“Life is like riding a bicycle. To keep your balance, you must keep moving.” –
Albert Einstein
Wow, what a sensitive subject fraught with emotions, a complexity of issues to consider, and the unknown. This article will not tell you how to overcome these emotions, but hopefully provide a guide on the process and some recommendations to reduce the fear of the unknown and allow both parties to keep riding their bicycles.
In Australia, the division of assets is governed by specific family laws that aim to ensure a fair and equitable distribution. This article explores how to navigate the asset division process, considering some legal and taxation implications. We want to also highlight the importance of collaboration and amicable negotiations to reduce costs, reduce taxes, and reduce the emotional toll on all involved. We hope to illustrate this through some simple examples that demonstrate how working together can yield the best outcomes for all parties involved.
Understanding Australian Family Law
In Australia, the Family Law Act 1975 outlines the framework for dividing assets following a divorce. The Actfocuses on the needs of children and the responsibilities that each parent has for their children, rather than on parental rights. The Family Law Act aims to ensure that parenting arrangements are made in the best interests of children.
In 2006, the Australian Government introduced a series of changes to the family law system. These included changes to theFamily Law Act 1975(Cth). A key objective of the 2006 family law reforms was to encourage greater involvement of both separated parents in their children’s lives after separation.
In consideration of this main aim, the Act emphasizes the importance of a just and equitable distribution of property, considering the unique circumstances of each relationship. Here are the key steps involved in the divorce asset division process:
1. Identifying the Assets and Liabilities
The first step is to identify the true market value of all assets and liabilities accumulated during the relationship. This includes:
- Real Estate: Houses, investment properties, or any other real estate.
- Financial Assets: Bank accounts, shares, superannuation, and other investments.
- Business Assets: Family companies or Trusts which hold active businesses or investments
- Personal Property: Cars, furniture, and other personal belongings.
- Liabilities: Mortgages, loans, and credit card debts.
Finding the true value of a business or unlisted investment where there is no market driven price is a very complex process. The reason why it is made more complex is that we do not have a situation where there is an active, willing, and stress-free buyer or seller. There is always strong disagreement on the value of these items as generally one party in the relationship has a greater vested interest than the other.
We recommend choosing a Chartered Accountant to represent both parties in the valuation process. That way the valuer will look at the valuation on a purely market driven basis and remove any valuation bias that is created from both parties.
Example: Jane and Tom are going through a divorce. They jointly own a house valued by two independent valuers worth $2,000,000, have $50,000 in joint savings, and owe $300,000 on their mortgage. They also have personal assets, such as two cars valued at $30,000 and $20,000, respectively, and credit card debt of $10,000. They also have a business that has been valued by an independent valuer at $1,200,000.
2. Assessing Contributions
Once the assets and liabilities have been identified, the next step is to assess each party’s contributions. Contributions can be classified as:
- Financial Contributions: Money earned and directly contributed to the relationship (e.g., salary, investments).
- Non-Financial Contributions: Contributions such as homemaking, child-rearing, and caring for family members.
- Future Needs: Consideration of future circumstances, including health, age, and financial resources.
Example: In the case of Jane and Tom, Tom was the primary caregiver for their two children and contributed significantly to homemaking, while Jane worked full-time and contributed financially. These factors will be weighed during the asset division process.
3. Considering Future Needs
The court will also consider the future needs of each party, including:
- The age and health of each party.
- The care of children.
- The ability to earn an income.
- Any financial obligations or support requirements.
Example: If Tom is likely to have a lower earning capacity due to his caregiving role, the court may take this into account and adjust the asset division to support his future needs.
4. Applying the Just and Equitable Principle
The final step is to divide the assets in a manner that the court deems just and equitable. This does not always mean a 50/50 split. The court will consider the unique circumstances of each case and may adjust the distribution accordingly.
This is the hardest area of dividing assets in a divorce as it evokes fear of financial security which is in two parts – asset security and income security. One party that has had the opportunity to develop their career and can easily maintain their income have a greater income security than the partner who has become the carer and homemaker. While the carer may get a greater percentage split of the assets they will have fear of where their income will come from, Likewise the stronger income earning partner will have fear around what assets they have to show and what happens if they get sick or cannot work anymore. It is important to note that each partner has their own fears that need to be considered in a fair and equitable way.
The Importance of Collaboration
While the legal framework for how to divide assets in a divorce provides a clear process for asset division, the emotional toll of divorce can lead many couples to dispute settlements aggressively. However, collaborative approaches can lead to more satisfactory outcomes for both parties and their families. Here’s why working together is beneficial:
1. Reduced Emotional Strain
Legal battles can exacerbate feelings of animosity and resentment. By working collaboratively, couples can reduce stress and foster a more amicable relationship, which is especially important if children are involved. Remember your partner will always be the parent of your child so you want to consider the future harmony of the family dealings and an example to your children of how to manage tough situations that nobody likes.
Example: Instead of engaging in a protracted court battle, Jane and Tom could opt for mediation. This process allows them to discuss their needs and concerns in a controlled environment, fostering a cooperative atmosphere.
2. Cost-Effectiveness
Litigation for dividing assets in the divorce can be expensive, draining both emotional and financial resources. Collaborative negotiation or mediation often results in lower legal fees and a quicker resolution.
Example: Jane and Tom might find that the mediation process costs significantly less than going to court, allowing them to preserve more of their assets for their future and their children.
3. Customizable Solutions
Collaborative negotiations allow couples to tailor solutions to their specific circumstances rather than relying on a court’s one-size-fits-all decision. This flexibility can lead to more satisfying outcomes.
Example: If Jane and Tom agree on a division of assets that considers their children’s needs, such as keeping the family home for the sake of stability, they can create an arrangement that suits their unique situation.
4. Maintaining Communication
Collaborative processes can help maintain open lines of communication, which is essential for co-parenting. Working together through the divorce can set a positive tone for future interactions.
Example: By cooperating on asset division, Jane and Tom can establish a precedent for working together, making future discussions about their children’s education or extracurricular activities smoother.
Tax Implications of Asset Division
When dividing assets in a divorce, it’s essential to consider the taxation implications, as these can significantly impact the final outcome. Here are some key points to keep in mind:
1. Capital Gains Tax (CGT)
In Australia, capital gains tax may apply to the sale of certain assets, including real estate and shares. However, transfers of assets between spouses as part of a divorce settlement are generally CGT exempt. This means that couples can transfer assets without incurring a tax liability at the time of transfer.
Example: If Jane and Tom decide to sell their investment property and split the proceeds, they may face CGT on any gains. However, if they agree to transfer the property to one party as part of their settlement, they can do so without incurring CGT at that moment.
2. Superannuation Splits
Superannuation can be a significant asset in a divorce. In Australia, superannuation is generally treated as property and can be divided between the parties. A superannuation splitting order can be issued, allowing the non-member spouse to receive a portion of the member spouse’s superannuation.
Example: If Tom has a superannuation balance of $200,000, Jane may be entitled to a percentage based on her contributions and the future needs assessment. It’s important for both parties to understand the implications of any superannuation split on their future retirement plans.
3. Income Tax Considerations
When determining the divorce asset division, it’s vital to consider the income tax implications of various assets. For instance, some investments may produce income, while others may not, affecting the net financial position of each party post-divorce.
Example: If Jane takes on a rental property that generates income, she must consider her income tax obligations on that property, while Tom may prefer to keep cash or other liquid assets that do not carry ongoing tax implications.
Steps to Achieve a Collaborative Asset Division
To navigate the complexities of asset division in a divorce collaboratively, couples can follow these steps:
1. Engage in Open Communication
Honest discussions about finances, needs, and future plans are essential. Each party should express their priorities and concerns clearly.
2. Seek Professional Guidance
Engaging with professionals such as mediators, Chartered Accountants, and family lawyers can provide valuable insights and facilitate discussions.
3. Explore Options Together
Work together to explore various asset division scenarios. Consider different arrangements that meet both parties’ needs and reflect contributions accurately.
4. Draft a Formal Agreement
Once a consensus is reached, document the agreement formally. This may involve drafting a binding financial agreement or applying to the court for approval of the settlement.
5. Review and Adapt
Life circumstances can change, so it’s important to revisit the agreement periodically and make adjustments as needed. This ensures that both parties’ needs are met over time.
Be Supported as You Divide Your Assets
Dividing assets during a divorce is undoubtedly a complex process, influenced by legal frameworks and individual circumstances. However, by embracing collaboration and prioritizing open communication, couples can navigate this challenging time with greater ease and satisfaction. Understanding Australian family law and the tax implications associated with asset division is essential, but equally important is the approach taken during negotiations.
Ultimately, a collaborative approach can not only preserve resources and reduce emotional strain, but also lays the groundwork for a respectful co-parenting relationship in the future. Jane and Tom’s story illustrates that with patience and willingness to work together, couples can reach equitable solutions that honor their contributions and prioritize the well-being of their family.
Easy to say but with the right advisors to provide guidance and support it can be done, we speak from experience.
If you or someone you know needs assistance for dividing assets in a divorce, contact Bishop Collins Chartered Accountants today for expert advice and support. We will connect you to a family lawyer and we will assist in the identification, treatment, valuation and finally the options to consider and discuss for dividing the assets.