What you may not know about Family Law

Aside from the typical real properties held in individual names, interests held in corporations, in partnership, business interests, superannuation, and trusts may all be included when dealing with property settlements and financial issues in family law matters. The list is endless.

The Court’s approach to property settlements

The Family Court of Australia[1] approaches property settlements utilising five (5) steps:

1. Is the property settlement actually necessary;

2. What are the assets, liabilities, superannuation and financial resources of the parties and what is the value of each interest;

3. What did each party contribute to the relationship at cohabitation, throughout the relationship and following separation;

4. Are either of the parties entitled to more of the asset pool due to their future needs; and

5. Whether the overall property settlement outcome, after going through the above steps, is just and equitable (or fair) in all the circumstances.

The impact of the broad definition of property and duty of disclosure

The Court has wide discretion and extensive powers over the types of orders it can make. At step 2 of the above 5 steps approach, all property interests are included in the Balance Sheet for division.

What is not commonly known is that the definition of property in family law is broad. It includes the traditional forms of property such as real estate, shares, and funds in bank accounts. However, the definition also extends the Court’s reach to business interests, shares in an employee share scheme or other employee entitlements, unsecured loans with family members or business partners, and assets which a party may have otherwise thought were protected in a trust. In addition, the Court has the power to include assets both within Australia, and overseas.

To be able to identify such interests, all parties have an ongoing duty of full and frank disclosure. As a result, there is potential for an individual who is not a party to a relationship breakdown to become joined, or in some way connected to, family law property proceedings.

Examples

By way of example, the duty of disclosure and the Court’s power can result in the following scenarios:

1. Where a parent or business partner has loaned funds to a person who becomes a party to family law proceedings, loan documents and the arrangements surrounding the loan will need to be disclosed. Sometimes, if the lenders calls on the repayment of the loan, the lenders may be joined to the proceedings;

2. Where a party to family law proceedings (party 1) holds an interest in a business, company or partnership with other third parties, party 1 will need to disclose financial accounts and other documents which may be confidential for business purposes. Such documents extend to management accounts, forecasted budgets, any future projections for the entity, and minutes;

3. Where a party does hold an interest in an entity, an expert may be appointed to conduct a formal valuation of the business/company. The party’s interest in the entity is included within the asset pool for division;

4. Where a party holds a controlling interest in a trust which holds substantial assets, those assets are likely to be included within the asset pool for division; and

5. Even where a party (party 1) only receives (or has historically received) distributions from a trust and has no controlling interest in that trust, the other party may join the trustee to the proceedings. Distributions received by party 1 may be considered as a financial resource and reduce any entitlement party 1 may have otherwise had for a future needs adjustment at step 4.

The above examples are the tip of the iceberg — there are a myriad of risks when family law issues are involved. It is becoming more common for clients to seek advice from a Family Law Accredited Specialist prior to the commencement of a relationship to understand their rights and the risks involved. A good legal advisor will consider whether protective measures, such as a Financial Agreement, need to be in place to exert some control over the outcome in the event of a relationship breakdown.

This article was first published by Legalwise on 23 September 2019, and is available here.

1 Whilst some matters under the Family Law Act 1975 (Cth) are delegated for determination by the Federal Circuit Court of Australia, this article refers to both courts holistically as the Court.