Property Settlements Under the Family Law Act

The court has the power to re-distribute matrimonial property between the parties to a marriage. This power is set out in s 79(1) of the Family Law Act (“FLA”). Section s 79(2) of the Family Law Act limits the use of this power to circumstances where making such order is “just and equitable.” Additionally, the court is required to take account of the provisions of s 79(4) in exercising its power under s 79(1). Section 90SM of the Family Law Act contains equivalent provisions for parties to a de facto relationship that has broken down.

Although it is not mandated by the Family Law Act, the case law reveals a preferred approach to the determination of s 79 and 90SM applications. This approach is comprised of 4 inter-rated steps:

  1. Identify and value the assets, liabilities and financial resources of either or both of the parties.
  2. Identify and assess the parties’ respective contribution based entitlements in accordance with s 79(4)(a)-(c) or s 90SM(4)(a)-(c) of the FLA. This step involves the determination of the parties’ respective contribution based entitlement. The parties’ contribution based entitlement is ordinarily expressed as a percentage of the net value of the parties’ property.
  3. Identify and assess the parties future economic circumstances in relation to the factors set out in s 79(4)(d)-(g) or s 90SM(4)(d)-(g) of the FLA.
  4. Determine whether it is just and equitable to make an order under s 79(1) or s 90SM(1). The court will determine this issue in view of matters set out in s 79(4) or s 90SM(4) of the FLA.

It is important to note the time restrictions that apply in relation to seeking orders for a property settlement. For married couples, the limit is 12 months from a nullity decree or a divorce decree becoming absolute. De facto couples have 2 years from the date of separation to file an application. In both cases, the court may grant permission to proceed with an application where the applicant has filed outside of the time limit. Permission is not granted as of right. Instead, it requires the applicant to demonstrate that

1. "Property" Under the Family Law Act
2. Valuing the Parties' Property and Debts
3. Assessing the Parties’ Contributions
3.1 Contributions to Property: s 79(4)(a) and (b)
3.2 Contributions to the Welfare of the Family: s 79(4)(c)
3.3 Assessing the Respective Weights of Financial and Non-Financial Contributions
4. The Parties' Present and Future Economic Circumstances
4.1 The Effect of a Proposed Order on a Party's Earning Capacity: s 79(4)(d)
4.2 Spousal Maintenance Considerations: s 79(4)(e)
4.3 Effect of Any Other Order: s 79(4)(f)
4.4 Provision of Child Support: s 79(4)(g)
5. The Just and Equitable Requirement
6. Binding Financial Agreements Under the Family Law Act
6.1 Requirements
6.2 The Effect of a Binding Financial Agreement
6.3 Setting Aside Financial Agreements

The 4-Step Process







“Property” Under the Family Law Act

“Property” is defined in s 4 of the Family Law Act as: “property to which those parties [i.e. parties to a marriage or de facto relationship] are, or that party is, as the case may be, entitled, whether in possession or reversion.” This definition does little to circumscribe the class of legal interests that might count as “property.” Accordingly, much of this concept’s substantive content comes from the court’s attempts provide a more precise definition.

In general, the term “property” has a very broad meaning. It has been held to include:

  • real property;
  • personal property;
  • choses in possession or action (both legal and equitable);
  • shares in a company;
  • partnership interests;
  • trade or professional licences;
  • rights related to a property held in trust;
  • a beneficiary’s interest in a deceased’s estate;
  • contractual rights; and
  • virtually any other interest that a person presently owns

Property does not include expectations of an interest that a person may own in the future. This holds true regardless of the likelihood of that interest vesting in the relevant party. For example, a mere expectation that a trustee will exercise their discretion in favour of a beneficiary is not property under the Family Law Act. There is, however, an exception where one of the parties has the ability to unilaterally vest property in themselves: Kennon v Spry (2008) 238 CLR 366.



Valuing the Parties' Property and Debts

The court must identify and value the property of the parties or either of them before making orders altering their respective property interests under s 79(1) or s 90SM(1) of the Family Law Act. All of the parties’ property must be taken into account. This includes property vested in a party’s trustee in bankruptcy and property owned by certain third party entities, such as companies. If the court is unable to identify all of the parties’ property or that of a party’s trustee in bankruptcy, then it is unlikely that the court will be satisfied that the orders sought are “just and equitable.” This would be fatal to an application for a property order under s 79(1) or s 90SM(1).

Once all relevant property has been identified, the court must then value that property. This is generally a two-fold process. First, the court will deduct the value of any encumbrances from the value of the property over which they are secured. A property’s value refers to its value at the time of the hearing. The second element of this process involves deducting the value of all unsecured liabilities from the value of the net asset pool. This will result in the court’s determination of the net asset pool.

There are, however, circumstances where the court may disregard unsecured liabilities. This may occur in relation to liabilities that are:

  • unlikely to be enforced (e.g., a loan from a family member);
  • unconnected to the parties’ relationship;
  • unreasonably incurred;
  • incurred due to a wanton disregard for the other party’s entitlements; or
  • indeterminate or vague.

Additionally, in determining the net value of the parties’ assets, the court may take account of “realization costs.” “Realization costs” are the costs associated with converting an asset into cash. For example, the realization costs associated with selling a property would include any relevant capital gains tax.



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Assessing the Parties’ Contributions

Sections 79(4) and 90SM(4) of the Family Law Act sets out seven considerations that a court must take into account in considering what property orders might be appropriate. Each of these considerations can placed into one of two categories:

  • Contributions to either the property of the parties or the welfare of the family; and
  • The parties’ present and future economic circumstances.

This section is concerned with the first category of consideration and how it relates to the court’s assessment of the parties’ contribution based entitlement.



Contributions to Property: s 79(4)(a) and (b)

Sections 79(4)(a) and (b) require the court to take account the parties’ respective contributions, or those of their children, to property, either presently or previously owned by the parties. Such contributions may be direct or indirect, financial or non-financial. They may relate to the acquisition, conservation or improvement of property. In general, a contribution to property is any action of economic significance. This means that contributions which fail to yield any economic advantage may also be taken into account in assessing the parties’ respective contributions.

Some specific examples of financial and non-financial contributions to property include:

  • mortgage payments;
  • purchasing real estate, motor vehicles, insurance policies, company shares, etc.;
  • providing both inspiration and criticism with respect to works of art produced by the other party who earned a living as a successful artist: In the Marriage of Whitely [1992] FLC 92-304;
  • obtaining a lower interest rate with respect to a mortgage on account of being a member of a particular building society: In the Marriage of Thomas [1981] FLC 91-018;
  • a party’s parents providing rent free accommodation, thereby enabling the parties to acquire property with the money they saved: In the Marriage of Pellegrino [1997] FLC 92-789;
  • conserving and improving property subsequently inherited by the other party: In the Marriage of James [1978] FLC 90-487;
  • previously caring to the other party’s deceased parents in circumstances where that party received an inheritance from them: In the Marriage of Health; Westpac Banking Corporation (Intervener) [1983] FLC 91-362;
  • gifts from third parties to either or both parties;
  • performing maintenance works on any property owned by either parties;
  • home renovations;
  • windfalls such as lottery winnings; and
  • domestic duties such maintaining the household and rearing children.

There are two ways the court can go about assessing the parties’ respective contributions to property. First, it may assess the contributions that either or both parties have made to each particular item of property. Second, it may assess the parties’ respective contributions to the property owned by either or both parties as a whole. The court generally adopts the second, global approach. However, an asset-by-asset approach can be more appropriate, especially in cases involving relatively short relationships.

In assessing a party’s respective contributions to property, the court may consider contributions made during the entire course of the relationship. It may also take account of contributions make after the breakdown of the relationship. The court will take a similar approach with respect to assessing the parties’ contributions to the welfare of the family.



Contributions to the Welfare of the Family: s 79(4)(c)

Section 79(4)(c) requires the court to take account of each party’s contributions to the welfare of the family. The main purpose of this section is to ensure that the court accords due weight to the parties’ respective contributions as a homemaker or a parent independently of their financial utility. Such contributions include cooking for the family, caring for the children and other domestic activities.

Although the paradigmatic examples of contributions to the welfare of the family are domestic activities, the court is not limited to considering such activities when assessing the parties’ contributions under s 79(4)(c). It may also take account of financial contributions to the welfare of the family. For example, a court may regard a party who uses their income to pay for family related expenses such as children’s tuition, groceries, utility bills, family vacations, etc., as having made a financial contribution to the welfare of the family.



Assessing the Respective Weights of Financial and Non-Financial Contributions

The court is required to assess the parties’ contributions in light the considerations set out in ss 79(4)(a), (b) and (c). In doing so, it must attribute an appropriate weight to each contribution. Natually, then, an issue arises as to how the court should use the concept of weight to measure the significance of fundamentally different types of contribution – i.e., financial and non-financial contributions.

The authorities seem to provide little practical guidance. What does emerge, however, is a certain consistency in the court’s findings with respect to its assessment of the parties’ contributions. In an average case, the court is likely to find that the parties contributed in equal proportions. An “average case” might be described as a case where the parties have:

  • acquired relatively ordinary assets during the course of their relationship, such as a house, car, an investment property and superannuation entitlements;
  • cohabitated for a relatively lengthy period of time; and
  • generally met each other’s expectations with regard respective roles in the context of the relationship.

There are, however, at least three circumstances where a court appears to be more willing to depart from a finding of equality of contribution. First, one of the parties had brought substantial property into the relationship. The significance of bringing substantial property into the relationship is that it mitigates the force of an arguments to the following effect. Namely, that a parties’ domestic contributions enabled the other party earn an income which is then used to acquire property. The reason why this argument cannot be persuasively relied upon in relation property brought into the marriage is simple. There is no connection between a party’s domestic efforts and property acquired prior to those efforts being deployed. Of course, the longer the relationship, the less significance a court will attribute to the property that a party brought into a relationship.

Second, one of the parties has made contributions outside the usual range of contribution as a result of their exceptional skills. Most of the cases relevant to this proposition have involved high net worth individuals with extraordinary business talent. Neither of these factors are a pre-requisite to the court finding that one of the parties made greater contributions based on their exceptional skill set. Nonetheless, recent authorities seem to demonstrate the court’s tendency to assess the weight of a party’s ability to accumulate substantial wealth as equal to the other party’s domestic contributions. This is consistent with the proposition that attributing greater or lesser weight to a party’s contributions is ultimately matter of judicial discretion exercised in accordance s 79(4) and applied to the facts of the case under consideration.

Third, the parties’ relationship lasted for a relatively short period of time, say, less than ten years. In these circumstances, it is unlikely that the domestic contributions of a party may not equate to the financial contributions of the other party. This observation, however, is subject to a number of caveats. A finding of equality of contribution may be available on the evidence before the court when the financial contributions in question are relatively modest. It may also be available where the relevant domestic contributions consist in rearing a newborn child relatively early on in the relationship. Once again, the proper weight attributed to a contribution is matter of judicial discretion. The preceding observations should not be mistaken for legal principles. Their intent is merely to provide guidance as to how a court may assess the parties’ contributions in certain categories of case.



The parties’ present and future economic circumstances.

Once the court has assessed the parties’ contributions under s 79(4)(a)-(c), it provisionally adjusts the parties’ interests in property accordingly. It then considers making a further adjustment in light of the parties’ present and future economic circumstances. The considerations that the court takes into account in making this adjustment are set out in s 79(4)(d)-(g).



The Effect of a Proposed Order on the a Party’s Earning Capacity: s 79(4)(d)

Section 79(4)(d) of the Family Law Act requires the court to take account of the effect any proposed order may have on the parties’ respective earning capacities. An order may affect a party’s earning capacity in circumstances where it requires the sale of an income producing asset. In general, the court will not make orders that affect a party’s capacity to earn income. It will depart from this position, however, if it is the only way to secure a just and equitable outcome.

For example, the pre-eminent asset of the parties to a property dispute may be an ownership interest in a business. That interest might belong to only one of the parties. It may also be that party’s source of income. The other party’s legal entitlements may be such that achieving a just and equitable outcome requires the sale of the business. In these circumstances, the court may order the sale of the business. This situation is different if it is possible to achieve a just and equitable outcome without selling the business. In these circumstances, the court may make orders that are consistent with the relevant party retaining their ownership interest in the business.



Spousal Maintenance Considerations: ss 79(4)(e)

Sections 79(4)(e) requires the court to take account of the factors relevant to determining an application for spousal maintenance. These factors are set out in s 75(2). When considered in relation to s 79(4)(e), the spousal maintenance factors are considered at large. That is, the court’s treatment of these factors in the context of a property dispute is not limited by the fact that they may be considered differently in relation to a maintenance application. Instead, they are considered for the purpose of ascertaining the parties’ current and future economic prospects. The court’s assessment of these matters may in turn warrant an adjustment to its provisional assessment of the parties’ respective entitlements flowing from its consideration of s 79(4)(a)-(c).

In addition to considering the parties’ current and future economic prospects, s 79(4)(e) empowers the court to examine past events. One particular category of event that is often considered under this paragraph is “waste.” Instances of waste involve the destruction, diminution or pre-mature distribution of matrimonial assets. For example, spending vast sums of money on drugs and alcohol in a manner that is completely disproportionate the amount of money the relevant party has spent on similar pursuits in the past may about to waste.

However, it should be noted that not all financial losses constitute waste for the purpose of s 79(4)(e). This is to reflect the principle that parties to marriage should share financial losses and gains in circumstances where the loss did not result from conduct that is deliberate, reckless or wanton. For example, a substantial loss caused by a decline in the stock market would ordinarily be shared by the parties in the same way that a substantial gain would.

Section 79(4)(e) also allows the court to take account of the parties’ “financial resources.” Financial resources are essentially income or capital that a party reasonably expects to receive in the future. A beneficiaries’ interest in a trust, pension payments, redundancy entitlements, long-service leave entitlements, future superannuation benefits, etc., are all typical examples of a financial resource.



Effect of any Other Order: s 79(4)(f)

Sections 79(4)(f) requires the court to consider the effect of any other order under the FLA affecting a party or a child of the marriage. Its purpose is to ensure that the court takes account of any order made – or proposed to be made – under the Family Law Act in deciding which property orders to make, if any, under s 79(1). The types of order that are usually considered in connection with this paragraph are parenting orders, orders for spousal maintenance and child maintenance orders.



Provision of Child Support: s 79(4)(g)

This paragraph requires the court to consider any child support liabilities, as well as any future child support liabilities. The weight accorded to a child support liability will vary from case to case.



The Just and Equitable Requirement

The court is required to take the considerations set out in s 79(4) when deciding which order to make, if any, under s 79(1) of the Family Law Act. Sections 79(2) requires the court refrain from making an order that alters the parties’ interests in property unless it is just and equitable to do so. Accordingly, the requirement of justice and equity under s 79(2) of the Family Law Act controls the exercise of the court’s discretion under s 79(1). It should also be noted that the requirement of justice and equity also applies to orders made by consent. That the parties have both sought legal advice will ordinarily constitute prima facie evidence that the orders are just and equitable.

There are no statutory grounds for finding that an order has failed to meet the just and equitable requirement. Nor is the term “just and equitable” defined in the Family Law Act. There are, however, cases where the court has articulated standards as to when an order may not be just and equitable. For instance, an informal settlement that generally reflects the orders a court would make at trial may support a finding that the orders in question are not just and equitable: In the Marriage of Browne and Green [1999] FLC 92-873. Another circumstance in which a property order may not be just and equitable is when the parties continue living together as a married couple: Green v Schneller (2002) 29 Fam LR 346. The basis for this approach is the prospect of the marriage breaking down, thereby rendering the existing orders inappropriate. It should be noted, however, that there is no principal limiting the court’s powers to make orders under such circumstances. Finally, the mere fact that parties’ to a property dispute are required to live apart due to an unforeseen circumstances – e.g., one of the parties being placed into a nursing home – may not result in the orders failing to meet the just and equitable requirement: Stanford v Stanford (2012) 87 ALJR 74.



Binding Financial Agreements under Family Law Act

Financial agreements (also known as “binding financial agreements”, “pre-nuptial agreements”, “post-nuptial agreements”, etc.) are a type of contract that binds both the parties to the agreement and the court. The courts are bound by a financial agreement insofar as they are prevented from making orders with respect to the property, maintenance or superannuation issues dealt with in the agreement. Financial agreements can be entered into by parties before, during or after a marriage or de facto relationship. They are generally sought when a party to a marriage or de facto relationship:

  • has significant assets;
  • is expecting a significant gift or inheritance; or
  • would like to preserve assets for the benefit of children that they have had from a previous relationship.


Requirements

Certain formal requirements must be met if the agreement is to be binding and enforceable as between the parties. These requirements include that:

  • the agreement is in writing;
  • it specifies the section of the Family Law Act under which it is made; and
  • the parties have not previously entered into a financial agreement that has the same subject matter;
  • both parties have obtained independent legal advice from a legal practitioner, concerning (a) its effect on their rights and (b) the advantages and disadvantages of entering into the agreement;
  • each party’s lawyer has certified that their respective clients have received independent legal advice;
  • the agreement is signed by all parties;
  • if the parties are married or contemplating marriage, they have both been given a signed statement from their respective legal practitioners stating that the requisite advice was provided;
  • a copy of the statement is given to either the other party or their lawyer;
  • the agreement has not been terminated or set aside;
  • if the financial agreement deals with property or financial resources in the context of a marriage that has broken down, then those parts of the agreement will have no effect unless the parties have either divorced, produced a separation declaration or one of the parties has died;
  • where provision is made for maintenance, it must specify both the recipient and either the amount of maintenance or value of the relevant item of property; and
  • if agreement relates to a de facto couple, then the parties must be ordinarily resident in the participating jurisdiction in which the agreement is entered into.

There are also substantive requirements that must be met if the agreement is to be binding. These include that:

  • the agreement relates to how any of the property, financial resources of the parties are to be dealt with upon the breakdown of their relationship; or
  • The agreement relates to the maintenance of the parties.

The property and financial resources that are the subject of a financial agreement may deal with property that the parties currently own. It may also deal with property that the parties owned during the course of their relationship, but before divorce. When a financial agreement is made after divorce, it may only deal with property and financial resources owned during the course of the marriage. Additionally, a financial agreement may also deal with matters that are incidental or ancillary to the property or financial resources of parties, and other matters – e.g., child support.

The parties to financial agreement may terminate the agreement by entering into a further agreement called a “termination agreement.” The formal requirements that must be satisfied in relation to a termination agreement are identical to those of financial agreement.



The Effect of a Financial Agreement

A financial agreement generally removes the court’s power to make orders with respect to maintenance or the parties’ property. This, however, is limited to the extent that the financial agreement contains provision in relation to these matters. For example, if a binding financial agreement does not contain provision for some of the parties’ property, then that property may be the subject of a property order.

There are, however, exceptions to the principle that financial agreements achieve finality with respect to spousal maintenance. A court is empowered to make spousal maintenance orders if one of the parties is unable to support themselves without an income-tested pension, allowance or benefit when the agreement came into effect. It is worth emphasising that this exception does not apply to circumstances where a party is unable to support themselves sometimes after the agreement comes into effect.

Financial agreements cease to have effect when a spouse or de facto partner who is a party to the agreement becomes bankrupt. If proceedings arise between the non-bankrupt party and the bankrupt party’s trustee in bankruptcy, the court may make orders for property and maintenance. The purpose of this is to prevent parties from defeating creditor’s claims by means of a financial agreement.

The preceding discussion underscores one important function of financial agreements in relation to spousal maintenance. That is, a financial agreement can remove a party’s liability for spousal maintenance. This removal of a party’s liability is, of course, subject to the two exceptions to the finality of financial agreements set out above.



Setting Aside Financial Agreements

Financial agreements may be set aside under any of the following circumstances:

  • the agreement was entered into by fraudulent means, including non-disclosure;
  • either party entered into the agreement to defeat the interests of a creditor or with reckless disregard for a creditor;
  • the agreement was either void, voidable or unenforceable;
  • circumstances have arisen whereby the agreement is no longer practicable for it to be carried out
  • a material change in circumstances whereby a child or the person with the care of the child would suffer hardship if the agreement were not set aside;
  • one of the parties had engaged in unconscionable conduct in relation to the agreement
  • a payment flag in relation to superannuation entitlement that is covered by the agreement and it is unlikely that a flag lifting agreement will be made.
  • the agreement deals with an unsplittable superannuation interest.

It should be noted that a mere change in financial circumstances is not sufficient to cause the court to set aside a financial agreement.