There is an enormous amount of benefit to clients of complementary family law and accounting advice. Lawyers cannot provide accounting advice and accountants in turn cannot provide legal advice. Together, however, the collaboration between lawyers and accountants provides for well-rounded advice that lays the financial foundations for clients to thrive even after enduring the financial upheavals of divorce and separation.
Family Lawyers often need the assistance of good accountants to assist on important issues such as:
Unravelling complex financial structures.
Providing advice on taxation implications of any proposed terms of settlement. For instance, when parties are effecting a family law property settlement, accountants can assist to determine what assets may contain latent tax labilities, so to ensure that the settlement terms achieve the desired effect. There is nothing worse for family lawyers than to receive a call from a client whose matter settled a while ago, telling you that their 55% settlement wasn’t really 55% now that they’ve received a tax bill from the Australian Tax Office.
Valuation of businesses, entities and shares.
Advice to clients on the restructuring of their assets. The family law environment can provide unique opportunities for clients to make changes to entities and financial structures, while avoiding or minimising substantial tax and revenue consequences.
Advice to clients about superannuation and the splitting of self-managed superannuation funds.
Advice to clients on their refinancing capacities and options.
We list 5 keys considerations that will assist you, as accountants, when helping your clients through what can be one of the most difficult times in their life.
1. Time Limits
There are no time limits as to when separating couples can start negotiations for property settlement. The sooner the better. However, time limits apply for when they must commence proceedings in Court.
In financial property settlement married couples must commence proceedings within 12 months of their divorce being made final. If parties are not divorced, then there are no time limits to filing an application.
In the case of de facto relationships, proceedings must commence within 2 years of the date of separation.
2. De facto Relationships
What is a de facto relationship?
A de facto relationship is defined in Section 4AA of the Family Law Act 1975. The law requires that two people, who may be of the same or opposite sex, have a relationship as a couple living together on a genuine domestic basis.
In order for the Family Law Courts to make orders for property settlements between de facto couples however, one of four possible gateway requirements must be satisfied:
- That the period of the de facto relationship was at least 2 years;
- That there is a child of the de facto relationship;
- That the relationship is or was registered under a prescribed law of a State or Territory; or
- That significant contributions were made or being made by one party and the failure to make an order would result in a serious injustice.
Tips – how you can help
Identify the existence of de facto relationships and refer them for legal advice as early as possible. Many clients will start living with their partner without understanding the potential financial consequences. Well-intentioned parents also give money, loans, assets and income from trusts to their children who are living with their partners, without understanding the possible implications and how these will be treated . Your client will thank you for identifying the potential issues and referring them for legal advice to help avoid an unintended de facto property settlement claim.
3. Family Law: Understanding the Broad Legal Framework
How does the law decide what each party will receive?
It is important to appreciate it is not a mathematical exercise. There is no rule that there will be a 50/50 division. A party’s entitlement is also not based on a dollar in dollar out approach. The Family Law Courts have a wide discretion and must consider and weight a series of factors against each other to determine an outcome which is overall just and equitable.
Broadly, the Courts’ approach to the alteration of the parties’ property interests includes:
- Identification and valuation of the parties’ assets, liabilities and financial resources.
- Assessing the contributions (financial and non-financial) made by the parties to the acquisition, conservation or improvement of their assets.
- Considering the parties’ futures needs which includes respective earning capacities, age, health and the care of children.
- An assessment as to whether or not the division of assets and proposed orders is just and equitable.
4. Identifying the Asset Pool
What is treated as property?
The term “property” is defined in s4(1) of the Family Law Act 1975 as:
“in relation to the parties to a marriage or either of them — means property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion.”
Broadly, these general propositions apply to property of the parties:
- The value of the property of parties will be taken as at the current time that being at settlement or trial and not as at the date of separation.
- Property includes all property in the name of the parties held individually, jointly, or owned through trust and company structures.
- As to companies and trusts, the use of these have been prolific in family businesses for both tax reasons and a method to protect family assets from creditors. However, the Family Law Courts have substantial power to look through the corporate veil and effect the assets and activities of a trust or company in circumstances where one of the parties has effective control. They key here is control.
- Superannuation is treated as property and can be split.
Tips – how you can help
Assist clients with providing a schedule of assets and liabilities, including explanations on relevant entities and recent valuations.
Each party has a duty to make full and frank disclosure of his or her financial situation to the other party and to the Court. This is where accountants are often called upon by their clients to assist with their disclosure obligations.
Full and frank disclosure is defined in Rule 13.04 of the Family Law Rules and includes disclosure of information such as:
- All sources of earnings including income received by entities under their control.
- Interest in property or financial resources including interests that are owned by a legal entity fully or partially owned or controlled by a party, trusts or other structures.
- All liabilities.
- All financial resources.
- Any disposal of assets in the twelve months immediately before or since separation.
What financial documents need to be disclosed?
The following financial documents generally must be exchanged:
A copy of their 3 most recent income taxation returns and assessments;
Documents about any superannuation entitlements, including superannuation statements and if the party is a member of a self-managed superannuation fund, a copy of the trust deed and the 3 most recent financial statements for the fund;
As to companies, trusts and partnerships they have an interest in:
a copy of the financial statements for the 3 most recent financial years, including balance sheets, profit and loss accounts, depreciation schedules and taxation returns;
a copy of the corporation’s most recent annual return that lists the directors and shareholders; and
a copy of the corporation’s constitution, trust deed and partnership agreement.
Improper Use of Disclosure Documents
There are statutory limitations and penalties for the improper use of documents. Parties are not permitted to use or disclose documents obtained for any other purpose but for their family law case. This is covered under section 121 of the Family Law Act 1975. A party who breaches this, may incur serious consequences including imprisonment or fines.
Exceptions to Use of Disclosure Documents
Despite the above, exceptions to the use of disclosure documents, however, do exist where its use is inconsistent with other legislation, particularly where it is inconsistent with child support, criminal or taxation legislations.
For example, in child support matters, a party could disclose documents obtained in Family Law Court proceedings to the Child Support Agency (CSA), to enable the CSA to determine the other party’s income or financial resources.
The Family Law Courts also have the power to refer breaches of taxation laws or fraud (including Centrelink fraud) to relevant government agencies The consequences of such referrals not only impact upon the outcome of a client’s family law settlement, with tax liabilities and penalties depleting the assets available for division, but clients may also face serious criminal charges.
Tips – how you can help
Assist your client to understand that there is no way around their disclosure obligations.
Obtain their approval to assist them to explain complex financial structures and provide relevant documents.
Remind your client that litigation has risks and unintended consequences. Judicial officers of the Family Law Courts can, and often do, refer breaches of fraud or other offences to relevant government bodies.