessing such factors as the total assets and liabilities of the couple, the previous contributions and future needs of each party, and whether the asset allocation is just and equitable. This article provides a brief overview of the property five-step test.
The Property Five-Step Test: Step 1. Identify the Assets for Division
The first step in the process is to identify and assign value to all assets held by the couple. It is important to note that this is not only the assets that are held by the couple jointly, such as a marital home but also every possession that is held solely by each party. These assets comprise legal interests in land, cash, cars, jewellery, furniture, household pets, and insurance policies. It also includes any equitable interest in assets that are not registered in the person’s name.
Superannuation is increasingly one of the largest assets in the marital pool. The court considers a superannuation policy to be “property” for the purposes of settlement, and as such applies the same property five-step test to these accounts as to any other asset. In all states and territories of Australia apart from Western Australia, a court can order that a superannuation account be split in a determined percentage or amount between the two parties if that is required to reach a fair property settlement.
The assets of a trust are also treated much the same as any other property for the purposes of the settlement. On occasion, one member of a couple will attempt to use a trust to conceal assets in the belief that assets held in trust cannot be included in a property settlement. This is not the case. If the court finds that a person has an interest or control in the trust sufficient that they can distribute funds to themselves, then the contents of the trust will be considered an asset within the property pool.
Step 2: Just and Equitable Outcome
Once the asset pool of the couple has been identified and valued, the next step is to assess whether there needs to be an adjustment in the division of property. This determines whether, if each member of the couple were to walk away with the assets within their ownership, the division would be just and equitable. If the existing distribution of property is, in fact, just and equitable then there is no need to proceed with the other steps (Stanford v Stanford).
This is most likely to occur if the relationship is of short duration and the couple has largely maintained separate financial interests. If, on the other hand, there needs to be an adjustment in the division of assets, then the court will move on to the next step in the process.
Step 3: Identify and Assess the Respective Contributions
The third step is to assess the contribution (direct and indirect, financial and non-financial) of each party to the asset pool. During this step, the court evaluates the financial contributions that each spouse brought to the relationship, including direct contributions like property and funds, and indirect contributions such as inheritances and gifts received during the course of the relationship.
The courts recognise that the contribution of running a household or the rearing of children carries as much weight as work outside the home. As such, non-financial contributions such as housekeeping and parental and carer responsibilities are considered as significant contributions to the asset pool.
While an initial contribution of major assets is important, the maintenance of these assets is also significant, assessed on the basis of both direct and indirect contributions. As such a direct contribution might be the repayment of a mortgage, while an indirect contribution might be renovations or the payment of utilities on the property. Another common category of indirect contribution is unpaid work in a family business.
Inheritances and gifts received by one member of a couple are considered financial contributions to the property asset pool, but they are commonly assessed on the basis of when they are received in relation to the commencement and breakdown of the relationship. The court may also consider whether the inheritance or gift was given with the expectation that it would be shared by the couple, or was intended for the benefit of one spouse alone. Essentially the court is held to no firm rule when assessing such assets.
Another important consideration in the assessment of contributions is the timing of the contribution. Any contribution made before the start of the relationship, or towards the conclusion of a relationship, is treated differently from a contribution made during the time when one might expect that there was a conscious merging of assets.
Step 4: Assess the Future Needs of Each Party
The next step is for the court to assess the future needs of each party in order to determine a fair property division. The court considers many factors in this phase of deliberations, including the age and physical and mental health of each party, the financial resources of each spouse and their current and future income, as well as any disparity between the incomes of the parties. If the essential commitments of either party burden them financially (such as the limited hours one spouse may be able to work because of child-care responsibilities) then that is also a matter for consideration. The court might also assess whether there have been any instances of domestic violence in the relationship, and the impact that this history has on the future needs of the abused spouse.
Step 5: Review Whether the Proposed Division is Just and Equitable
The final stage of the property five-step test is to assess whether the proposed property division would be just and equitable. The court will assess whether the steps outlined above have produced a just and equitable outcome, or whether further amendments are required. One of the guiding principles here is that the court should assume that the settlement is to be a “clean break” ending the financial ties between the couple.
The Property Five-Step Test: Time Limits
Time limits apply to the division of property after the end of a de facto or marital relationship. It is therefore essential that anyone separating from their partner contact a solicitor as soon as possible to be sure that a court application is within legislated time frames.
If you have further questions about the property five-step test or need advice about other matters relating to the division of assets after the dissolution of a marriage, please contact our Family Law team at Armstrong Legal on 1300 038 223 or send an email to make an appointment.