Chapter 18 Financial and estate planning on family breakdown, Study Guides, Projects, Research of Family Law

Download Chapter 18 Financial and estate planning on family breakdown and more Study Guides, Projects, Research Family Law in PDF only on Docsity! 1,131 Chapter 18 Financial and estate planning on family breakdown Updated by Nabil Wahhab The big picture .....................................................................................¶18-000 Introduction to financial planning on family breakdown .................¶18-005 The Family Court ..................................................................................¶18-010 What about de facto relationships? ....................................................¶18-015 Estate and financial planning: is it necessary? ....................................¶18-020 Property settlement The four-step approach to property settlement .................................¶18-100 Property settlement step 1: Identification of the property pool .................................................................................................¶18-105 Property settlement step 2: Assessment of contributions ..................¶18-110 Property settlement step 3: s 75(2) ‘‘Future needs’’ ...........................¶18-115 Property settlement step 4: Justice and equity ...................................¶18-120 Superannuation and family breakdown Superannuation splitting .....................................................................¶18-200 Binding death nominations and superannuation splitting ................¶18-205 Taxation and family breakdown Realisation and taxation costs to be taken into account in property valuations .......................................................................¶18-300 Are tax losses property? .......................................................................¶18-305 Superannuation splitting .....................................................................¶18-400 Trusts and family breakdown ..............................................................¶18-450 Investment properties and family breakdown ...................................¶18-500 CGT roll-over relief on family breakdown ..........................................¶18-505 Deemed dividends and company loans ...............................................¶18-510 Part IVA considerations when advising on family breakdown .....................................................................................¶18-515 Stamp duty and family breakdown Stamp duty exemptions on marriage or relationship breakdown .....................................................................................¶18-600 Principal place of residence .................................................................¶18-605 Land tax and family breakdown Land tax and family breakdown ..........................................................¶18-610 C h ap te r 18 1,132 MASTER FINANCIAL PLANNING GUIDE Family trust elections Income and taxation opportunities in making a family trust election ...........................................................................................¶18-615 Income splitting during marriage or relationships and after separation ......................................................................................¶18-620 Indemnities and guarantees from the controlling spouse .................¶18-625 Maintenance Spouse maintenance ............................................................................¶18-700 Child maintenance and support ..........................................................¶18-705 Adult child maintenance ......................................................................¶18-710 Child maintenance trusts .....................................................................¶18-715 Other issues Full and frank disclosure of financial position ....................................¶18-800 Issuing or receiving a subpoena ..........................................................¶18-805 Family Court’s powers over business entities ......................................¶18-810 Third parties standing in the Family Court .........................................¶18-815 When one of the spouses is bankrupt .................................................¶18-820 Binding financial agreements ..............................................................¶18-825 Estate planning for blended families ..................................................¶18-830 Family law mediations .........................................................................¶18-835 1,135FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN Financial agreements: Financial agreements provide a good measure of asset protection on marriage or relationship breakdown because they provide certainty of result on division of assets rather than rely on lawyers and judges to come up with a result that will cost tens of thousands of dollars. However, more recently lawyers have shied away from financial agreements. Why is this and how will this impact on clients? ........................................................................¶18-825 Mediation: The Family Law Rules 2004 mandate that parties undertake Pre- Action Procedures (PAP) before proceedings are commenced. This is an opportunity for advisers to seize upon and be involved in the settlement of their client’s family law disputes. This would be done in conjunction with the family lawyers retained by the client(s) ........................................................................¶18-835 ¶18-005 Introduction to financial planning on family breakdown There are significant financial planning, estate planning and taxation issues and opportunities that financial advisers (and family lawyers) should be aware of and address on marriage or relationship breakdown for their clients. With 40% of first marriages ending in divorce and a higher rate of breakdowns for de facto relationships, divorce or relationship breakdowns can be emotionally and financially draining. Divorce is a reality for many financial planning clients. It is, therefore, incumbent upon advisers and lawyers to consider, plan and implement strategies that take into account marriage or relationship breakdowns when providing financial and estate planning advice to their clients before the marriage or relationship breaks down and be proactive if and when the client’s relationship or marriage fails. Most clients choose to undertake estate planning because an adviser or lawyer identifies significant financial and other benefits to them and their family. A property settlement is the corollary in that it is a compulsory estate plan that clients are forced to undertake. Lawyers and advisers must not shy away when their clients’ relationships or marriages break down. Lack of action or awareness of the issues and opportunities by the adviser (or the lawyer, for that matter) of the financial impact and consequences of marriage or relationship breakdown could have a disastrous financial impact on the client and place a client’s future estate planning and retirement in disarray. With careful planning and cooperation between lawyer and adviser, clients’ financial costs could be kept at a minimum and leave their estate planning intact. This holistic approach that lawyers and advisers give to clients is akin to an insurance policy and crucial, regardless of whether or not divorce or separation will become a reality. From 1 March 2009, the laws on de facto relationships breakdown commenced in Australia with the exception of Western Australia. The new laws were a revolution as they represent a significant departure from the de facto laws that existed in some states. The laws apply to de facto couples and couples in same ¶18-005 C h ap te r 18 1,136 MASTER FINANCIAL PLANNING GUIDE gender relationships. Under the new regime, the rights of de facto partners (including same-sex partners) are equated with those of married couples in relation to matters such as property settlement, superannuation splitting and spouse maintenance. De facto rights are now determined in the Family Court/Federal Magistrates Court, under the Family Law Act. It was the revolution that had to happen. Previously, some people may have entered into de facto relationships deliberately because of the difference in the laws that applied to de facto couples versus married couples upon a relationship breakdown. From 1 March 2009, that difference no longer applies. Accordingly, now more than ever before, there is a need to work through the mire with a view to try and preserve the client’s financial and estate plan. How will this be achieved? Some of the advice that an adviser should give a client include consideration of whose name the assets should be held in — the client, their spouse or an entity, and what involvement should the client/spouse have in the running of a business that is being set up by the adviser on behalf of the client. Traditionally advisers, and lawyers for that matter, have advised clients to have their spouse as partners in the business. While this may provide tax benefits during the course of the relationship or marriage, consideration ought to be given by the adviser and the client as to whether or not this is a sound structure, given the risk of marriage or relationship breakdown. One of the considerations that need to be taken into account is the level of involvement of a non-financial activist spouse in companies or trusts set up by the financial activist spouse. This may have an ultimate bearing on the entitlement of that spouse in short relationships and short marriages. Financial advisers need to also understand who their client is. While this issue may seem trivial, in fact it has significant legal consequences. Invariably an adviser may be acting for the financial activist spouse and, as part of the financial planning for that spouse, advice is given that certain assets be purchased in the name of the non-financial activist spouse to minimise tax or for other such reasons. By doing so, the professional adviser has inadvertently become the adviser for both clients. However, the adviser believes that they are the financial activist spouse’s adviser. This is a misconception and has serious ramifications in relation to whether the adviser has discharged their obligation of assessing ‘‘the client’’ risk profile before investments are purchased in the name of the non-financial activist spouse; the level of contact between the adviser and the non-financial activist spouse; privacy issues and flow of information between the files of both clients; the role of the adviser on marriage breakdown; and whether the adviser can have or retain ‘‘both clients’’. Purpose of Chapter 18 This chapter is a practical guide for advisers to use in their daily practice. Its purpose is to outline many of the estate and financial planning issues that advisers should be aware of and should incorporate in a checklist to examine ¶18-005 1,137FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN and re-examine on behalf of their clients, not just at the first point of contact but throughout the duration of their professional relationship with the client. Given a client’s reliance upon professional advisers for advice, it is incumbent upon advisers to keep in mind the various financial and estate planning issues that are raised in this chapter whenever they give advice to clients. This is not to suggest that the adviser should become a de facto lawyer in giving advice to clients. It is about the professional adviser being attuned to the various legal ramifications of financial decisions that clients may make and being able to identify those issues. The adviser and the lawyer work together to ensure that clients make informed decisions. ¶18-010 The Family Court The Family Law Act 1975 (the Act) commenced in January 1976. The Act confers wide powers upon the Family Court in relation to property and financial resources of separated spouses. (In de facto matters, such powers were until 2009/10 conferred under the Property (Relationships) Act 1984 in New South Wales on the Supreme Court, District Court and Local Court (depending upon the pool of assets under consideration).) The word ‘‘property’’ is widely defined in the Act and includes real estate or shares in public or private companies, interest in trusts (where the spouse is a controller or a spouse is a beneficiary and where there has been regular distributions from the trust), interest in any business and bank accounts. The Family Court does not distinguish between assets held in the name of a spouse or in a company or trust controlled by a spouse or in circumstances where a company or trust, for instance, are controlled by third parties who are mere puppets for the spouse in Family Court proceedings. They are all ‘‘matrimonial property’’. The decision of the High Court in Kennon v Spry highlighted the broad powers given to the court in relation to what ‘‘property’’ is. The decision may have some significant ramifications on trust law generally and also on areas that traditionally viewed trusts as separate entities. This includes bankruptcy cases where trusts are generally excluded from a property that vests in the trustee in bankruptcy. In Kennon v Spry, the High Court confirmed what the Family Court has done over the years — including trusts in the general property pool of the parties. The courts have endorsed the concept that a typical family trust is in effect for the family, and an individual cannot exclude their spouse from the fruits of that trust even if the trust was originally established to benefit the parties’ children. Superannuation is ‘‘another species of assets’’. In some cases, superannuation will be treated as if it is property but in other cases it will be treated as a financial resource. The nature, characteristics and form of a superannuation interest will determine whether super will be added to the property pool in Step 1 (of the four-step approach adopted by the court which will be discussed in ¶18-100) or will be taken into account in Step 3. This distinction is not ¶18-010 C h ap te r 18 1,140 MASTER FINANCIAL PLANNING GUIDE up to two if not three years, or even longer. Even if the parties were divorced, the wife would still have received the house by survivorship. In all likelihood the husband in the case did not intend for the above to occur. He was in the Family Court because he wanted a financial separation from his wife. The question that must be considered is whether the lawyer for the husband, or for that matter his professional adviser breached any duties to him. It is arguable that they should have advised that death meant the person he was trying to secure assets from would inherit everything, but that a few small steps could have avoided this outcome. In the example above, the husband could have severed the joint tenancy on separation, changed his will and changed his binding death nomination. These steps were simple yet necessary and it was crucial to have been taken or for the husband to have been advised upon and his mind be applied to those issues. This is where the adviser’s role becomes critical immediately upon separation. The adviser’s role, however, is not confined to providing advice of the type referred to above on marriage breakdown. The role of the adviser is dynamic and ever changing, and given changes in community standards and developments in society, the adviser needs to turn their mind to issues that impact upon their clients. One timely example relates to baby boomers assisting their Generation X and Y children by providing them with a deposit on a house or giving them money to set up a business. It is not unheard of, in Sydney at least, that parents give $500,000 and in some cases more to an adult child to assist them in buying a home. What is unclear in such cases is the basis of the advancement of funds. That is, did the parents intend the money advanced to be a gift or a loan? If a gift and the adult child was in a relationship already, was the money advanced to the adult child or to them and their partner? Is the partner aware of the nature of the advance? How is that proven in the future if the parties separate and the partner denies the advance as a loan because they were unaware of the terms of the advance or they were not involved in discussions? The adviser should give advice to the client to deal with the above issues. Advisers are constantly approached by clients asking them to liquidate assets for purposes such as the above. The adviser’s obligations extend to enquiring about the purpose of the advancement; how the advancement of the monies to the Generation X and Y children should be done; that documentary evidence should be put in place before the funds are advanced; whether interest rates will be charged or should be charged if certain conditions come into play. Even if the adviser does not know the legal implications of the above, the client should be advised (and such advice should be documented in a file note at least) to seek legal advice before the money is advanced. The above steps are necessary because the baby boomer client, while wishing to benefit their Generation X or Y child, would not want to see the funds lent or advanced being shared by a future spouse of their son or daughter in the ¶18-020 1,141FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN event of marriage breakdown. A deed of loan evidencing the advancement of funds could be entered, which outlines the amount given in situations when the funds are repayable, such as marriage breakdown, sale of business, or death of the adult child. If the adult child later separates from their spouse, the money advanced would, prima facie, be a liability that will reduce the property pool to be divided between the spouses. If, on the other hand, the funds advanced were not the subject of documentation such as a deed of loan, the adult child and the parents will be put to the task of proving the existence of the debt and, if this is not established, the court may only accept that the money advanced was a gift. A monetary gift made on behalf of a spouse is taken into account by the court at Step 3; however, it does not receive the same weight as a loan that has the effect of reducing the pool of property available for distribution. The difference between gift and loan is not cosmetic. It is significant and substantive. Even if there is a deed of loan, that may not be sufficient to get the client over the line and have the debt deducted from the pool of property. This generally occurs because a spouse would argue that the debt is not a real debt or is not repayable. It is therefore crucial to consider whether the baby boomer should insist on there being a Binding Financial Agreement between their adult child and their spouse before the money is lent, which deals with the financial consequences relevant to the money to be advanced in the event of a breakdown of the relationship or marriage. There are a number of advisers who set up trusts on behalf of their clients by simply buying a standard trust deed without giving any consideration to the client’s particular circumstances. There is a potential negligence claim here as the adviser needs to consider whether or not the trust should benefit a child of the client (or that child’s spouse or former spouse), who should be the appointor or appointors of the trust, who should be the trustee of the trust and whether there should be any statements of intentions as to the reasons for the setting up of the trust to be incorporated in the trust deed. The High Court decision in Kennon v Spry is a reminder of how crucial it is to turn your mind to the structure as to who should be the appointor, the trustee and the beneficiaries from the outset rather than seek to amend the trust deed after the event. More recent cases in the Family Court have provided guidance on what happens when a trust is set up in a way that control is not conferred on a party but the control remains with, for example, the parents of the spouses. In a recent case the court found that such a trust was not property for family law purposes given that the husband did not have the control of the trust. In that case the trust owned the family home. The husband’s father set up the trust and bought the home which the parties used as their matrimonial home during the marriage. The wife was unable to convince the court that the Trust is the alter ego of the husband as the husband’s father was in real control of the trust. Advisers should also be aware that their clients can enter into binding financial agreements (before the client gets married or into a relationship, ¶18-020 C h ap te r 18 1,142 MASTER FINANCIAL PLANNING GUIDE during marriage or the relationship, following separation or divorce). Until 1 March 2009 for most states except SA and WA, couples used to enter into domestic relationship agreements. These types of agreements have the effect of ousting the court’s jurisdiction. They outline the financial consequences to each of the parties on relationship or marriage breakdown. Such certainty of outcome may be necessary because of the significant wealth that a client has as compared with that of their spouse, or because the client is in business with third parties where certainty that the business will not have to be sold as a result of a claim by a spouse in the future is necessary for the running of the business and the financial planning not only of the client but also of the business partners. In cases where one of the spouses refuses or simply does not want to enter into a binding financial agreement, there are practical steps an adviser can take to protect their client to some extent. One of the greatest debates in family law cases centre around the initial financial contributions of spouses. In cases where a client has some wealth and they cannot convince their spouse to enter into an agreement, then it is important for the adviser to ensure that there are objective records available to establish the client’s initial financial contributions. This can take the form of bank statements, share trading records showing the number of shares owned and the price at the end of the relationship or marriage, valuation of real estate, copies of the financial statements of any company or trust under the spouse’s control. These records must be kept in a secure place and not destroyed. They may come in handy one day if the client and their spouse separate. All of the above are examples of the value-added service that an adviser can and should provide to their client. Failure to identify the issues may result in a negligence claim against the adviser not only by the client but (as we saw above) by intended but disappointed beneficiaries. PROPERTY SETTLEMENT ¶18-100 The four-step approach to property settlement Until 2012, the process for the making of orders pursuant to s 79 of the Act was commonly dealt with by reference to a four-stage process (see eg Hickey & Hickey). That process involved: (1) identification and valuation of the property of the parties (2) identification and evaluation of contributions to the property (including property no longer owned by the parties) (3) identification and assessment of the various matters in s 79(4)(d) to (g) including, to the extent they are relevant, the matters in s 75(2), and (4) consideration of matters of justice and equity. In the High Court of Australia decision of Stanford v Stanford [2012] HCA 52; [2012] FamCAFC 1 in 2012, the joint judgment of French CJ, Hayne, Kiefel and ¶18-100 1,145FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN As for the family home or other real estate, the Family Court has traditionally looked at the value of such property as at the date of hearing or as close as possible to that date rather than as at date of separation. This is because the court takes the view that any increase in the value of real estate occurs not by reason of any direct contribution by either of the parties but by reason of fluctuation in the property market. One wonders why the Family Court has taken this approach given that generally the court does not give any, or any significant weight to the spouse who continues to make mortgage repayments on the family home, notwithstanding that that spouse no longer resides in the family home following separation (as the court assesses that such contributions would have been offset by the homemaker and parenting role carried out by the other spouse during separation). Taxation liabilities Taxation liabilities have the effect of reducing the property pool by the amount of tax liability that either or both of the parties have to pay. This includes unpaid income tax and capital gains tax payable in relation to property sold. As for CGT that may become payable in the future by a spouse who will retain a particular property or shares in a company, the test that the court applies is whether or not the property is likely to be sold in the short to medium term by that spouse. If the answer is in the affirmative, then the court will generally reduce the pool of property by the amount of the CGT that would become payable on disposal. If the answer is in the negative, but the court is satisfied that the spouse will ultimately dispose of the property in the future, the court takes the CGT into account under s 75(2) (Step 3). Further, if the property was purchased for investment purposes, then the tax consequences have generally been taken into account in the first step, thus reducing the value of the property pool by the tax that would be payable. ‘‘Add-backs’’ ‘‘Add-backs’’ are notional property that the court adds back to the property pool which has the effect of enlarging the pool. Up until recently, add-backs occupied significant court time arguing over property that no longer exists and the reasons why this ‘‘property’’ ought to be added to the property pool. The Full Court has recently made it clear that add-backs are a thing of the past. If the property no longer exists then how could it be added back. This appears to be true in relation to all except legal fees, waste (such as gambling) and ‘‘interim property settlement Orders’’. Family law proceedings can take a significant time to resolve. From date of filing an application to date of trial is about three-year delay. Such delay is unfortunate but that is the reality. The consequences for parties though can be far reaching in particular in relation to partial or interim property orders (discussed in detail below). The Full Court of the Family Court in the decision of Bevan and Bevan made it clear that add-backs need to be dealt with ‘‘carefully, recognising the assets no longer exist, but that the disposal of them forms part of the history of the ¶18-105 C h ap te r 18 1,146 MASTER FINANCIAL PLANNING GUIDE marriage — and potentially an important part’’. The court went on to say that the court can take into account assets that no longer exist when the court looks at s 75(2) being the third stage in the assessment where the court looks at whether there should be an adjustment of the percentage notional division made by the court in respect of the contributions assessment in respect of the existing assets and superannuation. The court does this relying on s 75(2)(o) being ‘‘any fact or circumstance which, in the opinion of the court, the justice of the case requires to be taken into account’’. To satisfy the court that an item of property that is no longer in existence should be added back, a party must be able to show that the item of property was in some way wasted by the spouse in control of the item. Examples of add-backs include legal fees paid from capital and assets that were wasted by a spouse, such as by gambling. In relation to legal fees paid, these will generally be added back if they were paid from capital. That is, if a spouse withdraws money from a savings account that the parties had as at the date of separation or sells an asset to pay legal fees, the legal fees are added back as notional property and will be taken as if there has been a partial distribution in favour of the spouse who paid the legal fees from that savings account or disposal of the asset. On the other hand, legal fees paid by a spouse from their earnings are not generally added back as they have been paid from that spouse’s earnings. However, a judge still has the discretion to add-back the legal fees paid from earnings or to exclude legal fees paid from capital. The circumstances of the case can, in some instances, sway judges to act in this manner. For example, in cases where a judge makes a finding of non-disclosure, and where one spouse pays legal fees from capital and the other spouse pays legal fees from borrowings, there have been cases where judges have ignored the legal fees paid and excluded the loan obtained to fund one party’s legal fees. Most advisers and lawyers also do not appreciate that when adding back certain property and then dividing the pool say equally, then the pool is enlarged by the amount added back and then divided between spouses. So the spouse pushing for an add-back could be sharing in something that no longer exists. If that spouse receives 60% of the total property, then an add-back would see that spouse receive 60% of something that no longer exists. Thus, proportionality needs to be considered as the add-back may hold up settlement of a family law matter because one party is convinced that a certain sum be added back. The reality is, in an add-back, both parties end up sharing the amount added back. This was never the intention. So perhaps consideration ought be given to depart from add-back and argue that a spouse has received a financial benefit and seek a higher contribution of what is left in the pool or seek an adjustment back against the other spouse from their share of the property pool. The latter would be better argued in cases such as waste. ‘‘Assets waste’’ ‘‘Assets waste’’ has become more popular in recent times in family law disputes. The court has to make a finding that the spouse who dealt with an ¶18-105 1,147FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN asset did so with reckless indifference to the parties’ accumulation of the pool. It is difficult to establish that a spouse has been recklessly indifferent to the asset if the asset has been lost, given the test that the full court has formulated. An extreme example of waste is where a spouse gambles $100,000 at the casino and loses the money, then the court will add as notional property the amount of property that has been wasted by that spouse, namely $100,000. In the overall property division the court will take into account that that spouse has received the property that has been wasted as partial distribution. Gifts and inheritances Gifts and inheritances are treated differently to assets accumulated by spouses. If the inheritance or monetary gifts have been intermingled in the parties’ property pool, the court would still take them into account in assessing each of the parties’ contributions. However, if the inheritance or gifts, for instance, were not intermingled or were received close to or following separation, it is likely that the court will quarantine them from the property pool in Step 1 on the basis that the other spouse did not make any contributions to the inheritance or gift. Notwithstanding this, however, the court would still take such inheritance or gifts into account in Step 3 (s 75(2) factors). ¶18-110 Property settlement step 2: Assessment of contributions In assessing the parties’ respective contributions to the acquisition, conservation and improvement of the pool of property, the court assesses the following: ● the parties’ respective initial financial contributions ● gifts and inheritances received and their application ● the direct and indirect financial contributions of each of the parties ● the direct and indirect non-financial contributions of each of the parties, and ● the parenting and homemaker contributions made by each of the parties. Initial financial contributions It is incumbent upon advisers to advise clients who, at the commencement of their cohabitation or marriage (whichever is earlier), own property that they should obtain valuation of the assets so as to be able to prove the value of the assets and therefore the value of their initial financial contribution in the event of separation. For businesses owned by a client, an adviser should advise the client to retain the financial statements and income tax returns for the business for the three financial years prior to the commencement of cohabitation or marriage as these documents can be used to value the business if the client and their spouse were to separate in the future. ¶18-110 C h ap te r 18 1,150 MASTER FINANCIAL PLANNING GUIDE generally the court assesses contributions made by spouses equally. This is notwithstanding one spouse was the financial activist and the other spouse attended to the homemaking and parenting role during the marriage. What the Family Court has developed in house and garden cases is a partnership analysis where each partner contributes to the partnership. If one spouse is the financial activist, then the other spouse freed that party to pursue wealth-making activities and thus to be a contribution not just to the welfare of the family but also to the generation of wealth. There have been cases determined by the Family Court going back to 1994 where the court gave loading to a financial activist spouse contributions entitlement because of what the court termed as ‘‘special contributions’’, ‘‘business acumen skills’’ and ‘‘entrepreneurial skills’’. These cases started with the case of Ferraro [1992] FamCA 64. However, in the year 2000 in the case of Figgins [2002] FamCA 688, the court started to distance itself from such concepts. The recent decisions of the Full Court in Kane and Kane [2013] FamCAFC 205 and Hoffman and Hoffman [2014] FamCAFC 92 appear to lay to rest such concepts and confirm that such a path was a ‘‘terrible mistake’’ that the court embarked upon and it should not go down that path. In 2015, in the case of Fields and Smith [2015] FamCAFC 57 (17 April 2015), the Full Court all but laid to rest the concept of special contributions. No doubt assessing homemaker and parenting contributions versus financial contributions is like comparing apples and oranges. What makes an apple better than an orange in a basket is difficult to say. In a way the court does not want to consider the quality of contributions that each spouse makes as that would be a very difficult and time consuming task and is highly subjective. It is a very difficult task to evaluate contributions where one party was homemaker and parent and the other party was the financial activist as the evaluation and comparisons are not conducted on a level playing field. In essence, you are comparing two different matters, one can be quantified and the other cannot. In Kane and Kane, the parties had a net asset pool of $4.2m of which $3.4m was in a self managed superannuation fund (SMSF). The parties were married for 28 years and had four children; the youngest being almost 18 years at the time of trial. Shortly prior to separation, the parties sold a jointly owned company for $1,650,000. Of this sum, the amount of $1,060,400 was paid into the parties’ SMSF. The value of the SMSF at the date of trial was $3,420,294. The trial judge awarded the husband, a retired businessman, two-thirds of the SMSF, and the wife one-third having acknowledged ‘‘the assertion of the husband that the application of his acumen to investment decisions, which caused the superannuation fund to prosper, was a contribution of significance which differentiates his contributions from those of the wife and entitles him to a much greater share of the superannuation interests’’. The Full Court of the Family Court overturned the decision, ruling the trial judge had given unacceptable weight to the husband’s ‘‘special skill’’. Deputy Chief Justice Faulks made the following comment ‘‘. . . the trial judge’s ¶18-110 1,151FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN discretion miscarried because he took into account the ‘special skills’ of the husband in accordance with what he might reasonably have thought was authority binding on him, but which in my opinion should not have been’’. Faulks DCJ further stated that ‘‘The reason for attributing (or not) special weight to the contributions of the husband in this case may be tested by asking whether, if the parties (before the husband invested what the learned trial judge found were joint funds) had been asked if they agreed that while losses would be shared equally between them, any gain would be disproportionally acquired by the husband there would have been agreement by the wife or the husband to proceed.’’ In Hoffman and Hoffman, the parties had net assets of almost $10m. The parties resided together for 36 years. The trial judge ordered that the assets be divided equally. The husband appealed submitting that his ‘‘‘[s]pecial [s]kills and [e]ntrepreneurial flair’ applicable to both substantial investments in real property and the share market’’ should have resulted in him receiving a greater proportion of the pool. The Full Court dismissed the appeal and rejected the notion that there was a binding principle of law relating to ‘‘special contributions’’ or that there was any legitimate guideline in respect of such contributions. The Full Court quoted O’Ryan J in D & D [2005] FamCA 1462 at [271] who stated ‘‘. . . the notion of special contribution has all been a terrible mistake . . .’’. The above spells the death of the argument that has been advanced in big money cases about special contributions and therefore a greater entitlement to the financial activist spouse. However, that does not mean that, in an appropriate case, the court would not assess a party’s contributions as higher than 50%. While this will involve the court in an analysis of the contributions made and cause judges to go down a very rocky terrain of balancing contributions that can be measured versus those that cannot be measured by a known yardstick, namely in dollar terms, such cases may crop up. In the decision of Smith and Fields [2012] FamCA 510, Murphy J embraced not the big money cases concept that appeared in prior cases where there was an emphasis or finding of special contributions in one spouse, generally the financial activist spouse but the circumstances surrounding the accumulation of the parties’ wealth. In Smith and Fields, the pool was valued between $32m–$40m, which had been accumulated by the parties after nearly 30 years of marriage. The judge rejected the concept of special contributions, favouring instead an assessment of the form, nature and characteristics of the contributions made by each of the parties in ultimately awarding the husband 60% of the pool. His Honour said: ‘‘. . . it is then important to identify the nature, form, characteristics and extent of the contributions made by each of the parties by reference to the sub-paragraphs of s 79(4) of the Act — in effect to identify each and all of those contributions of varying types and extent and compare them. 30. Having done so, what remains is the exercise of discretion — to do what is just and equitable — as between these particular parties, not ¶18-110 C h ap te r 18 1,152 MASTER FINANCIAL PLANNING GUIDE because one or the other has ‘special skills’ or because there is a ‘matrimonial partnership’, but because the identification and comparison of contributions and the ‘general counsel of experience’ pulls toward a particular result. Or, as Coleman J recently put it: ‘Given that the evaluation of contribution based entitlements inevitably moves from qualitative evaluation of contributions to a quantitative reflection of such evaluation, there will inevitably be a ‘‘leap’’ from words to figures. That is the nature of the exercise of discretion, whether it be in the assessment of contributions in the matrimonial cause, assessment of damages in a personal injuries case, or determination of compensation in a land resumption case . . ..’’’ Ultimately the judge took into account the husband’s stewardship of the company in reaching the conclusion that the parties’ contributions were not equal. His Honour said: ‘‘However, an analysis of those contributions points to a greater contribution having been made by the husband directly to the business, predominantly by reference to the design of the buildings which the business constructs and sells so successfully and to what I will call the stewardship of the company including the plainly clever strategies and planning that have given it such success and to the financial and other planning that have led to it doing, relatively speaking, remarkably well in very adverse macro-economic conditions. These are important contributions in which it is, in my view, both appropriate and just to distinguish between the parties to this lengthy union. I consider that disparity to be particularly evident and pronounced in the period post- separation.’’ After reaching the view that the parties’ contributions were not equal, his Honour struggled as to how to jump from a qualitative assessment of contributions to a quantitative assessment. His Honour then said: ‘‘91. I consider that it is the ‘real worth in money terms’ that should inform the assessed difference in contributions between the husband and the wife in this case when the ‘leap’ described by Coleman J in Steinbrenner is performed.’’ His Honour then took the view that a 20% disparity between the husband and the wife was appropriate. In a pool of $30m, that disparity is worth in money terms $6m. That is, the first $6m would be received by the husband and the balance be divided equally. Smith and Field is on appeal and yet to be determined. What is noteworthy is that Murphy J was one of the judges on the full court in the case of Hoffman and Hoffman. After assessing the contributions made by each of the parties to the acquisition, conservation and improvement of the property pool, the court notionally divides the property pool, for example, 50/50, 60/40, etc, and then moves to the next step. ¶18-110 1,155FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN to ordinary common law and equitable principles, the existing legal and equitable interests of the parties in the property. So much follows from the text of s 79(1)(a) itself, which refers to ‘altering the interests of the parties to the marriage in the property’. The question posed by s 79(2) is thus whether, having regard to those existing interests, the court is satisfied that it is just and equitable to make a property settlement order.’’ Section 79 must be applied in accordance with legal principles ‘‘Second, although s 79 confers a broad power on a court exercising jurisdiction under the Act to make a property settlement order, it is not a power that is to be exercised according to an unguided judicial discretion. In Wirth v Wirth (1956) 98 CLR 228 at 231–232, Dixon CJ observed that a power to make such order with respect to property and costs ‘as [the judge] thinks fit’, in any question between husband and wife as to the title to or possession of property, is a power which ‘rests upon the law and not upon judicial discretion’. And as four members of this Court observed about proceedings for maintenance and property settlement orders in R v Watson; Ex parte Armstrong (1976) 136 CLR 288 at 257: ‘The judge called upon to decide proceedings of that kind is not entitled to do what has been described as ‘‘palm tree justice’’. No doubt he is given a wide discretion, but he must exercise it in accordance with legal principles, including the principles which the Act itself lays down’ . . ..’’ Judges must not conflate the statutory requirements ‘‘Third, whether making a property settlement order is ‘just and equitable’ is not to be answered by beginning from the assumption that one or other party has the right to have the property of the parties divided between them or has the right to an interest in marital property which is fixed by reference to the various matters (including financial and other contributions) set out in s 79(4). The power to make a property settlement order must be exercised ‘in accordance with legal principles, including the principles which the Act itself lays down’ (R v Watson, Ex Parte Armstrong (1976) 136 CLR 248 at 257). To conclude that making an order is ‘just and equitable’ only because of and by reference to various matters in s 79(4), without a separate consideration of s 79(2), would be to conflate the statutory requirements and ignore the principles laid down by the Act.’’ The High Court concluded that adhering to the above three fundamental propositions ‘‘gives due recognition to ‘the need to preserve and protect the institution of marriage’ identified in s 43(1)(a) as a principle to be applied by courts in exercising jurisdiction under the Act. . . . These principles do so by recognising the force of the stated and unstated assumptions between the parties to a marriage that the arrangement of property interests, whatever they are, is sufficient for the purposes of that husband and wife during the ¶18-120 C h ap te r 18 1,156 MASTER FINANCIAL PLANNING GUIDE continuance of their marriage. The fundamental propositions that have been identified require that a court have a principled reason for interfering with the existing legal and equitable interests of the parties to the marriage and whatever may have been their stated or unstated assumptions and agreements about property interests during the continuance of the marriage’’. It is still too early to work out whether the Family Court will embrace the concepts elicited by the High Court given that Stanford was a unique case which involved an involuntary separation between spouses and where the spouse applicant was represented by a litigation guardian. How does the Family Court deal with De Facto matters Under the old law as contained in the Property (Relationships) Act 1984 (NSW) (which law was similar in some of the other states laws on de facto relationships), the only matters that the state courts took into account in determining the financial consequences on relationship breakdown was the contributions that were made by each of the partners during the course of their relationship to the property pool. The property pool did not include superannuation; albeit in a recent Supreme Court decision it was suggested that while superannuation was a financial resource, it would or should have been taken into account in the property pool assessment (the difficulty with this is that for over 20 years superannuation was somewhat ignored in the assessment of contributions by lawyers acting for parties and the courts!). The state courts also developed a concept of compensation to counteract contributions made by a de facto partner. That is, in determining someone’s entitlement to the property pool based on their contributions the courts looked at the benefits that a spouse received from the other spouse such as gifts, holidays, a nice home to live in, restaurants attended, etc, to reduce that party’s overall entitlement. This made it difficult to see how relationships could be viewed as partnerships, a concept that was developed very early on in the family law sphere when the Family Court dealt with property matters. Even if we ignored the concept of compensation, the assessment of contributions by the state courts (be in Local, District or Supreme Court) have been so inconsistent that it was difficult to advise a client as to the likely outcome. State courts generally, however, were less robust in their assessment of contributions. Accordingly, a case that was determined in the state courts versus a case determined in the Family Court with the same set of facts, might have yielded significantly different results. The Family Law Courts have had a wave of de facto cases filed. There have been a number of cases that have been filed where the other spouse have taken issue with jurisdiction, namely whether the de facto spouse applicant can show that the de facto relationship was in existence for more than two years. In the case of Jonah & White [2011] FamCA 221, Murphy J found that parties who were in a relationship for 17 years were not de facto as that term is understood under the Act. His Honour found that they lacked the ‘‘coupledom’’ requirement that is so essential to establish jurisdiction. The ¶18-120 1,157FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN matters that his Honour took into account as indicia of there being no de facto relationship (as against a relationship) were: ● each of the parties kept and maintained a household distinct from the other ● no relationship between the applicant and the respondent’s children who were relatively young when the relationship commenced ● the relationship between the applicant and the respondent was clandestine and the time spent between the parties was spent (on either party’s case) very much together, as distinct from time spent socialising as a couple ● the respondent emphasised during the relationship the limits of the relationship with the applicant and, in particular, if circumstances ever required him to ‘‘make a choice’’, he would ‘‘choose’’ his wife and family over the applicant ● despite the regular monthly payments (about $3,000 per month) and the payment of $24,000 the parties maintained no joint bank account; engaged in no joint investments together; and acquired, or maintained, property in their own individual names ● the parties rarely mixed with each other’s friends ● the respondent ran what seems to have been a successful business, in which for some (early) years, the applicant was employed, but the parties did not mix with the respondent’s business associates. After the applicant’s employment with that business had ceased, she had no involvement with it at all ● there was virtually no involvement by the respondent in the applicant’s life in Brisbane (where she lived between about 1996 and 2006), and virtually no involvement by the respondent in the applicant’s life in Sydney where she has resided since 2006 ● the respondent accepted that he hoped that the relationship with the applicant was permanent, he considered the relationship as an ‘‘affair’’ ● there was very little time spent by the applicant and the respondent with the applicant’s family ● the parties did not have a ‘‘reputation’’ as a couple; indeed, there was, on the evidence, very few public aspects to their relationship. The court made it clear that how one party regards a relationship (in this case, ‘‘an affair’’) is not determinative as to whether or not a de facto relationship actually exists or not. Having regard to the facts in Jonah & White, the court found that the parties were not in a de facto relationship. The effect of this is the applicant could not make a claim for property settlement against the respondent. No doubt the aim of the new de facto laws is to unify the legal consequences that will flow on from a relationship or marriage breakdown. Of course, there will still be a range of possible outcomes, however, it is likely that the range of ¶18-120 C h ap te r 18 1,160 MASTER FINANCIAL PLANNING GUIDE whether to make an interim order, the overarching consideration is the interests of justice. That is, the court has to be satisfied that in all the circumstances it is appropriate to exercise the power. (2) have regard to the matters in s 79 (FLA s 79(2) and 79(4)). A detailed enquiry, however, is not necessary but there must be some assessment of the factors in s 79. The interim order, however, has to be conservative so that the final outcome cannot be compromised by the interim order. Recently, judges have been quick to allow interim or partial property settlement orders to be made. These are orders applied for by one spouse to receive part of the available property on an interim basis. Generally, this is able to be done where there is cash at bank available and the funds are locked up because they are in joint names. A spouse would apply for funds to be released to them for partial property. The applicant does not have to show a reason for wanting the money. The test adopted by the court in deciding whether to make an order is this: ‘‘the overarching consideration is the interests of justice’’. This is a very loose concept and it appears to have been interpreted in this manner: if the order sought is less than what a party’s entitlement would be at a final hearing then they should be entitled to receive their entitlement ‘‘early’’ and deal with it as they please. The above appears to offend the concept of there being one property settlement not multiple or interim property settlement/s. Judges routinely say that when one receives their partial settlement then whatever they do with the property is their prerogative. That in itself can cause injustice if that is what judges do at a final trial. Take for example the spouse who did not work during the marriage, the other spouse’s income is not sufficient to support the other spouse for there to be an interim spouse maintenance order made, and the spouse receives say $150,000 in partial property settlement which they apply over three years of waiting for the final trial to come on in meeting their needs. The suggestion that the $150,000 is part of that spouse’s entitlement suggests that add-backs are back in a different guise. The more worrying though about the approach above is that if the court considers that the spouse already received part of their entitlement, that suggests that the discretion conferred on judges in achieving justice and equity is being curtailed and that goes against the principles in the Act. How could justice and equity be achieved if the pool available for distribution is $150,000 less than what it was or should be? The spouse who received the $150,000 spent the money on meeting their needs (thus obviating the need for the court to determine say a spouse maintenance application), the other spouse has more money available to them because the court did not make an order against them to support the other party. If that other spouse spends the surplus because of the court not making the order against them, that may then cause injustice against the spouse who received the $150,000. ¶18-120 1,161FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN SUPERANNUATION AND FAMILY BREAKDOWN ¶18-200 Superannuation splitting The Family Court has the power to split superannuation interests between separated spouses. There are a number of super interests that are unsplittable, such as small super interests of less than $5,000. The court still has discretion as to whether to split super or not. In the first supersplitting case decided by the Family Court after the amendments came in, the trial judge notionally split the super between the spouses 49/51 in the husband’s favour, but when applying Step 4 said that the wife needed to rehouse herself and the children and that she needed the cash now rather than keep it all in super. The judge, however, was still keen that the wife have some super in retirement and ultimately gave her 20% of the husband’s super interest and made up the balance of her super entitlement from the other property the parties owned. In the first supersplitting case decided by the Full Court of the Family Court, it was held that superannuation was property regardless whether or not a party seeks a superannuation splitting order. However, a differently constituted full court in the case of Coghlan and Coghlan (2005) FLC ¶93-220 held that superannuation was not property. The Full Court held that ‘‘Superannuation interests are another species of asset which is different from property as defined in s 4(1), and in relation to which orders also can be made in proceedings under s 79’’. C v C highlighted the importance of understanding the nature, form and characteristics of a superannuation interest. That is, one has to consider whether: ● an interest is in the growth or payment phase ● an interest is capable of being commuted to a lump sum ● the interest was accumulated before, during the relationship or marriage or a combination of both periods ● the interest is capable of being paid as a lump sum or pension or combination of both (where the interest is in the accumulation phase). Although the changes to superannuation in 2007 somewhat diluted the benefits of superannuation splitting, there are still situations in which super can still be used as weapon or shield by a spouse. The nature of a superannuation interest is that investments inside a superannuation fund is taxed concessionally. Investment earnings in a super fund, in the growth phase, is taxed at 15% flat rate. Earnings in the payment phase attract zero tax. Further, drawing down on a super interest after age 60 is generally tax-free. As announced in the 2016 Federal Budget, the government is considering some significant changes to superannuation. At the time of writing, it was unclear if all of the changes proposed would be passed into law or the impact ¶18-200 C h ap te r 18 1,162 MASTER FINANCIAL PLANNING GUIDE of such changes on how lawyers and advisers would approach superannuation. In any property settlement, the super spouse can use super as a way to extract a better deal. If for example, the super spouse knows that the non-super spouse needs the cash to rehouse themselves, they could offer part of their super interest as a way to reduce the cash payment ultimately to be made. By the same token, the super spouse would not want to split the super if they can offload an investment property to the other spouse, thereby retaining the super interest intact. Superannuation splitting may take prominence again from 1 July 2012. The government has announced that from that date, if a person has a superannuation balance of $500,000 or more, then the maximum they can contribute in any one year will be $25,000. However, it is unclear what scope, if any, will exist for spouse superannuation splitting to be used to keep a person’s account balance under $500,000. For spouses who are concerned with meeting their future retirement plans, and those who are attuned to the significant tax benefits that super confers on them as they approach retirement, they may not be so willing to give up their super for the cash as they may never be able to accumulate the super they give to their spouse in a property settlement. It may be far more financially advantageous to them to retain the super and part with the cash, as super is taxed concessionally, and they will ultimately benefit in retaining their super. It is a balancing act whether to give up the super or retain it. Financial advice is crucial in this area. Opportunities for financial advisers The Family Law Regulations 1984 prescribe a method for valuing superannuation interests. Generally, there are no issues of valuation for accumulated funds. The valuation issues relate to defined, hybrid funds and self managed superannuation funds (SMSF). The Regulations do not provide a method for valuing SMSFs. These are valued generally by forensic accountants and if the fund owns real estate a property valuer is also required to value the real estate. The super splitting law recognises that some people will marry or have many relationships and divorce or separate more than once in their lives, and provides for splitting when this occurs. The Act allows for more than payment split to operate on the same superannuation interest. The provision works by setting an order of priority with earlier spouses taking before later spouses. The Act provides that super trustees must be provided with procedural fairness before a super split order is made. For a SMSF, this is not an issue. However, for accumulated or defined interests, it is important that a copy of the court’s application or terms of settlement is served on the trustees. The trustee has 28 days to respond as to whether or not the orders are such that the trustee can comply with them. ¶18-200 1,165FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN TAXATION AND FAMILY BREAKDOWN ¶18-300 Realisation and taxation costs to be taken into account in property valuations The Full Court in 1998 in the case of Rosati (1998) FLC ¶92-804 set down principles in relation to the circumstances when the court ought to take into account potential capital gains tax which would be payable upon the sale of an asset. The Full Court in Rosati held: ‘‘It appears to us that although there is a degree of confusion, and possibly conflict, in the reported cases as to the proper approach to be adopted by a court in proceedings under s 79 of the Act in relation to the effect of potential capital gains tax, which would be payable upon the sale of an asset, the following general principles may be said to emerge from those cases: (1) whether the incidence of capital gains tax should be taken into account in valuing a particular asset varies according to the circumstances of the case, including the method of valuation applied to the particular asset, the likelihood or otherwise of that asset being realised in the foreseeable future, the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to that asset (2) if the Court orders the sale of an asset, or is satisfied that a sale of it is inevitable, or would probably occur in the near future, or if the asset is one which was acquired solely as an investment and with a view to its ultimate sale for profit, then, generally, allowance should be made for any capital gains tax payable upon such a sale in determining the value of that asset for the purpose of the proceedings (3) if none of the circumstances referred to in (2) applies to a particular asset, but the Court is satisfied that there is a significant risk that the asset will have to be sold in the short to mid term, then the Court, whilst not making allowance for the capital gains tax payable on such a sale in determining the value of the asset, may take that risk into account as a relevant s 75(2) factor, the weight to be attributed to that factor varying according to the degree of the risk and the length of the period within which the sale may occur (4) there may be special circumstances in a particular case which, despite the absence of any certainty or even likelihood of a sale of an asset in the foreseeable future, make it appropriate to take the incidence of capital gains tax into account in valuing that asset. In such a case, it may be appropriate to take the capital gains tax into account at its full rate, or at some discounted rate, having regard to the degree of risk of a sale occurring and/or the length of time which is likely to elapse before that occurs.’’ ¶18-300 C h ap te r 18 1,166 MASTER FINANCIAL PLANNING GUIDE Based on the principles or guidelines enunciated by the Full Court in Rosati above, the likelihood of a possible future sale is important in determining if and how, the potential CGT liability should be taken into account. Accordingly if there is no intention or the evidence does not establish that a party has to sell a CGT asset then the court generally would ignore any CGT liability. On the other hand if the court makes a finding that it would be inevitable to sell a property in the near future, then CGT will be taken into account in Step 1 which has the result of reducing the property pool. Having said this, it should also be noted that the court may still take the CGT liability as a s 75(2) (or s 90SF(3) in the case of de facto couples) factor if the court is satisfied that there is a significant risk that the asset will have to be sold in the short to mid term. It should be noted that because a property has been valued using a particular method, it does not necessarily follow that the realisation costs or CGT liability will automatically be taken into account and therefore reduce the property pool. Certainly, the court can still take the realisation costs and/or CGT in Step 3 under the s 75(2) (or s 90SF(3) in the case of de facto couples) factor. In JEL v DDF, certain assets of the parties were valued on a tangible asset or asset realisation approach; however, the Full Court noted that this is only one of the matters to be taken into account under the Rosati principles. The Full Court also noted the trial judge’s finding that while the assets had been ‘‘acquired with a view to making a profit’’ this did not equate to a finding that ‘‘all of the assets were acquired solely as an investment and with a view to ultimate sale for profit. To the contrary, it is clear that all of the assets were not acquired solely as an investment’’. The Full Court referred to the parties’ former matrimonial home and their holiday home. Income tax In SPG and BAG (unreported, Full Court of the Family Court, 20 December 2001), the Full Court held that the principles in Rosati apply to income tax. The Full Court held that ‘‘where property which is held by a party or the parties to proceedings under s 79 of the Act was acquired as part of a business of acquiring, developing and the re-selling of real property for profit (ie essentially as trading stock of that business) then, in valuing that property for the purpose of the proceedings, the court should ordinarily take into account both the estimated realisation costs and the tax (in that case) ‘mainstream’ income tax which will ultimately be paid on its sale, even if the Court’s Orders leave the property in the hands of one party and the sale of it is not seen as an inevitable or even a likely consequence of those Orders’’. ¶18-305 Are tax losses property? There are cases where a company controlled by either of the parties or both of them may have significant tax losses and the question that will arise in the ¶18-305 1,167FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN proceedings is whether or not such tax losses are property or financial resources. This issue is significant because tax losses have the effect of reducing the tax that ultimately may be paid in respect of future profits earned by the company that would be retained by one of the spouses. In JEL v DDF (2001) FLC ¶93-075, the trial judge found that the husband would retain the benefit of losses in a company with a tax benefit of $1.866m while the wife would retain a benefit in another company of approximately $239,000. The trial judge found, on the evidence, that the tax losses did not constitute property as they had no immediate realisable value. However, the judge found that they constituted a financial resource of potentially significant benefit to the husband in the future. It appears that the trial judge thereafter omitted to return to this issue in the course of her judgment; however, on appeal to the Full Court, the Full Court made an adjustment in the wife’s favour under s 75(2) in the sum of $200,000 by reason of the husband’s significant tax losses that he would retain the benefit of. ¶18-400 Superannuation splitting The simpler super changes that came into effect on 1 July 2007 may have caused advisers to discourage their clients from agreeing to or offering a super split as part of an overall property settlement. However, that ignores the basic principles to a super split, namely that super can be used as a weapon and a shield. It is submitted that super splitting still has significant benefits. For a non-member spouse, the effect of a super split in their favour is to allow that person to have a super fund where in the usual course of events such an interest would not have been accumulated. Further, investing in a superannuation environment has significant tax benefits, including tax rates of 15% on earnings and nil on withdrawal of the investment after the member turns 60 years old. It is crucial that superannuation is brought to the forefront of discussions between the spouse and the adviser. For example, it is proposed that from 1 July 2012, the maximum voluntary contribution that can be made by a spouse to their super fund will be reduced from the current level of $50,000 to $25,000, if the member spouse account has a balance of more than $500,000. Accordingly, if a spouse has to split say $100,000 of their super with their spouse they may need up to four years to recover that money in the super environment. This is an important consideration when viewing the spouse’s retirement plans and whether they will be in a position to still maintain their estate plan overall. As a result of the significant concessions that superannuation provides, it can be used to a party’s advantage in any property settlement negotiations. Let’s consider an example where a party owns an investment property and has a superannuation interest and both are of similar value. If the member is able to survive financially without the benefit of say rent from the investment property, the member can offer their former spouse the investment property and retain their superannuation interest. The member will therefore retain the ¶18-400 C h ap te r 18 1,170 MASTER FINANCIAL PLANNING GUIDE Another way to deal with the property is for one spouse to transfer their interest in the investment property to the other spouse pursuant to a court order. Stamp duty will not be payable on the transfer as there is a stamp duty exemption under the marriage breakdown. ¶18-505 CGT roll-over relief on family breakdown Marriage or relationship breakdown CGT roll-over between spouses Under s 126-5 of the Income Tax Assessment Act 1997 (ITAA97), there is a compulsory or automatic same assets roll-over if a CGT event involves an individual taxpayer disposing of an asset to, or creating an asset in, their spouse (or former spouse) because of: ‘‘(a) a court order under the Family Law Act 1975 or a corresponding foreign law; or (b) a maintenance agreement under section 87 of that Act or a corresponding agreement approved by a court under a corresponding foreign law; or (c) a court order under a State law, Territory law or foreign law relating to de facto marriage breakdowns; or (d) something done under: (i) a financial agreement made under Part VIIIA of the Family Law Act 1975 that is binding because of section 90G of that Act; or (ii) a corresponding written agreement that is binding because of a corresponding foreign law; or . . . (f) something done under a written agreement: (i) that is binding because of a State law, Territory law or foreign law relating to de facto marriage breakdowns; and (ii) that, because of such a law, prevents a court making an order about matters to which the agreement applies, or that is inconsistent with the terms of the agreement in relation to those matters, unless the agreement is varied or set aside.’’ Accordingly, any capital gain or capital loss from a CGT event is ignored if the marriage or relationship breakdown roll-over happens. This applies to married couples and de facto couples (including same-sex couples). However, the changes to the definition of spouse (which commenced on 9 December 2008) have an operative date of 1 July 2009. This means that any transactions entered into prior to 1 July 2009, despite having arisen as a consequence of the ¶18-505 1,171FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN breakdown of a same-sex relationship and entered into pursuant to a Family Court order, state or territory order, BFA are not eligible for capital gains tax roll-over relief. If the asset is a post-CGT asset and the transferor disposes of the asset to a transferee spouse and the marriage or relationship breakdown roll-over happens, the first element of the cost base (or reduced cost base) for the transferee will be the same as the cost base of the transferor at the time the transferee acquires the asset. Therefore, any costs incurred by the transferor in effecting the transfer (such as conveyancing costs) pursuant to the court order will form part of the first element of the cost base (or reduced cost base). Since 12 December 2006 CGT roll-over relief has been extended to: (1) assets transferred to a spouse or former spouse under a financial agreement for married couples and domestic relationship agreements and termination agreements for de facto couples or a similar agreement under a corresponding foreign law or an arbitral award under the Family Law Act or a corresponding award made under a corresponding state law, territory law or foreign law, and (2) changes to the CGT main residence exemption so that a spouse who receives a property pursuant to a court order will inherit the history of the property. In relation to the second measure above, under the previous law as it stood prior to 12 December 2006, if a spouse received an investment property owned by their former spouse pursuant to a court order, and immediately upon receiving that property the spouse commenced to use the property as their main residence, then the CGT main residence exemption applied and that spouse would not pay CGT when they sold the property in the future. Under the amendments which came into effect on 12 December 2006, the transferee spouse inherits the property’s history so that CGT will be apportioned between the periods when the property was held for investment purposes and when it was used as the main residence with CGT being payable on ultimate disposal for the period the property was used for investment purposes. It should be noted that since 27 December 2000, s 87 maintenance agreements are no longer possible to be entered into and receive court approval. Maintenance agreements have been replaced by financial agreements. For CGT roll-over relief to apply pursuant to a court order or a BFA, the transfer of a property must be to a spouse and not to a company or trust controlled by or associated with the spouse. While s 126-5 and 126-15 of the ITAA97 do not expressly require that there be marriage breakdown, this is implicitly required (see Taxation Determination TD 1999/49). ¶18-505 C h ap te r 18 1,172 MASTER FINANCIAL PLANNING GUIDE CGT roll-over on transfer from company/trust to spouse Section 126-15 of the ITAA97 extends the CGT roll-over relief if the trigger event involves a company (the transferor) or a trustee (also the transferor) and a spouse or former spouse (the transferee) of another individual because of: ‘‘(a) a court order under the Family Law Act 1975 or a corresponding foreign law; or (b) a maintenance agreement approved in accordance with section 87 of that Act or a corresponding agreement approved by a court under a corresponding foreign law; or (c) a court order under a State law, Territory law or foreign law relating to de facto marriage breakdown; or (d) something done under: (i) a financial agreement made under Part VIIIA of the Family Law Act 1975 that is binding because of section 90G of that Act; or (ii) a corresponding written agreement that is binding because of a corresponding foreign law; or . . . (f) something done under a written agreement: (i) that is binding because of a State law, Territory law or foreign law relating to de facto marriage breakdowns; and (ii) that, because of such a law, prevents a court making an order about matters to which the agreement applies, or that is inconsistent with the terms of the agreement in relation to those matters, unless the agreement is varied or set aside.’’ Accordingly, there is also an automatic or compulsory marriage breakdown roll-over if the marriage breakdown conditions between spouses are met, except that the transfer is from a company or trust associated with the parties to a spouse or former spouse. Caution Notwithstanding the above roll-over relief, there are other significant consequences in respect of transfers of property owned by a company or trust to a spouse pursuant to court orders which are dealt with under the heading ‘‘Division 7A consequences’’ (¶18-510). Marriage or relationship breakdown CGT roll-over on transfer of shares CGT roll-over relief is also available on transfer of shares (in public and private companies) if made pursuant to court orders. ¶18-505 1,175FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN made to only one shareholder if the payment arises out of marriage breakdown (s 109RC of ITAA36) (2) loans or debt forgiveness as part of a property settlement will not trigger Div 7A of ITAA36 (3) the Commissioner has a discretion to either disregard deemed dividends or allow them to be franked where they have been triggered by honest mistakes or omissions by the taxpayer. This amendment applies from 1 July 2001 (s 109RB of ITAA36). Company loans Loans to associated persons of a company may become the subject of the deemed dividend provisions. Associated persons include shareholders, their spouses and related entities. Section 108 of ITAA36 applies where a private company pays an amount to an associate as an advance or a loan or credits an amount to an associated person and the Commissioner forms the view that the amount represents a disguised distribution of profits. In those circumstances, the payment received will be deemed as an unfranked dividend paid by the company to the person and therefore assessable to income tax by the recipient. Division 7A provides that where there is a loan from a company to an associated person, a deemed dividend will arise from the company unless either the loan is repaid before the end of the financial year, or if there is a genuine commercial loan evidenced in writing with all of the relevant terms and interest conditions. In addition, the loan must be repaid within seven years from the date that the loan was issued, otherwise the loan will be deemed as dividends in the hands of the associated person. When dealing with loan accounts the following should be taken into account and considered: ● forgiveness of the loan is not an effective way of dealing with the loan account as this will trigger the deeming dividend provisions ● consideration should be given as to whether loan accounts should be brought to nil by declaring a dividend payment in favour of the spouse in whose name the loan account is in; however, it should be noted that this would trigger income tax liability but such income tax will be less than if s 108 operates ● the loan could be assigned to the other spouse who will retain the company; however, it is important to obtain the relevant indemnities to ensure that the spouse exiting the company is protected from any tax liabilities that may flow on from such an assignment. The above should be read subject to the changes that came in on 21 June 2007 where the Commissioner has the discretion to disregard Div 7A or allow the dividend to be franked. This applies in relation to property settlements that have occurred as early as 2001 on the condition that the mistake or omission occurred due to an honest mistake (s 109RB). ¶18-510 C h ap te r 18 1,176 MASTER FINANCIAL PLANNING GUIDE ¶18-515 Part IVA considerations when advising on family breakdown An important matter that must also be addressed in any family law matter which involves tax restructuring or tax advice is the potential impact of the general anti-avoidance provisions of Pt IVA of ITAA36. The most important ingredient which will attract the operation of Pt IVA is where it could be concluded that a participant in the scheme had the sole or dominant purpose of obtaining a tax benefit for the taxpayer. The anti-avoidance legislation is concerned with the following aspects of the scheme: ● manner — this refers to the manner in which the scheme was entered into or carried out ● form and substance of the scheme — this requires the Commissioner to look at the commercial reality as well as the legal or literal form of the scheme ● timing — this refers to the time at which the scheme was entered into and the length of the period during which it was carried out ● result achieved — this refers to the result that would have been achieved by the scheme if Pt IVA did not apply ● change in the financial position of the taxpayer that has resulted or may reasonably be expected to result from the scheme ● change in the financial position of the person connected with the taxpayer ● any other consequence for the taxpayer connected — ie non-financial consequences, and ● nature — if there is a connection between the taxpayer and the other person, the connection may be of a business, family or other nature. STAMP DUTY AND FAMILY BREAKDOWN ¶18-600 Stamp duty exemptions on marriage or relationship breakdown Stamp duty exemptions vary between each of the Australian states and therefore it is important to ascertain the stamp duty consequences as well as the stamp duty exemptions in the state where the property the subject of any property settlement is located. All references in the following paragraphs are based on the duties law for NSW. ¶18-515 1,177FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN Stamp duty exemptions on marriage breakdown Section 68 of the Duties Act 1997 (NSW) provides exemption from duty on transfer of matrimonial property following the breakdown of the marriage or relationship. Similar provisions apply in respect of breakdown of domestic relationships pre-1 March 2009. Notwithstanding the changes that came into effect on 1 March 2009 in relation to de facto couples, at least in NSW the Duties Act 1997 has not been amended to reflect changes to the definition ‘‘matrimonial property’’. This term remains defined as outlined below. However, it is submitted that this should not in any way affect the exemptions to payment of stamp duty. For the exemption to apply, the property transferred must be ‘‘matrimonial property’’, that is to say property of the parties to the marriage or of either of them. This has been interpreted widely by the court in Commissioner of Stamp Duties (NSW) v Bryan (1989) 89 ATC 4529. In that case, the property was transferred by the trustee of a family trust to one of the parties to the marriage. The trust was discretionary and provided for a gift over to parties to the marriage subject to the trustee’s discretion. At the time, the only beneficiaries named were the husband and the wife; however, the trustee had the power to add new beneficiaries. At both first instance and on appeal to the Court of Appeal, it was held that the property transferred was matrimonial property and the exemption applied. Where property is transferred by a company to a spouse, the property of the company is considered to be matrimonial property, if the only members of the company are the parties to the marriage. If only one party is a member of the company, the voting power of the spouse who owns the shares would be examined. Pursuant to s 68(1) of the Duties Act, no duty is chargeable in respect of a transfer of matrimonial property if: (a) the property is matrimonial property. Property includes real estate as well as shares in private companies (b) the transferee is a party to the marriage (and this includes a child or children) (c) the marriage has either been dissolved or annulled or in the opinion of the Chief Commissioner, has broken down irretrievably (d) the transfer is affected by or in accordance with: (i) a financial agreement under the Family Law Act (ii) a court order (iii) an agreement that the Chief Commissioner is satisfied has been made for the purpose of dividing matrimonial property as a consequence of the dissolution, annulment or breakdown of the marriage, or (iv) a purchase at public auction of the property that immediately before the auction was matrimonial property where the public auction is held to comply with any such agreement or order. ¶18-600 C h ap te r 18 1,180 MASTER FINANCIAL PLANNING GUIDE It is important to consider the land tax implications of a property settlement as there is no land tax roll-over on transfer of land pursuant to court orders. Thus, if a company is to transfer land to a spouse pursuant to a court order, then land tax may well be payable by the company and this needs to be considered at the time of settlement. Similarly, this also applies to the transfer of an investment property between spouses under a court order. FAMILY TRUST ELECTIONS ¶18-615 Income and taxation opportunities in making a family trust election Generally, the trustee of a discretionary trust would consider making a family trust election in the following circumstances: ● the discretionary trust has tax losses and would like to carry forward its losses. If the discretionary trust had made a family trust election, it only needs to satisfy the income injection test to enable the losses to be carried forward ● the discretionary trust is the shareholder of a company that has tax losses and the company would like to carry forward the losses. If a family trust election is made, the discretionary trust is deemed to hold the shares in the company in the capacity of an individual. This will assist the company to satisfy the various tests which must be passed before it can carry forward its tax losses ● the discretionary trust will be receiving franked dividends for shares that it acquired after 31 December 1997 and would like to pass on the franking credits that are attached to the dividends to its beneficiaries. Although the making of a family trust election will ensure that the relevant tax benefits can be passed on to the beneficiaries and related entities, the election has the effect of narrowing the class of beneficiaries to whom distributions from a discretionary trust can be made tax-effectively. This narrower class of beneficiaries (called the ‘‘family group’’) is defined in the ITAA36 by reference to a ‘‘test individual’’. Any income distributions made by the trustee to a beneficiary that is not within the ‘‘family group’’ will result in the trustee being liable to family trust distribution tax (FTDT). FTDT is charged at a rate equal to the top marginal rate plus the Medicare levy on the amount of income distributed to that beneficiary. Section 272-95 of Sch 2F of the ITAA36 sets out the members of a ‘‘family group’’ as: ‘‘(a) any parent, grandparent, brother or sister of the test individual or the test individual’s spouse; (b) any nephew, niece or child of the test individual or the test individual’s spouse; (c) any lineal descendant of a nephew, niece or child referred to in paragraph (b); ¶18-615 1,181FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN (d) the spouse of the test individual or of anyone who is a member of the test individual’s family because of paragraphs (a), (b) and (c).’’ Section 272-90(2A) extends the family group further to include: ‘‘(a) a person who was a spouse of either the primary individual or of a member of the primary individual’s family before a breakdown in the marriage; and (b) a person who was a widow or widower (whichever is applicable) of either the primary individual or of a member of the primary individual’s family and who is now the spouse of a person who is not a member of the primary individual’s family; and (c) a person who was a step-child of either the primary individual or of a member of the primary individual’s family before a breakdown in the marriage of the primary individual or the member of the primary individual’s family.’’ ¶18-620 Income splitting during marriage or relationships and after separation During the course of marriage or relationships, parties generally split the income of partnerships, companies or trusts between spouses. There is nothing unusual in this. However, on separation, one of the spouses may retain control of the entity while the other spouse is shut out. As family law cases can take up to two years to be determined, it is important as an adviser who may be acting for both spouses to consider whether the splitting of income should continue during the separation period. For the spouse who has been shut out of the entity, this may not be an arrangement that would be in their interest as income tax would be payable on such splitting and they may not receive any of the income. On occasions where the controlling spouse is ordered by the court to pay spouse maintenance, they may pay that maintenance through income splitting, which again will trigger an income tax liability. The recipient spouse should ensure that if such an arrangement will or may likely be put in place by the controlling spouse, they are not liable to pay the tax or any penalties that may be levied by the ATO, if the ATO forms the view that such an arrangement falls foul of tax law, by obtaining indemnities from the controlling spouse. It is also important that at the time of making final orders indemnities be provided by the controlling spouse in relation to all taxes that may be payable as well as other indemnities, which will be outlined below. Such indemnities could prove valuable if the client later finds out that their spouse had made declarations of income which they never received. For example, in one case a spouse declared a trust distribution in favour of their former spouse on the eve of the making of court orders without informing the spouse. The indemnities that were included in the orders proved valuable as they assisted the spouse in forcing the other spouse to be liable for the tax payable on the distributions which were never received. ¶18-620 C h ap te r 18 1,182 MASTER FINANCIAL PLANNING GUIDE ¶18-625 Indemnities and guarantees from the controlling spouse Generally, the exiting spouse must ensure that they obtain indemnities from the controlling spouse in relation to: ● all claims made against the entity by a third party ● any claims that the entity or the controlling spouse has against the exiting spouse of the entity ● all tax liabilities including CGT, goods and services tax (GST), income tax and all other tax liabilities, that may arise in respect of any act or thing done or omitted to be done by the exiting spouse, whether by reason of the exiting spouse having been an employee and/or director and/or officer of the entity and/or by reason of the exiting spouse’s shareholding within the entity and/or any loan account in the exiting spouse’s name and/or the receipt by the exiting spouse of any monies at any time from the entity or otherwise. It is also important to ensure that the exiting spouse is released from all guarantees they may have given during the period of the marriage. Omission to obtain such a release means that the client may be called upon to make good any default by the entity even years after the spouse exited the entity. While an indemnity may be obtained from the controlling spouse that they be responsible for and indemnify the exiting spouse in relation to all guarantees, this is not ideal and in some cases not sufficient. The exiting spouse should be released from the guarantees as part of the orders to ensure that they will never be called upon to make good any default. MAINTENANCE ¶18-700 Spouse maintenance In cases where one spouse earns the income and the other attends to the homemaker and parenting role, after separation the party who did not work during the course of the marriage or relationship may apply for spouse maintenance. This is maintenance for the support of the spouse (not the children). Generally, a spouse would make an application for spouse maintenance shortly after separation. The court has to be satisfied that the spouse making the application has a need and that the financial activist spouse has the capacity to pay spouse maintenance. Need does not mean subsistent level but a reasonable standard based on the particular circumstances of the case. There may be cases where someone’s needs may be found to be $300 per week whereas in another case the party’s needs may be $10,000 per month. There is no hard and fast rule that the court applies as to the level of maintenance awarded. The interim spouse maintenance, if awarded, will continue until the final hearing where the court has to assess whether the spouse does still need the maintenance, taking into account the property settlement that the court will ¶18-625 1,185FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN ● can only be made between an eligible carer and a person who is a parent of the child and resident in Australia on the day the LCSA is entered into ● has no effect unless it is accepted by the Child Support Registrar ● must comply with s 80E of the Child Support (Assessment) Act 1989 requirements — namely the amount of support to be paid must be at least equal to what the assessment provides for or would otherwise be payable under the formula ● has a statutory sunset clause of three years after which either party can terminate the LCSA. For an agreement to be a BCSA, the following must apply: ● must comply with the same formal requirements under a LCSA ● must have legal advice and certificates as to legal advice annexed to the BCSA ● does not have to comply with s 80E requirements — namely the payment payable could be less than an administrative assessment or would otherwise be payable under the formula. Under new changes, parents can make an agreement to pay some or all of their child support using a lump sum without agreeing about the amount of child support — they can continue to have formula assessments each year. Example John and Joanne separate and decide that Joanne can retain the house on the basis that Joanne has to pay John $100,000. Instead of making that payment, John and Joanne agree to enter into a lump sum agreement for the $100,000. This sum will constitute a credit for John which will gradually be drawn down as John draws against it to meet his child support obligations. The remaining credit will be indexed at the end of each financial year. In the 2017/18 year, assume John’s liability is $20,000 per year in child support. At the end of 2017/18, John’s child support liability is met from the lump sum credit. Assume the agreement is entered into on 1 October 2017. The credit used up for the remaining 270 days is $14,785. The remaining credit is $85,215. This is indexed by the CPI. If the relevant factor for 2017/18 is 1%, then the indexed amount is $86,067. When one parent lives overseas Australia’s international maintenance arrangements apply when one parent lives in Australia and the other parent lives in a country that is a reciprocating jurisdiction. A number of countries have signed treaties in relation to support of children and a list of the reciprocating jurisdiction countries are found on the CSA website. The principle of these arrangements is that, wherever possible, a liability should be issued and administered in the jurisdiction where the payee resides. The jurisdiction in which the payer is resident is responsible for collection and providing the payer with reasonable assistance in dealing with the overseas authority. ¶18-705 C h ap te r 18 1,186 MASTER FINANCIAL PLANNING GUIDE A payee in Australia can apply for a child support assessment if the payer is a resident of a reciprocating jurisdiction on the day they make the application, except if it is one of the excluded jurisdictions. A payee must obtain a court order for child maintenance if the payer resides in an excluded jurisdiction. An overseas authority can apply for a child support assessment on behalf of a liable parent resident in their jurisdiction. A liable parent who is resident overseas cannot make their own application for an administrative assessment. A payee in a reciprocating jurisdiction can apply for a child support assessment for a child who does not meet the usual residence requirements (the child is in Australia when the person makes the application; and the child is an Australian citizen, or ordinarily resident in Australia on that day). An overseas authority can also apply on behalf of a payee resident in their jurisdiction. A payer in Australia cannot apply for a child support assessment payable for a child who does not meet the residence requirements. Centrelink benefits If the payee is in receipt of a Centrelink benefit, they must make an application through Centrelink and they cannot opt out of the child support scheme nor can they negotiate a payment of child support that is less than what they would be entitled to receive under an assessment. If the payee is not in receipt of a Centrelink benefit, they are at liberty to negotiate a child support agreement with the liable parent. Such an agreement can only be enforced by the payee after they have registered the agreement with the CSA, and the CSA accepted the agreement in writing. An agreement that has not been accepted by the CSA Registrar means that the agreement cannot be enforced in the court. The agreement may be enforced as a contract; however, this is far from ideal. Prescribed payments are certain payments that can be credited as child support even if the parent receiving child support does not agree the payment was in lieu of child support. As long as the paying parent pays 70% of their normal monthly child support payment on time, a maximum of 30% of the monthly payment can be credited in this way. Prescribed payments can be for childcare costs, school fees, school uniform and book fees, essential medical and dental items, the other parent’s share of rent, mortgage, utilities and rates, or some motor vehicle costs. The CSA, however, will only credit prescribed payments if the paying parent has less than 14% (regular) care for all the children of the assessment. This is because if the paying parent has more than 14% care of any of the children, the direct costs that parent incurs when caring for the children are recognised in the child support formula. The child support scheme works and will work well with payers who are employees who are the subject of Pay As You Go (PAYG) income tax. Where payers are contractors or owners of private companies or those people who have the potential to distort their true income position, the child support scheme may not deliver justice to the payee, although parties are entitled to apply to review the child support assessment. ¶18-705 1,187FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN If either party is not happy with the assessment issued by the CSA, they can apply to review the assessment. The change to the assessment application is also done administratively by qualified officers within the Child Support Registrar’s office. Lawyers are not allowed to represent clients; however, they can assist them in completing the form. The parties need not attend the hearing personally. They can do so by telephone and not at the same time as the other parent. Reviewing the child support assessment There are a number of reasons why a parent currently may seek a change to the assessment; however, the officer has to be satisfied that in the special circumstances of the case, one of the following main reasons are made out: ● it costs more than 5% of child support liability to exercise contact ● it costs the payee extra to cover the children’s special needs ● it costs extra to care for, educate or train the children in the way that the parents intended. This may result in the payer being asked to pay in addition to the periodic child support amount, the children’s school fees and for extra curricular activities or part thereof ● the child support assessment does not take into account the income, earning capacity, property or financial resources of the children, and ● the child support assessment does not take into account the income, earning capacity, property or financial resources of one or both parents. If a parent is unhappy with an assessment issued by the agency, they can lodge an objection which will be determined by the registrar. If either parent is unhappy with the Registrar’s decision, the parent can make an application to review the assessment on any of the grounds referred to above. If either party is still dissatisfied with the result, they will have to apply to the Administrative Appeals Tribunal (AAT). Parties can have legal representation at the AAT. A decision from the AAT can be appealed to the court but only on questions of law. The road to the court is a long one and the new process is aimed at trying to ensure that child support matters are dealt with efficiently. It is still possible to bypass the various steps above and proceed to court if there is a financial matter that the court is dealing with at the same time. A current child support year runs for 15 months; however, a new assessment is issued when a tax return is lodged by either party. The current child support payable by a payer will be reduced if the payer has the children for more than 109 nights. The new scheme will be different in that there will be no threshold number of nights before there will be a reduction in child support payable. The new formula will take into account the number of nights the child or children stay with each parent. While negative gearing has the effect of reducing one’s taxable income, for child support assessment purposes, the CSA will ignore negative gearing in calculating the payer’s child support liability. ¶18-705 C h ap te r 18 1,190 MASTER FINANCIAL PLANNING GUIDE The PAPs are aimed at ensuring litigation is a last resort. If the matter does not settle, a party may then wish to apply to the court for property settlement. There are two court phases, namely the resolution phase and the determination phase. In the resolution phase, there are two court events, namely a case assessment conference and a conciliation conference. If the matter does not settle at the conciliation conference, the matter then moves to the determination phase where the court makes directions for the preparation of the matter for trial and the appointment of single experts to prepare valuation of the property in dispute. As part of the PAP and full and frank disclosure, parties must exchange financial documents and keep each other informed of changes in their financial position throughout the negotiations and until orders are made. The parties’ duty of disclosure is broad and very extensive so as to ensure that each of the parties and the court are fully informed of the parties’ financial position before a decision is made about dividing the pool. It is very crucial for clients to comply with their duty. Once a finding has been made by the court that a party did not make a full and frank disclosure of their financial position, then the court would not be unduly cautious about making findings in favour of the innocent party. To do otherwise might be thought to provide a charter for fraud in proceedings of this nature. Advisers are in a good position to assist in this area, as they have a good understanding of the client’s financial affairs. ¶18-805 Issuing or receiving a subpoena Parties are entitled to cause to be issued by the court a subpoena to produce documents. A subpoena is directed generally to a third party to produce documents in that third party’s possession, custody or control. Advisers may be served with a subpoena. It is important to note the following about a subpoena: ● a subpoena is a court order and must not be ignored ● if a subpoena is not complied with, the party at whose request the subpoena was issued can apply to the court for the arrest of the person named in the subpoena for failure to comply with the subpoena ● a subpoena must give the recipient at least five clear working days after it is served to produce the documents ● a subpoena must be accompanied with conduct money. Generally, $10 or $20 is paid at time of service. This is not the complete conduct money in compliance with the subpoena. A subpoena recipient can ask for money that they will incur in complying with the subpoena, such as time in compiling the documents, photocopying and the like ● a subpoena recipient cannot withhold production of documents on the basis that proper costs of the recipients have not been paid. If the conduct money is not sufficient to comply with the subpoena, negotiations should be entered into with the party on whose behalf the subpoena is issued ¶18-805 1,191FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN and if there is no agreement, an application for costs be made by the recipient to the court ● once served with a subpoena, the adviser should immediately provide a copy of it to their client as their client may wish to object to the subpoena or certain parts of it. (While the Rules provide that the party at whose request a subpoena is issued must provide a copy of the subpoena to the other party at least seven days prior to the return date of the subpoena, this may not occur and this may be the crucial time that the client requires to consider their legal position in relation to the subpoena issued.) ¶18-810 Family Court’s powers over business entities Where a company is owned by the parties, in all likelihood the court will find that the company is the alter ego of a spouse or both of them. The Family Court has wide powers against the company (or trust for that matter). The court can bind the company through the spouse as the company is the spouse’s alter ego. Where third parties are involved, the court’s powers are not unfettered. The High Court in Ascot Investments Pty Ltd v Harper and Harper (1981) 148 CLR 337 found with respect to Family Court jurisdiction of third parties as follows: ● an order cannot be made where its effect will be to deprive third parties of an existing right ● an order cannot be made to impose on such a party a duty which the party would not otherwise be liable to perform ● parliament did not intend for third party interests to be subordinated to interests of parties through a marriage ● parliament did not intend that the court should be able to make an order that would operate to the detriment of third parties. The court’s ability to deal with family companies involving third party interests have been developed by the High Court and the Family Court, enabling the Family Court: ● to set aside transactions pursuant to s 106B of the Family Law Act ● to make orders directly in relation to property in ante-nuptial or post- nuptial settlements made in relation to the matter pursuant to s 85A of the Act ● if there are other ample assets for distribution between the parties, to establish that the party has a financial resource represented by the third party’s property ● to find that the third party is the alter ego of a party to the proceedings ● to find that the third party is a sham brought into being in appearance rather than reality as a device to assist one party to evade their obligations under the Act ¶18-810 C h ap te r 18 1,192 MASTER FINANCIAL PLANNING GUIDE ● to find that the third party is the puppet of a party to the marriage (eg the company is completely controlled by one party to a marriage) so in reality an order against the company is an order against the party ● to grant injunctive relief ● to make orders against the third party if the third party is in effect an accomplice of a party to a marriage whose actions are designed to assist one spouse to the disadvantage of the other ● to make a declaration pursuant to s 78 of the Act that the spouse be declared the equitable owner of certain property held by the company. As can be gleaned from the above, the Family Court still has wide powers in relation to companies, including companies where third parties are involved. One of the difficulties that the Family Court grapples with is the valuation of family companies. Such companies may be valued in a number of ways with significant differences in value. Some of the valuation methodologies that the court has accepted depending on the facts of each case include future maintainable earnings, net assets, and value to the owner of super profits. This last valuation method causes the greatest grief as a company is valued on the basis of what it is worth to the owner after taking into account a reasonable salary for the owner. This valuation method has no correlation to the reality of what the company would be sold for to a third party purchaser who is a willing but not an anxious purchaser, by a seller who is not an anxious seller. Faced with such a valuation method, many clients now seek orders from the court for the sale of the company if the valuation by a single expert is found to be above a certain amount as that spouse can no longer keep the business and pay out their former spouse their entitlement. This will no doubt have a follow-on effect in relation to that spouse’s future earning capacity and the adjustments that will ultimately be made by the court under the s 75(2) factors. ¶18-815 Third parties standing in the Family Court A party that may be affected by a decision of the court has standing to intervene in Family Court proceedings. Generally, family law proceedings are inter partes; however, there may be occasions where third parties need to intervene to protect their position. One example of third parties wishing to be involved in proceedings and even to commence proceedings is in the area of financial agreements. Third party proceedings can apply to set aside binding financial agreements (BFAs). The federal government had been concerned that the Act could be used to defeat or defraud creditors and those concerns have been addressed with amendments passed. ‘‘Third party proceedings’’ is defined to mean proceedings between: ● either or both of the parties to a financial agreement, and ● a creditor or a government body acting in the interest of a creditor, ¶18-815 1,195FINANCIAL AND ESTATE PLANNING ON FAMILY BREAKDOWN A client may own a farm that has been in the family for generations; the client may be in business with third parties or there is a prospect that they may receive a large inheritance in the future. This would be a good reason why a BFA would be beneficial. A BFA provides certainty of outcome in the event of separation. That is, by entering into the BFA the result of the property division is agreed upon and there is no question or argument. The Family Court’s jurisdiction is ousted and therefore the lawyers are ousted as well! Lawyers are required to provide a certificate confirming that they have provided advice on the agreement before the agreement can be valid. Each party must have their own independent lawyer. Can BFAs be abused? It was never envisaged that parties could enter into BFAs in order to reduce assets and remove them from claims by third parties such as creditors. Some people have tried that in the past but ultimately the government closed that loophole and now creditors or trustees in bankruptcy can apply to the Family Court to set aside a BFA if it can be shown that the BFA was entered into with a view to defeat or defraud creditors. A BFA can be used for a good measure of asset protection; however, planning when a BFA should be entered into and what it should provide for becomes crucial to ensure it will withstand attack from a future spouse, a creditor or future creditor or trustee in bankruptcy. More and more lawyers are no longer prepared to draft financial agreements because of the risk of being found negligent in the way the agreement is drafted. There have been a number of cases following the introduction of BFAs into the Family Law Act where BFAs were set aside because the lawyers did not comply with s 90G requirements. That appears to have been rectified by the government introducing rectification provisions which enables a judge to rectify any technical defects, however, the judge still has the discretion to set aside the agreement notwithstanding the power to rectify. More recently cases to set aside BFAs have centred on the substance of the agreement, namely whether the drafting was plain and covers the situation the parties find themselves upon separation. It appears that parties sometimes forget about their agreements once they are signed. In one case where the BFA was set aside, the parties set up a trust to run a business. Setting up a trust was never contemplated in the agreement and therefore no one could work out what each of them was entitled to. As a result the BFA was set aside. In other cases, while parties may take into account contingencies such as the birth of children, if they do not specifically provide that regardless of whether they do or do not have children they want the same financial outcome to flow to the other spouse, the BFA is susceptible to being set aside. Care must be exercised when drafting BFAs. They are not standard documents. They need to be tailor made to suit the client’s needs and as such caution must be exercised when drafting. The adviser’s role in assisting with the drafting of a BFA cannot be underestimated. Their job complements that of ¶18-825 C h ap te r 18 1,196 MASTER FINANCIAL PLANNING GUIDE the lawyer drafting as they understand the client’s financial needs and depths and what structures will be put in place in the future. ¶18-830 Estate planning for blended families If the adviser’s client has children from a previous relationship or marriage, the adviser should advise the client to consider the impact of their superannuation death benefits as well as the structure of purchasing assets. For instance, if the client and their new spouse have just purchased a property in joint names or are intending to purchase a property in joint names then notwithstanding what the client provides for in their will, on their death their interest in the property will be given to their spouse by survivorship. If the client nominates that their superannuation death benefits be given to their current spouse, the adviser should ask the client to consider the impact of such a nomination on their children from their first marriage. Let us assume that the client separated from their spouse some time ago and has just met someone new. The client informs you, or you are aware that they have not yet done a property settlement with their former spouse; however, they are anxious to settle financially with their former spouse because they want peace and harmony in the new relationship. The client may inform the adviser that they have reached a settlement with their former spouse and wishes to give effect to that informal settlement. Advisers should direct the client to consult with a lawyer in order to document the agreement reached, as the former spouse could spend the money received in the informal settlement and then consequently apply to the court for property settlement seeking a further division of whatever assets they have together with whatever assets the client has at the date of hearing, which may be months or even years after the informal agreement was effected. The court has in the past made fresh property settlement orders in favour of former spouses who received their full entitlement when the first unenforceable agreement was entered into and required one spouse to pay the other further monies. This would be in addition to the significant legal costs that the client would incur. The adviser should advise the client not to hand the money until the agreement is signed, sealed and delivered. ¶18-835 Family law mediations As discussed at ¶18-800, the Family Law Rules require parties to attend Pre- Action Procedures (PAP) before proceedings are commenced. This is an opportunity for advisers to seize upon and be involved in the settlement of their client’s family law disputes. This would be done in conjunction with the family lawyers retained by the client(s). The adviser’s role in the negotiations and structuring of settlements at mediation sessions could save the parties a significant amount in legal fees and in tax costs. Now, more than ever, lawyers and advisers need to communicate and collaborate to deliver wholesome and complete advice to their clients. ¶18-830