A mirror will is a simple will that is, for the most part, identical to that of their partner or spouse. a mutual will is where each partner or spouse makes a will which forms a binding contract between them.
What is a Mirror Will?
Mirror Wills are usually used by couples. They are mainly identical to and reflect each other.
They may be changed or revoked at any time by either Will-maker.
Mirror Wills: Positives
A mirror will can be changed at any time, even after the death of the other will-maker. A mirror will may be useful for young couples and blended families as they may need to make changes in the future.
Mirror Wills: Negatives
Changing both mirror wills or changing or revoking only one of the mirror wills does not require notice to be given to the other will maker. For example, a surviving husband may decide that he no longer wants his step-children to inherit anything, including the assets he acquired through his first wife’s estate. The husband may revoke his mirror will and create a fresh will which excludes the step-children.
There are cases where a surviving spouse re-marries and has more children, then changes his or her Will to leave his or her estate to the new spouse and new children and cuts out the children from the first marriage.
What is a mutual Will?
Mutual wills (also known as mutual will contracts or binding wills) form a legally binding contract between two people. Both wills are drafted in terms agreed by the will-makers; and the wills prevent either will-maker from revoking or amending their will without the other’s agreement. After the death of the first will-maker, both wills become irrevocable and cannot be amended.
Mutual wills work as a contract to protect the estate interests of both will-makers’ beneficiaries.
Mutual Wills: Positives
Where both will-makers have agreed to the terms in their wills, the surviving party is bound by this agreement and can be sued for breach of the agreement.
If either will-maker changes their will contrary to the agreement, the courts may enforce the original agreement.
If the surviving party unreasonably exhausts the deceased’s assets, beneficiaries may sue for breach of contract.
Mutual Wills: Negatives
Mutual Wills do not prevent challenges to the estate.
Circumstances may change after the will makers have signed the mutual will agreement, which could disadvantage the survivor (e.g. remarriage or additional children).
The survivor may attempt to frustrate the operation of the mutual will agreement by depleting the estate assets or by changing the way these assets are owned.
Contact us for advice and assistance in establishing mirror wills or mutual wills.
In New South Wales, two types of public officers can perform services related to confirming identities and witnessing documents of a legal and binding nature.
The one most commonly used is a Justice of the Peace (JP), who can be used for things such as certifying true copies of original documents, witnessing affidavits and statutory declarations.
The second type is a Notary Public (also known as a Public Notary) who is used for more significant forms of legal verification.
What is a Notary Public?
Whilst all of the rights and responsibilities of Justice of the Peace are also conferred on a Notary, the reverse is not true. For example, a Notary Public can verify documents for international use.
A Notary can apply through the Legal Profession Admission Board to be appointed by the Supreme Court pursuant to the Public Notaries Act 1997 when they have satisfied the following requirements:
a lawyer with at least 5 years of legal practice; and
completion of the prescribed Notarial Practice Course
A Notary has more responsibilities than a Justice of the Peace. They are granted their own seals or stamps for use in Australian, international and courts in foreign countries.
Notary services relating to acts of verification include:
Verifying a person’s identity by witnessing their signature or fingerprints;
Taking a witness’s statement for official use;
Certifying the correctness of a document permitting it to be taken as an original in international courts of law;
Authenticating documents for domestic or international purposes;
Completing certificates of law in overseas courts; and
Notarising documents going overseas.
For documents going overseas, a Notary Public must know which process is necessary for the documents to be fully validated. The process can require between one to three steps including:
Notarising the document before it is sent overseas;
Authenticating the document with the Department of Foreign Affairs and Trade; and
Sending the document overseas to the relevant legal agency for approval and verification.
The types of documents a Public Notary is accustomed to verifying and certifying include many that are entered into by people on a relatively regular basis, including: trusts, loan documents, powers of attorney, estates, contracts (including both land conveyance and business contracts), deeds and licenses.
Legal verification is a necessary and protective move when entering into any of these documents, as it maximises all involved parties’ legal protection.
Using a Notary Public to verify of any of these documents gives the document complete authenticity. The parties ensure that everyone signing the document or partaking in the contract, license or loan is of sound mind and well informed of the effects of signing the document.
How is a Notary Public different to a JP?
A Notary can officiate over and administer oaths, affirmations and give legal advice and services. A Justice of the Peace can’t do any of these.
The types of services that a Notary Public can perform include:
Acknowledging deeds and other conveyance of land and property;
Taking declarations and legal affirmations including affidavits;
Processing notes of bills and exchange; and
Providing notice to foreign drafts.
Using a Notary for significant domestic transactions and for all overseas legal issues is imperative. One of the most common uses of the services of a Notary, is for Estate concerns, including Wills and Trusts, and Power of Attorney.
These documents deal with sensitive legal issues that are strongly dependent upon the understanding and mental capacity of the signatories. Paramount in the legal validity of these documents is verification of identity, signature, and the mental clarity and ability to enter into such agreements.
The Federal Circuit and Family Court of Australia (FCFCOA) must be satisfied that an order in relation to the division of property in a Family Law property settlement is just and equitable before making it.
In leading cases (such as Mallett & Mallett and Hickey & Hickey), the Court has stated that the just and equitable requirement is generally the last of the four step process undertaken by the court in family law property settlements.
What does just and equitable mean?
In Mallet & Mallet the words ‘just and equitable’ were described as the “overriding requirement” to determine whether it is just and equitable to make AN order at all and IF one is made, what that order should be. In determining whether the order is just and equitable, the court must consider not just the underlying percentage distribution of the assets but also the justice and equity of the outcome (i.e. the actual order) (see Russell & Russell and JEL v DDF).
The main purpose of section 79(2) is to ensure that the Court:
alters the parties’ property rights only if justice requires it to do so; and
If the court decides it is just and equitable to make any order, the court is satisfied that the alteration of property goes no further than the justice of the matter demands.
What are the four steps?
Before the High Court case of Stanford v Stanford, the four steps the Court considered in determining what orders it makes, were:
identify the value of the parties’ property, liabilities and financial resources at the date of the hearing;
identify and assess the parties’ contributions and determine their contribution based entitlements as a percentage of the net value of the property pool;
identify and assess the relevant ‘future needs’ factors under section 79(4) and 75(2) of the Family Law Act and determine any adjustment necessary;
consider the effect of those findings and determine what order is just and equitable in the circumstances.
The court’s decision making In property disputes involves an exercise of discretion, having regard to these four steps, which turns on the facts of each individual matter (Russell & Russell).
The effect of Stanford
In the case of Stanford the High Court expressed its views on the proper approach to an application for property adjustment under s.79 of the Family Law Act.
In Stanford, the High Court stated that the Court must first consider whether it is just and equitable to make an order, rather than considering whether the order is just and equitable as a ‘fourth step’. Stanford refocussed attention on the Court’s obligation not to make an order adjusting property interests unless it was just and equitable to do so.
Watson & Ling confirmed that the breakdown of a marriage or de facto relationship does not automatically result in the parties’ property being altered and, nor should the making of an order at all be assumed.
Accordingly, the requirement to consider whether an order is just and equitable is now more accurately considered as the first step, adding an extra step to the four step process.
How is the just and equitable requirement (as a first step) satisfied?
The just and equitable requirement as a first step is generally satisfied because, once the parties no longer live together, there will no longer be common use of the property. Consequently , the assumptions underpinning the parties’ property arrangements will have been brought to an end. The question of whether it is just and equitable to alter the existing property interests is readily answered where both parties are seeking orders which alter their respective property interests. Whether it is just and equitable to make an order is more difficult to answer where one party seeks that no order be made.
The just and equitable requirement: Case Studies
Bevan & Bevan found in the appeal that the trial judge erred in determining that altering the existing property interests of parties who had largely lived apart for 18 years and the husband had told the wife she could retain the assets was just and equitable.
In the Full Court appeal of Redman & Redman, the husband and the wife applied for consent orders to be made. The sole purpose of the orders sought was to transfer the family home in an intact marriage from the name of the husband to the names of both himself and his wife and to employ the Family Law Act 1975 to achieve this to avoid paying stamp duty. The Registrar refused to make the order. On appeal, the Court indicated that it has power under s 79 to make orders where the parties’ marriage was intact. However, the court must have a principled reason for interfering with the parties’ existing legal and equitable interests (per Stanford). There was no apparent reason and the appeal was dismissed.
Are you unsure what order is just and equitable in your case?
If you have recently separated, contact us for advice regarding what orders are just and equitable in your case.
In multicultural Australia, it’s common to hold assets overseas as well as in Australia. But have you considered what happens to your overseas assets if you pass away? Does your Australian will cover them or do you need a separate will in each country in which you have assets?
If you make a will in New South Wales, it will cover assets that you own in other parts of Australia. But you can’t assume that any overseas assets you have will be included in your Australian will. Every country has its own rules and laws that apply to your assets when you die.
There are a couple of options available if you have assets in different countries.
An international will
One option is to make an international will. This is made in accordance with the Convention Providing a Uniform Law on the Form of an International Will 1973 (the Convention). A country that is a party to the Convention will recognise a will made in accordance with the requirements of the Convention. Whether an international will is appropriate depends on the country in which the assets are located and whether it is a party to the Convention.
Australians who have made an international will may find it easier to prove the validity of the will in a country which has adopted the Convention. But although the Convention provides uniformity on the formal requirements for a will, it doesn’t address:
the local laws which apply;
who can apply for probate;
where probate can or should be taken;
family provision applications (who can make a claim and in which jurisdiction);
inheritance rules specific to each country (who can inherit and what they can inherit);
tax and estate administration requirements; and
revocation of the will.
These things continue to be governed by:
where your assets (particularly immovable assets such as land) are situated;
the jurisdiction where you make the will;
where probate is granted; and
where you die or are domiciled.
A separate will in each country
The other option is to make a local will in each of the countries in which you hold assets. This option is usually preferable because:
it allows executors in different jurisdictions to apply for probate concurrently and independently of each other. If there is only one will, probate must be obtained in one jurisdiction then re-applied for in the other jurisdictions, which can cause delay;
if there is only one will for all property, having probate of the original will granted in one country and then in the others may cause difficulties, because the Court in each country will want to retain the original will.
there may also be delays caused by the translation and interpretation of will made in another country;
there may be tax savings and reduced court fees where a particular country is dealing only with property within that country rather than with all of your estate’s assets;
administrative difficulties can occur if the original will is held in one country while there are assets in another country which have to be distributed;
the probate process can be significantly simplified for your family and executors because the executors have a local legal advisor to guide them through the process and the cultural differences.
When making wills in separate countries, it’s very important to advise each of your lawyers that you either intend to make, or have already made, a will in another country. This is to ensure that your wills don’t contradict each other or that one will doesn’t inadvertently revoke (cancel) another.
An international will may still be appropriate if most of your assets are in Australia with a modest asset (such as a bank account) in a signatory country where a grant of probate is likely to be necessary.
If you have assets in countries other than Australia, contact us for legal advice as to the best structure for your situation to ensure that your assets are disposed of in accordance with your wishes and that the estate administration process is as cost-effective and streamlined as possible.
If you have separated from your former partner and cannot reach agreement regarding a division of property, you may end up before a Court considering what property division orders should be made.
Most couples undergoing a separation reach agreement regarding the division of their property and never see the inside of a court room. If you reach agreement, you should ensure that it is formalised, either by:
orders made by consent and issued by the Federal Circuit and Family Court of Australia (FCFCOA); or
signing a binding financial agreement.
Even if you and your former partner reach agreement, it is important to obtain advice about the way in which the FCFCOA determines your property entitlement. This is an important tool in negotiations with your former partner.
If your matter were before the FCFCOA, it is likely to consider:
firstly- what assets and liabilities form the asset pool available for division between you and your former partner;
next – the financial and non-financial contributions made by you and your former partner. The court determines each party’s percentage entitlement to the property pool based on those contributions; then
then – what further adjustment (if any) should be made in favour of you or your former partner based on your “future needs”. The FCFCOA looks to the future and decides whether to make an adjustment based upon any of the matters set out in section 75(2) of the Family Law Act 1975 (FLA).
Future needs factors that may result in an adjustment being made include:
Where one party is of advanced years or suffers from some long term or permanent health condition; and
Where one party has the ongoing or primary care of children of the relationship; and
Where one party has a greater future earning capacity.
Evidence which may be relevant to “future needs” factors includes:
Age and state of health of parties.
If one party is nearing retirement age, are they likely to retire in the near future or continue working?
What is the nature and severity of any illness suffered by a party and is that illness long term or likely to be remedied (if so within what kind of period);
Does an illness or health condition of one party effect their ability to care for the children or to earn income?
Care and control of children of the relationship under 18 years of age.
for the party with whom the children live:
The number and ages of the children and the number of years before they turn 18;
the amount of supervision the children require;
How care of the children effects the lifestyle/recreation time of that party and their ability to work;
The extent to which child support paid contributes towards the children’s expenses.
for the party with whom the children spend time:
The amount of time the children spend with that party and the extent to which that relieves the other party of the burden of caring for children or allows them freedom of lifestyle/recreation and to be gainfully employed;
The number and ages of the children and the number of years before they turn 18;
Whether child support has been paid and the history of payments, including the likelihood of payments continuing in the future;
The level of child support payments.
the earning capacity of the parties during the relationship;
Whether one party’s earning capacity has been affected by the relationship (whether due to caring for children or otherwise);
each party’s current income and potential earning capacity;
If one party is not working or is not working full time, their capacity to obtain employment or other employment and their expected remuneration in that employment;
training or further qualifications a party may need to complete to obtain employment;
the likelihood of a party receiving or retaining an income producing asset as part of the property settlement;
The size of the property pool to be divided between the parties relative to each party’s income and earning capacity.
Contact us for advice and support in resolving your family law issues.
In a property settlement, the first step of the four-step process in determining a split of the assets of a marriage or de-facto
In a property settlement, the first step of the four-step process in determining a split of the assets of a marriage or de-facto relationship is identification of the asset pool. The next step is assessment of the contributions of the parties to the asset pool, which is achieved by applying sections 79 or 90SM of the Family Law Act 1975 (Cth) (“the Act”).
The percentage split of the property pool is affected by assessment of the extent of each parties’ contributions. Greater contributions by a party may increase that party’s entitlement.
The Court takes into account different types of contributions.
These are contributions by or on behalf of a party to the relationship, or a child of the relationship, to the acquisition, conservation or improvement of the parties’ property.
They include significant assets or superannuation brought into the relationship at the start of the relationship, or the contributions of salary, superannuation or other earnings generated during the relationship.
These are contributions by or on behalf of a party to the relationship, or a child of the relationship, which may not have a “price-tag”, to the acquisition, conservation or improvement of the parties’ property.
They include home improvement or renovations undertaken by a party which improve the value of the matrimonial or investment home.
Homemaker or parenting contributions
These are contributions by a party to the welfare of the parties to the relationship (including any children) as a homemaker or parent.
They include parenting duties, cleaning duties and general house maintenance duties. The weight given to these contributions is on par with financial and non-financial contributions.
Weight attached to contributions
The Court takes into account when in a relationship contributions were made. Progressively less weight attaches to initial contributions over time. Contributions made by a party at the beginning of a relationship bear greater weight in a short relationship than they do in a long relationship. A party who contributes the majority of the asset at the start of a short relationships has grounds to leave the relationship with most of those assets, which is a less likely outcome in a longer relationship.
Specific types of contributions
Specific types of contributions may also be relevant to certain assets. For example, one partner caring for an injured partner may be a relevant contribution in determining the entitlement (if any) of the uninjured partner to the injured partner’s personal injury compensation payment.
A gift by third parties to a party to the relationship may also be a classified as a contribution. These contributions (often from parents) include monetary gifts, assistance with home purchases, or a gift of household furnishings.
Above is a brief overview of contributions-related factors which may be considered by a court in property proceedings. This is a complex area of law and it is important to get advice from an experienced family lawyer. Contact us for advice specific to your circumstances or if you have any questions about contributions in family law property settlements.
The breakdown of a marriage or de facto relationship can be incredibly stressful. Both parties want to achieve the best possible outcome for themselves. Consequently, dividing assets can be a difficult process.
However, receiving legal advice about your available options should help to minimise your emotional and financial stress. In this article, we cover what assets are included in the asset pool and how they are valued and divided.
What Assets are Included in the Asset Pool?
The asset pool is the total net value of all matrimonial assets. This includes assets, liabilities and superannuation interests:-
in the name of both parties;
in the name of either party; and
under the control of one party.
Identifying `matrimonial’ or `relationship’ assets available for distribution between If you and your ex-spouse or de facto partner is an important and sometimes complex step in a property settlement. If you and your ex cannot agree which are matrimonial or relationship assets, the court may have to decide.
The court’s usual approach is to value the matrimonial/relationship assets as at the date of trial (not at the time of separation). The time of Trial may be up to 2 years after the commencement of proceedings. Between the dates of separation and the trial, the value of assets may have significantly risen or fallen. The court will consider any changes in value and, if appropriate, attribute such changes as being a contribution by a party. Depending on whether such change is positive or negative, it may increase or decrease that party’s overall entitlement.
There may be consequences if a party attempts to remove an asset from the pool by disposing of it before settlement. If a party wrongly disposes of an asset after separation, the court will consider the factual circumstances surrounding that disposal. It may decide to notionally “add back” the value of the asset to the matrimonial/relationship assets by treating it as part of the share of the person who dealt with it.. Cases surrounding this complex area of law are regularly developing the law.
A recent study found that the following ‘basic assets’ are usually divided in a settlement. The most common assets and the percentage of cases they were included in are:
Furniture – 100%
Cars – 95%
Bank and credit union accounts – 81%
House or unit – 77%
Other basic assets – 46%
How are Matrimonial Assets Valued?
Valuation of matrimonial assets, although essential to resolve a family law property settlement, can be contentious. Here’s how the value of many of these items is determined:
Land and homes are usually the largest value shared assets. Parties are often able to agree on a value after appraisals from real estate agents. However, it is generally better to get an independent valuation by an expert jointly engaged by both parties, as the value is more precise than an appraisal. This is required by the court if there is a dispute over value.
Parties should jointly instruct an independent expert such as a forensic accountant to carry out a valuation of a business, even if the business has an in-house accountant. In some cases, the value of the business will simply be the value of its assets minus its liabilities. In other cases, it is far more complex.
A jointly appointed expert can be used to ascertain the value of a motor vehicle. If the value of the vehicle isn’t high, a website such as Carsales or Redbook can be used to provide a value range which the parties can use to agree on a price.
Furniture and Jewellery
The court tends to adopt a conservative approach to valuing furniture and jewellery, generally preferring the second-hand value to the insured or replacement value. Independent valuations can be used, but you should consider whether their cost is likely to outstrip the value of the jewellery.
How does the Court Divide the Matrimonial Assets?
If mediation and/or other negotiations fail and a settlement is only achievable by going to court, the court will decide what it believes is ‘just and equitable’ for both parties.
The court will:
Consider the value of the assets after the payment of any liabilities;
Consider the contributions made by each party, including:
Non-financial contributions (e.g. repairs to a property or unpaid work in a family business);
Contributions as homemaker;
Contributions as a parent;
Assess the current and future circumstances of the parties referring to a list of factors including:
the age and state of health of each of the parties;
the income earning capacity or disparity between the parties;
the length of the relationship and its effect on each of the parties’ income earning capacities; and
who will be the children’s primary carer in future;
Determine, in the whole of the circumstances and the adjustments made (percentage wise) to the contributions and circumstances of the parties moving forward, whether the division of assets is just and equitable.
The court can apply as much weight to these factors as it considers necessary, so there is no set formula for calculating how much each party will receive.
Couples can often resolve their financial issues outside of court but whether you can negotiate an outcome yourself or require the intervention of the court, you should seek independent legal advice concerning the best approach for your situation and your likely range of entitlement. Contact us to discuss your matter and receive advice on your best course of action.
The treatment of superannuation in a property settlement between separating couples was historically a problem area for the Family Courts because of the special qualities of superannuation interests. Because of strict rules governing superannuation interests, it has sometimes been difficult to arrive at a settlement which is fair to both parties.
Property settlements dealt with under the Family Law Act can divide superannuation along with other assets as part of property settlement. As most people have superannuation, this has a significant effect on most people’s property settlement.
There are varying approaches on valuing and determining the division of superannuation interests in family law matters. Each case is approached and determined based on its own specific circumstances.
It is important to seek advice concerning the valuation of either your own or your spouse’s superannuation interest before agreeing on a property settlement.
Accumulation funds, also known as industry funds, are the most commonly held superannuation interests. The value of this type of superannuation interest is usually determined by a recent member statement or a completed superannuation information form.
Self-Managed super funds
Self-managed super funds are becoming more common, particularly as a way to invest in property. However, unlike other types of superannuation, the diverse nature of the self-managed superfunds and the property they own, make a standard valuation regime impossible. An expert is generally required to value a self-managed super fund.
Defined Benefit Funds
To value a defined benefit superannuation fund, you will need to send a Form 6 or a Superannuation Information Request Form to the specific fund. Information provided by the fund regarding a superannuation interest may have to be valued by an Actuary to determine its value for family law purposes. Defined Benefit valuation formulas are usually based on a combination of factors including:
The age of a member;
A member’s average salary leading up to retirement or the value of the super at retirement; and
How long a member has worked for the employer.
How do you split superannuation?
Superannuation interests are split by a splitting order or agreement, usually contained within Court Orders (made by consent or after litigation) or a Binding Financial Agreement (BFA).
After the Orders or BFA are served on the Trustee of the superannuation fund, the Trustee will arrange for a payment from the member spouse’s superannuation interest to a super fund nominated by the non-member spouse. The payment may be expressed as a specific amount or as a percentage of the member spouse’s interest.
A superannuation split cannot be converted to cash. The non-member spouse is not able to access the superannuation they receive until retirement or hardship.
Contact us today for help with valuing superannuation interests and your potential entitlements.
The purpose of life insurance is to provide a cash payment for your loved ones in the event you unexpectedly pass away. The policy may also provide a payment if you are permanently disabled or suffer a critical illness. The payment can be used to support your spouse and children or to pay down debts. It can also be used to meet your tax obligations, to give a beneficiary cash in lieu of other assets, or for a donation to charity.
You can hold your life insurance through a policy taken out personally or through your super fund.
It is important to consider who will receive the proceeds from your life insurance policy and how to minimise taxes and other claims on the cash.
Who will receive the proceeds from your policy?
There are some traps, which could mean the difference between the money going directly to your family, or being used to pay outstanding debts and obligations.
Holding the policy in your own name.
If you are the owner of the policy, the proceeds will go to your Estate and be dealt with in accordance with your Will. If you do not specify in your Will who is to receive the life insurance proceeds, they will form part of your “residual Estate” and be paid to your residual beneficiaries.
If you have outstanding debts or other claims against you when you pass away then your Estate assets (including the proceeds from the policy) may be used to pay these debts and obligations, which may result in your dependents missing out.
A person may challenge it your Will if they consider that it does not adequately provide for them. If the challenge succeeds, they may take a larger portion of the insurance proceeds than you intended.
Naming a beneficiary to receive the proceeds.
If instead you name a beneficiary under the policy, the proceeds will not be paid to your Estate: they will go directly to the named beneficiary who will receive the proceeds outright after your passing.
If a beneficiary has unsatisfied debts or liabilities, the proceeds may be used to satisfy those claims. If the beneficiary is a child, they will be entitled to the full amount of those proceeds when they reach 18, which could be too early for them to properly handle the money.
Consider using a ‘testamentary trust’ in your Will.
If you want the proceeds from life insurance paid to your Estate, you should consider including a testamentary trust in your Will to ensure that your objectives for your life insurance are met. A testamentary trust will:
Ensure that the proceeds are passed to your intended beneficiaries, as and when you direct. For example, you may specify that the proceeds are to be paid to young beneficiaries over time;
give your beneficiaries capital gains and income tax advantages, particularly if they are under 18; and
Provide a significant level of protection for assets in the event a beneficiary becomes bankrupt or divorced.
Insurance through super
If you hold a life insurance policy through your super fund, then your options regarding who receives the proceeds are more restricted and the tax considerations are more complex than if the policy is held outside super.
If your life insurance policy is held through your super fund:
You may nominate either your Estate or a person who qualifies as a “dependent” for superannuation law purposes to receive the super proceeds. If your nomination is not a valid binding nomination, the trustee of the super fund has the authority to overrule your nomination to ensure that your benefits are distributed appropriately; and
if the beneficiary is not also a “dependent” for tax law purposes, (which is a slightly different definition than for superannuation law purposes) there may be an additional layer of tax on the payout to the beneficiary.
Contact us to ensure that your life insurance ties in with your estate planning and that your dependents are properly looked after as you intend.
An important but often overlooked aspect of family law property settlements is the tax and duty consequences of parties retaining or disposing of assets. It is essential that all parties receive financial and tax advice before finalising a property settlement to ensure that everyone walks away with what they intended and to avoid nasty surprises later.
Generally, the biggest tax issues in family law matters are:
Capital gains tax;
Income tax consequences – “deemed dividends”; and
Capital gains tax (CGT)
CGT is payable on the net capital gain made on the sale, transfer or disposal of property. This includes real estate (other than the family home), shares, leases and different types of rights.
Generally, the following is exempt from CGT:
Assets acquired before 20 September 1985;
Collectables less than $500;
Some personal assets less than $10,000;
Cars and motor vehicles;
Sale of a small business or business asset;
Assets used to produce income; and
The parties’ main residence.
CGT and the family home
If you keep the main residence (or family home) selling it later, the sale is exempt from CGT on the profits.
CGT and investment properties
If you have and keep an investment property, the transfer from your former partner to you is not subject to CGT. You must have a certain written agreement or Court order to obtain marriage or relationship “rollover relief”. If you later sell the investment property, you will have to pay CGT on any profit.
Rollover relief on assets from a company or trust
Rollover relief can also apply to assets transferred from a company or trust to a party of the marriage or relationship. But be wary of Division 7A of the Income Tax Assessment Act 1936 (ITAA) [see below].
Capital losses (when what you receive from the sale, transfer or disposal of an asset is less than what you paid for it) can be claimed against income.
Calculating CGT obligations
If and exactly how much CGT you will have to pay or how much loss you may incur is a question for your accountant or tax lawyer.
The Family Law Courts can take future CGT liabilities or losses into account if certain factors are present. For example, how the asset was acquired, the intentions of the parties at that time, and whether the asset sale is inevitable or part of a Court Order, may all be considered.
Transfer duty (formerly called stamp duty)
Generally, properties and motor vehicles in New South Wales are not subject to transfer duty if the transfer from one party to the other is pursuant to a Court Order or Financial Agreement under the Family Law Act 1975.
However, where a private company, owned by one party, transfers, say, a car owned by the company to the other party, transfer duty is payable by the party to whom the car is transferred.
Income tax – deemed dividends
In some cases, the ITAA may “deem” a party to have received a taxable dividend which will determine the income tax payable by that party. This could occur with:
the transfer of cash;
the transfer of an asset; or
forgiving a debt owed to a private company by a party to the relationship.
A deemed dividend can occur where a private company:
pays a shareholder or an associate of a shareholder; or
forgives the debt of a shareholder or an associate of a shareholder.
“Payment” can even include the transfer of property or giving a guarantee and meeting guarantee duties.
An associate of a shareholder includes the relative or partner of, or trust or company controlled by, the shareholder. The party receiving the benefit (not the shareholder) is taxed at their full marginal tax rate.
For example, if your former partner owns a company which pays you money (not as part of a legitimate employment or other contract), the ITAA deems the amount you received as a dividend which is taken into account when calculating your income tax liability.
Trusts can also have deemed dividend consequences.
Exemptions, exclusions and marriage breakdown concessions to the deemed dividend provisions of the ITAA include:
loans on commercial terms;
the payment of genuine debts; and
having the deemed dividend receive the benefit of franking.
A dividend is franked when your income tax calculations take into account the tax already paid by the private company or trust so you are taxed at a lesser rate rather than your full tax rate.
Goods and services tax (GST)
Where a company, owned by one party, transfers a car to the other party, the party receiving the car will not pay GST on the transfer (because it is not made during the course of the business).
However, if the company claimed the GST on the purchase of the car as a credit, it may have to pay GST on the transfer. The company cannot retain the benefit of having claimed GST on its purchase because the car changed its “purpose” from being a company asset to private use. In that case, the transfer changes category of the car from an “enterprise asset” (used or intended to be used in an enterprise that is or should be registered for GST) to a “private asset” (anything that is not an enterprise asset).
There are many ways that a transfer or retention of assets can lead to tax consequences.
Obtaining taxation advice from an accountant or tax lawyer before entering into a property settlement involving a private company will ensure that you are informed of all tax issues. If you are unsure of the impact of the tax consequences of your or your former partner’s corporate structure or properties on a property settlement, contact us to assist you through the process. Where necessary, we can refer you to an accountant to obtain tax advice.