Property Settlement

Property settlement establishes on a final basis the arrangements effected between separated spouses (married, de-facto or same-sex) to distribute or divide their assets, liabilities or financial resources in a way which should, according to the legislation, be “just and equitable”. 

In general terms, the concept of “property” incorporates anything which has a value, whether that be more obvious, tangible items such as real estate, cars, boats, bank accounts etc.; but also interests in a business, superannuation (at the time of writing, superannuation in WA is still characterised as a financial resource), compensation payments, interests in trusts or even inheritances where the deceased estate has yet to be calculated or distributed. The Court has even determined that domestic animals are “property” and can be distributed to one party or another. 

It is essential to note that property settlement is not restricted to property acquired during the relationship – so it is often prudent to address a financial resolution with your spouse as soon as practically possible after separation. Property owned or controlled by a spouse at the time of property settlement – whether acquired before cohabitation/marriage or after separation – can be brought into play. Also, the value of such property will be considered at the date of settlement, not at separation or when the property was acquired. In some cases, the asset pool at the date of settlement can be significantly different from that which existed at the date of separation. 

Once the Court has made property settlement orders (either with the consent of the parties or after Trial) this draws a “line in the sand” between them financially and both parties can (except in highly unusual circumstances) take comfort in the fact that they will no longer be pursued for assets (or income) they may acquire in the future. As an alternative to a Court order, it is also possible to formally reach a final property settlement by way of a Financial Agreement.

As stated above, property settlement is how the net assets of separating parties should be distributed. Divorce, on the other hand, is simply the formal dissolution or termination of a marriage.

Property settlement can in some cases be agreed and effected by a Court order (or Financial Agreement) within a few months of separation – there is no set period of time that a party must wait before applying to initiate property proceedings or seek consent orders.

Divorce, however, requires the parties to be formally separated for at least 12 months before an application can be made to terminate the marriage.

Although not common, it’s possible for parties to enter into a formal property settlement without ever becoming divorced. It’s equally possible to obtain a divorce yet never formalise a property settlement. The only correlation between the two processes is that the automatic right to file an application for property settlement is lost if the parties have been divorced for more than 12 months. In such circumstances special permission must be sought from the Court – otherwise, the parties can still enter a Financial Agreement.

Precisely the same considerations apply in property settlements involving separating de facto couples, so long as the parties have – in general terms – been:

• residing together on a genuine domestic basis (i.e. as if married) for at least two years;
• or they have a child together;
• or they have made substantial contributions to the parties’ property.

Once the jurisdiction of the Court to make property settlement orders has been established, the only current difference in de facto cases (at least in Western Australia) is the Court’s inability to “split” the parties’ superannuation entitlements.

This has long been the subject of controversy in family law disputes in WA, particularly where superannuation forms a large part (or, indeed, all) of the assets of the parties.

In de facto cases, superannuation is characterised as a financial resource, not specifically an asset, and although it has to be “taken into account” under the relevant legislation, it can still result in objectively unfair outcomes to the party with the least superannuation.

At the time of writing, the WA government is still considering legislation to make de facto superannuation splitting a legal option in property settlement cases, as it is in throughout the rest of Australia.

Basically, the Courts will follow a long-established 5 step process when determining how the assets of separating couples should be divided. Briefly, these 5 steps are set out as follows: 

1. Based on the current legal ownership of the assets, is it just and equitable in all the circumstances to alter either party’s interests in the property presently available for distribution. This will almost always be the case where there has been a long marriage and the assets are held unequally, or there are young children to consider.  
2. The assets, liabilities and financial resources of the parties must be identified and valued to clarify the net asset pool for distribution (i.e. what is to be included within “the pot”, and what it’s all worth).      
3. Stage three involves assessing their overall contributions to the acquisition, conservation and improvement of the assets (usually in percentage terms but not always). “Contributions” are widely defined and include each party’s initial financial contributions at the start of the relationship as well as their ongoing direct/indirect, financial and non-financial, parenting and homemaker contributions. Contributions made by the parties post separation are also taken into account. 
4. The next step is to consider the future financial needs of each party by taking into consideration a multitude of different factors set out in the section 75 (2) of the Family Law Act (1975) (or, for de-facto couples, section 205ZD(3) of the Family Court Act (1997)). This includes the age and health of the parties, their respective earning capacities, and any ongoing parenting arrangements. Once all such matters have been considered, the Court will make a percentage adjustment (or sometimes an additional dollar amount) to the “contributions – based” entitlements to the party with the greater future needs. However, it is not mandatory that such adjustment be made. 
5. Finally, the Court will have to consider whether, in all the circumstances of the case, the orders it proposes to make are ultimately “just and equitable”. This may involve a consideration of the constitution of the asset pool and what the orders may mean in practical terms for each party.

It is commonly thought that inheritances are protected assets in family law cases, but this is not the experience of litigants who have argued that their inheritance should be excluded from the asset pool for distribution.

The Family Court has wide discretion as to how to treat inheritances received before final orders are made. The common approach tends to be that an inheritance received during or before the commencement of cohabitation will be included in the asset pool. This even applies if the inheritance is received after the parties have separated.

Sometimes, however, inherited assets can be considered differently to the other assets of the relationship, with the Court adopting a “two pools” approach and assessing each party’s contribution to the existence of those pools.

How an inheritance is treated can depend on several different factors:

• How long the relationship was between the parties;
• The amount of the inheritance paid as compared to the overall size of the pool for distribution;
• When in the relationship the inheritance was received – e.g. early in the marriage/relationship, or after separation?
• The benefactor’s relationship with each of the parties, and any intention they may have expressed during their lifetime; and
• How the inheritance was spent, or if it is still intact.

By way of example, if an inheritance was received mid-way through a 30-year relationship, the Court will likely treat it the same as other assets but adjust the financial contributions of the inheriting party. If, on the other hand, it was received at or towards separation, the Court might treat the inheritance as a totally independent pool, with most if not all of the contributions being “awarded” to the recipient of the inheritance. Inheritances in family law cases can be a complicated issue.

The Courts as a general rule will not be interested in “possible” or “prospective” inheritances, even if the amount is likely to be substantial. An inheritance will only be taken into account if it has already been received by one party, or where the benefactor is e.g. severely ill and no longer has the capacity to alter their will. It is long established that the “mere expectation” of a future inheritance from a wealthy family will not impinge upon the otherwise just and equitable asset distribution between the parties.

An award of damages for personal injury falls within the definition of matrimonial property, and should therefore be considered as part of the net pool for distribution after separation.

Like other windfalls such as inheritances or insurance pay-outs, damages arising from a personal injury claim is a “contribution” of the party who suffered the injury. It should not be considered in isolation “for the reason that every contribution which each of the parties make must be weighed and considered at the same time” (see the 1996 case of Aleksovski – where the wife’s compensation for the injuries she sustained in a motor vehicle accident resulted in a distribution of 65% to her, based on an assessment of the parties’ contributions alone). 

Accordingly, if a personal injury payout is fairly large in comparison to the overall asset pool for distribution, then the injured spouse is likely to be awarded a significantly greater percentage distribution when assessing each parties’ financial and other contributions.

In addition, because the respective future needs of the parties are considered under the Family Law Act (1975) (or Family Court Act (1997) for de facto couples in WA) if a personal injury award is made on the basis that the affected party can no longer work or earn an income then a further adjustment would also likely be made to cater for these requirements, and to ensure that each party leaves the relationship with reasonable future prospects. Otherwise, the outcome might not be “just and equitable”, as the legislation requires.

However, if a personal injury claim is simply being contemplated at the date of settlement, and no application for damages has been commenced (let alone an award made) the mere right to bring a claim is not included within the definition of property. A party cannot be forced to make a claim and, even then, there is no objective guarantee it will succeed. The Court cannot deal in “speculation”.

Sometimes, couples will commence living in a de facto relationship whilst still at University, and accruing HECS debt as a result. If one party has paid off their HECS debt during the marriage, but at separation the other party still has an outstanding HECS liability, should that debt be treated as a joint liability and be considered in calculating the net asset pool for distribution?

If not, then it will remain a liability of the debtor, and the other party will not have to contribute to it. If, on the other hand the outstanding HECS debt is treated as a joint debt of the parties then it will be included in the asset pool for division, meaning that the net assets for overall distribution will be reduced.

In the case of Berry and Berry (2010, FMCAfam 542) the wife during the marriage began studying for qualifications with the husband’s knowledge and agreement. After completing these studies, the wife secured employment within the industry related to her qualifications, and from then on became the family’s primary income-earner and financial provider. The Court held it was reasonable to include her HECS debt as a matrimonial (and not personal) liability, as her study and qualifications had significantly benefited the family’s position overall.

However, in Mullins v Birchmore (2014, FCCA 1297) the Court came to a different conclusion, holding that the husband’s HECS fees should remain his personal liability and not be included in the asset pool. The Court found that the husband had, in effect, been the sole beneficiary of his studies. His wife had worked to financially support him and their children during his period of education, and the family only benefited from the increase in income derived from his new qualifications for around 2 years.

The Court also considered that the wife had already made a significant financial and non-financial contribution towards discharging the husband’s earlier HECS fees for previous study during the marriage. Finally, the husband was planning to study for several more years and was not intending to remain in the industry which pertained to the disputed fees, and would not be exercising his earning capacity derived from his additional studies.

As outlined above, part of the property settlement process involves assessing contributions to the relationship. Often, separating parties will dispute the significance of gifts (mostly, but not always, from family) and how these should be treated. A pivotal consideration is who was intended as the principal beneficiary of the gift.

If the wife during the relationship was e.g. to receive a gift of, say, $100,000 from her family, it must be determined whether that sum was meant for the exclusive benefit of the wife; or for the benefit of the husband as well.

The general rule emanating from cases over the years is that unless there is clear evidence that the gift was intended for the joint and/or equal benefit of both relationship parties, the Court will most often hold that the gift was received only by one party. If this is so, this will impact on the assessment of each party’s overall contributions and, potentially, adjustments under section 75(2) or 205ZD(3).

The length of the marriage and when the gift was received can also significantly impact on the weight of the gift to be attributed to the principal recipient. In very short relationships it might be the case that any substantial gifts are excluded from the asset pool, remaining the sole entitlement of the donee. In lengthy marriages, however, the Courts are more likely to include the gift as an asset of the marriage but, perhaps, alter contributions in favour of the person who received it.

Families contemplating making significant financial gifts to married parties during a relationship must exercise extreme caution, particularly if the marriage is experiencing “difficulties”. One way of trying to “protect” such sums from being claimed by the other spouse as part of the settlement funds is to create a formal loan document, making the money legally repayable. This has been tried in numerous cases, to varying degrees of success. However, such arrangements are heavily scrutinised by the Courts and there is often much conjecture about whether the sums are in fact a loan, and whether the lender would be prepared to sue their son/daughter in the event of non-repayment.

Another way might be for the parties to draft a Financial Agreement acknowledging that the gift belongs exclusively to one party in particular and is to be excluded from any future property settlement in the event of marital/relationship breakdown.

How family gifts are treated often forms a significant part of litigation in disputes involving wealthy families.

As a general rule, capital gains tax and also stamp duty is payable when one profitably sells, disposes of, or transfers property to another person.

The main exception to this is the transfer of the family home between spouses – one of the most common and important of Family Law Orders – which is generally speaking, exempt from stamp duty.

The caveat to this is that the property must have been owned by the parties and used for the period in question as the matrimonial home. If transfers are made pursuant to a Family Court Order or Financial Agreement, cars, boats, furniture and superannuation transfers are also generally exempt. 

However, it is essential to note that if a spouse is receiving e.g. real estate that was previously owned by a company or trust, or was rented out for lengthy periods of the marriage, then if/when this property is ultimately sold by the recipient spouse, CGT will be payable on any net profit made upon sale.

If you are proposing to receive as part of your property settlement entitlements an item of real estate, shares, artwork, leases or even e.g. a vintage car, then you may need to “factor in” to the overall percentage distribution the likelihood that CGT will be payable. The difficulty is that this will be almost impossible to calculate for the purposes of settlement unless the asset is likely to be sold shortly after being transferred under the Court orders.

For the great majority of separating parties who own “standard” everyday (and, most likely, depreciating) assets, the interaction of CGT and family law settlements is not an issue.  But if your affairs are complex, and the proposed settlement involves your retaining valuable trust assets or investment properties, it is essential that you seek experienced accounting advice before signing off on any Court orders or Financial Agreements.

Finally, any spousal maintenance order incorporated in a property settlement is not taxable.

Basically, the answer is yes – an insurance claim is money that can be recovered and will form part of the asset pool for distribution.

A prime example is where there has been substantial damage to e.g. the matrimonial home, or the parties’ boat. Assuming the claim has been made and accepted by the insurance company, then even if the amount is yet to be finally assessed the Court can “factor in” to its settlement orders a percentage amount as to how the amount claimed should be distributed.

If, however, the claim (often made by both parties as co-insureds) is disputed, and involves a substantial sum, then the Court can adjourn the Family Court proceedings until the outcome of the insurance claim has been determined.

One case recently considered an insurance claim which had not yet been finalised following severe fire damage to the matrimonial home. The estimate for repair was anticipated to be around $230,000. By the time of the Family Court Trial, the wife had already conditionally agreed to accept the insurance company’s settlement offer of $214,000. Although the final amount had not yet been set in stone, and payment not received, the Trial Judge felt it appropriate to consider the sum of $214,000 as matrimonial property, and included that amount within the asset pool for distribution.

As with many family law matters, however, much depends on the particular circumstances of each and every case, and parties should seek professional advice as to how an outstanding insurance claim might affect their overall claim.

The short answer is no. The general rule is that each party is responsible for meeting their own legal costs in connection with either divorce or property settlement proceedings.

It also needs to be borne in mind that engaging legal representation is not mandatory, so in objective terms why should self-represented litigants meet the fees of the represented party?

Furthermore, each party’s costs are seen as a personal liability, and not viewed as a matrimonial debt to be “factored in” to the ultimate net asset pool for distribution.

The exception to the general rule is where the Court imposes what is known as a “costs order” on the unsuccessful party to pay a portion of the other party’s legal costs. This can happen either following an interim argument or after Trial, particularly if it can be demonstrated that the “losing” party should previously have accepted a reasonable offer to settle made by the other party.

However, there are many other factors which need to be considered when applying for a costs order, and such orders are relatively rare. Accordingly, caution must be taken when deciding on if, when and how to instruct Solicitors to pursue or oppose an Application. Legal costs already expended (and particularly future legal costs if the matter reaches Trial) must be considered when making offers of settlement.

In Divorce Applications, the filing fee of $930 is paid by the Applicant, and is not recoverable. In joint applications, however, the filing fee is usually split between the parties on an informal basis.