Spooky Stuff in Family Law Property Settlements: What to Watch Out For
Halloween is just around the corner, and in the month of ghosts, ghouls, and scary creatures, don’t get caught out by hidden nasties in your family law property settlement.
In this article, we address some of the lesser-known risks of family law property settlements, so you can avoid the scary parts!
The Importance of a Proper Property Settlement
We encourage all clients to attempt to resolve their family law disputes as quickly, efficiently and effectively as possible. However, it is essential to ensure that you properly consider:
Making sure you have addressed all tax, stamp duty and corporate risks
Ensuring the Orders are easy to follow and effective
Considering long-term impacts and potential future liabilities created by the property settlement
These are essential steps to take in any good property settlement.
Property Settlements Under the Family Law Act
Property settlements pursuant to the Family Law Act can be recorded formally through either:
Orders (made by the court) or,
In this article, we refer to property settlements generally as "Orders". There are nuanced differences between the two, which should be carefully considered before you decide which method is appropriate for you.
Tax, Stamp Duty & Corporate Risks in Property Settlements
The Family Law Act, and tax assessment acts, in combination with state-based legislation, contain various exemptions that are available for parties who are legitimately separating their respective:
Assets
Liabilities
Superannuation interests
…pursuant to a property settlement or financial agreement under the Family Law Act.
This can mean the parties avoid the need to:
Pay transfer duty (stamp duty), or
Assess capital gains tax at the time of transfer of assets
However, it is unfortunately too common see parties who have attempted to transfer a property without having a:
Properly made Order
Terms of settlement
Financial agreement
…falling foul of the very strict transfer exemption rules.
Common Issues Include:
The property is not sufficiently described in the settlement documents
The transferee (the party receiving the asset/interest) is not an entitled party
The transaction is not properly thought out — i.e., WHO needs to transfer WHAT to WHOM and WHEN. We have seen more than one example of someone jumping the gun and transferring an asset before the Court makes the Orders (even though the Orders would have allowed for the exemption). This resulted in the transfer duty being payable anyway and triggered a significant capital gains tax bill.
The asset/interest being transferred required a specific set of steps to be completed – considering the interests, are there any special steps to be taken? This can arise particularly around superannuation and company interests.
Superannuation Splitting Risks
Superannuation in property settlements often leads to costly mistakes:
a. SMSF Risks
As more and more people have large superannuation balances, and in particular, self-managed superannuation funds (SMSFs), we see more cases of people:
Withdrawing cash from their SMSF
Paying it to their spouse’s everyday bank account
Depending on the age of the parties, and the status of their respective interests, it could have:
A massive, unexpected taxation impact
Render the SMSF non-compliant, resulting in a penalty tax
All transfers of interests in/out of superannuation funds must be treated with respect and carefully thought through before taking any steps.
b. Defined Benefit Funds
If your superannuation interest is a defined benefit interest, this can:
Be more difficult to transfer
Result in a significant delay due to the particular rules that apply
Specific legal advice should be sought before attempting to transfer defined benefit superannuation interests.
c. Asset vs. Right Transfer
Are you transferring an asset or a right?
For example, the difference between transferring a share within a company, and resigning as a company director or secretary, is critical and will have a significant impact on the overall outcome of your property settlement.
Understanding the different roles within a corporate or trust entity is imperative to having an effective and easy-to-follow final property settlement.
Legal Compliance for Tax Exemptions
Are there any particular elements of an exemption that must be met to make a transaction fall within the rules?
There are strict rules relating to the sale of a CGT asset, which, if not met precisely, will mean that the transaction is a trigger event, and cause capital gains tax to be assessable.
Clear Legal Language and the Risks of Poorly Drafted Orders
Ensuring any agreement you enter into is able to be given clear effect is one of the most important reasons to consider having a lawyer involved in recording your property settlement through Orders or a Financial Agreement.
A good set of Orders will be clear as to:
WHO needs to do WHAT
WHEN it needs to be done
HOW it should be carried out
So that anyone who reads the Orders can determine how to give effect to the property settlement.
Think About the Third Parties Involved
You must consider who is going to give effect to the Orders, such as:
A conveyancing lawyer
A bank
A superannuation fund
Ask yourself:
Will they, as a third party with no other understanding about the matter, be able to figure out what they need to do and how/when?
Can You Amend Family Law Orders?
Although it may be possible to amend an Order after it is made by the Court, in our experience:
It is costly
It can be difficult
The Court may not agree to the amendment
Our suggestion is to get it right the first time.
Final Checklist for a Safe Property Settlement
In conclusion, well-thought-out Orders should help all parties move forward with a property settlement arranged between them. The below checklist should put you on the right path:
Have you spoken to your accountant, financial planner, or superannuation advisor about the potential long-term and tax impacts of your proposed arrangement?
Are there any “loose ends” that need to be closed off, such as old companies or trusts that are no longer being used, or positions that need to be resigned from?
Are there any unpaid liabilities in joint names that need to be addressed through property settlement?
Are there any properties to be transferred or sold jointly which may benefit from stamp duty or CGT relief under the Family Law Act?
Do you need a lawyer to help draft your Orders to make them plainly clear about who needs to do what, when, and how or to help you understand the steps needed to transfer particular assets?
Contact the Pippa Colman Family Law team today to find out more.