A good working partnership between your legal team and financial advisors is essential. In this article, we consider six big things that accountants need to know about family law.
Accountants will often work in family law cases (along with your skilled legal team) helping couples negotiate the complex financial aspects of divorce and separation.
Accountants need to know how to effectively collaborate with their client’s family lawyer to deliver the most favourable outcome.
Accountants need to understand all the legal nuances around family law including how the Family Court system defines “property”.
Accountants need to understand time limits, how the asset pool is determined, the Five-Step-Test, how property valuations change over time as well as all the tools that family lawyers use when preparing proceedings for court.
Accountants need to know the various complexities around property division during the course of a divorce.
1. Time limits
Many accountants aren’t aware that in family law cases, property settlement negotiations can commence as soon as a couple is separated.
When a couple decides to separate it’s in both their best interests to be instructing not only the most skilled legal practitioners but also to have engaged competent accountants who have an understanding of some of the legal mechanisms involved in completing a divorce.
2. Accountants need to know about family law – how to correctly identify the asset pool
Section 4(1) of the Family Law Act 1975 defines “property” held by each of the parties in a marriage to be:
“property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion.”
For the purposes of divorce and separation, property value between parties is evaluated on the day of settlement or trial – rather than the official date of separation.
Property will include all property held in the name of each of the parties.
This includes assets held individually, jointly or included in family trusts and company structures. Assets can be either domestic or overseas assets and accountants need to know how to correctly identify and calculate both.
In addition, the Family Law Act broadly defines marital property – which can include superannuation, personal injury settlements as well as real estate and other tangible assets.
The family court system then applies a Five-Step-Test to deliver the most equitable division of the shared assets. Accountants need to know precisely how this works in practical terms.
3. Accountants need to know about the family law Four-Step Test
Accountants need to know what the Four-Step Test is and how it works in practice. The Four-Step Test calculates the total assets and liabilities of the couple, considers the previous contributions of each party as well as their future needs. Under the Five-Step Test, the asset division must be just and equitable.
Step 1 – Identifying assets for division
Accountants need to know how to identify the couple’s assets and determine their value. These assets include not only assets held jointly by the couple – such as a house or car – but also personal possessions such as jewellery, cash, furniture, cryptocurrency, shareholdings, household pets and value of insurance policies. They may also include more complex assets not registered in the person’s name – or these could be company assets, family trusts or assets held offshore.
One of the biggest assets considered in Step 1 are superannuation accounts. Skilled accountants usually have detailed knowledge and experience advising on superannuation, early release schemes and self-managed superannuation funds (SMSFs) as well as each fund’s compliance requirements. This skillset is particularly useful for your legal team to correctly identify what elements of your superannuation fund you may be required to split during your divorce
Step 2 – Identifying and measuring each party’s contribution to asset pool
In Step 3, the court will evaluate the financial contribution of each party during the marriage. This will include looking at direct contributions such as property and cash as well as indirect contributions such as those included in family inheritances or gifts received during the marriage.
The courts will consider the important role of non-financial contributions such as parenting or running a household as significant contributions to the couple’s asset pool.
Courts will look at mortgage repayments as well as indirect contributions which might add property value such as renovations or even paying necessary utilities on family property on time. Other indirect contributions may also be unpaid work in a family business.
The courts, when assessing family inheritances and gifts, will consider if those inheritances were originally intended to be shared by the couple (or not).
However, there are no firm rules around how the court may assess those items. When in doubt, accountants working in family law should be checking with the family law principal managing the case about the likely allocation of those assets.
When assessing these types of contributions, accountants also need to be closely consulting the family lawyer about timing which may affect which party is entitled to a greater or lesser share of this asset pool.
Step 3 – Assessing future needs of each party
In this step, the family court system considers the future needs of each party and this step will look closely at things like the age of each spouse, their physical and mental health, capacity to work, their financial resources and their likely current and future income – as well any potential disparity.
For example, if one spouse has significant child care responsibilities which prevents them from working full-time then the courts will take this into account. If there’s been a history of domestic violence within the marriage, leaving one party unable to work to their full capacity (because of mental or physical injury suffered), the courts will consider that as well.
Step 4 – Final review: Is asset division “just and equitable”?
In this final crucial stage, the courts will assess whether the steps set out above have delivered a just and equitable outcome for both parties. If not, further adjustments will be required.
In a sense, the nuances around the Five-Step Test are better suited for the family lawyer to drive the negotiations, than the accountant. During the Five-Step-Test, the accountant’s role will focus upon providing accurate financial valuations which the family lawyer will use to submit to the courts. However, accountants need to know how the courts will apply the five-step-test to produce an asset division which is just and equitable to both parties.
4. Accountants need to know that the value of assets can change between separation and divorce
Many accountants may mistakenly believe that the asset pool of both parties is determined at the time of separation. However, the Family Court looks at the asset pool at the time of the finalised settlement.
The asset pool can change considerably between the date of separation and final divorce settlement.
During this period, this could be a time where parties might try to hide or minimise assets. So, this is where skilled forensic accountants are useful.
A good example of this is where one party might have a personal injury or workers’ compensation claim which is pending at the time of separation.
If the personal injury settlement is unknown at time of separation – it’s possible that either the husband or the wife could seek to delay the potential payout – so it’s not included in the asset pool.
Remember that the asset pool is determined at the time of the final divorce settlement.
5. Accountants need to know exactly how a Financial Agreement works
Financial agreements can come in the shape of prenuptial agreements (made prior to marriage or cohabitation) or after marriage. Prenuptial agreements in Australia are formally called Binding Financial Agreements (BFAs) and they typically cover:
- Real property and assets (such as your home and car)
- Business or company assets (including shares or income earned
- Debts and liabilities
- Inheritance and property trusts.
The Family Law Act 1975 formally defines a Financial Agreement as a formal contract between two or more parties described under Part VIIIA (for marriages) or Division 4 of Part VIIIAB (for de facto relationships).
A financial agreement that is established before marriage can be a useful tool to assist couples when they are commencing formal negotiations about the formal splitting of assets.
Financial agreements might set out in detail what types of assets are included in the asset pool, and what types are not.
Prenuptial financial agreements can also decide to exclude things like family inheritances or gifts or loans.
Accountants working in estate planning should have an excellent understanding of how these agreements work in practice. Financial agreements may also have estate planning aspects around leaving money to adult children. Accountants need to know how prenuptial financial agreements can affect final settlement proceedings.
Accountants need to know that Financial Agreements made before or during a marriage are quite separate from Financial Statements filed during family court proceedings.
The final court Orders may consider information provided in both Binding Financial Agreements as well as the Financial Statements filed during the divorce proceedings.
Accountants need to know and understand the complexities and nuances around a binding financial agreement and division of assets upon divorce.
6. Accountants must understand the family law disclosure obligations
During a divorce, each party is required to give a “full and frank disclosure” of their financial situation to the other party and to the court – for the five-step test to be correctly applied. This is where skilled accountants can step in to help with disclosure obligations (which are complex).
Rule 13.04 of the Family Court Rules defines “full and frank disclosure” to include:
- Listing all sources of income received by each party.
- Property and financial interests – including those contained in trusts or company structures.
- All liabilities.
- All financial resources.
- Any assets which were disposed of in the twelve months before or after the separation.
- Existence of financial agreements (or prenuptial agreements).
Generally speaking, the duty of disclosure includes a specific list of documents to be produced such as the three most recent income tax returns and assessments, superannuation entitlements (and fund statements), interests in companies, trusts or partnerships, balance sheets, profit and loss statements and depreciation information. But where there’s a more complex asset pool, this can include additional elements – particularly in high net worth divorce cases.
Accountants working in family law need to know and understand all the nuances around full and frank disclosure of assets as well as the significant penalties for incorrect reporting.
Family law accounting specialists will also be required to provide undertakings about the accuracy of the information provided (Rule 6.02 of the Family Court Rules).
Considerable penalties apply if either party fails to disclose or attempts to hide assets.
In addition, professional legal and financial advisors are also bound by similar rules around disclosure. Failure to do so could result in being found in contempt of court.
This process includes a substantial amount of procedural paperwork required to comply including:
- production and inspection of documents (Part 6.2)
- list of documents (Rule 6.09)
- orders for disclosure (Division 6.2.3), and
- answers to specific questions (Part 6.3).
Accountants need to know about the improper use of disclosure documents and that these documents are only for use in their family law case (set out in section 121 of the Family Law Act, 1975). Inappropriate use of disclosure documents can result in significant penalties including imprisonment or fines.
Finalising your property settlement – what accountants need to know about family law
Even with the knowledge explained above, accountants need to be confident and effective collaborators with their client’s family lawyers to ensure that there are no mixed messages and all court paperwork is completed appropriately and filed on time.
Justice Family Lawyers often work hand-in-hand with accountants to successfully complete their clients’ divorce and separation and final property settlements.
Our skilled legal team combines strategy, compassion and extensive legal knowledge to help you secure your desired outcome.
We have offices in both Sydney and Melbourne and you can contact us today for a confidential discussion about your family law matter.