How is Property Distributed in a Divorce Settlement?

14 August 2022 in Family and Divorce Law

A divorce is the legal termination of a marriage while property settlement is the formal division of assets and following a couple separating. Section 79 of the Family Law Act 1975 (Cth) (The Act) is the primary authority regarding property settlements in family law matters.

The division of assets and property may occur through

1. A non-legal arrangement when a couple splits amicably and agrees to divide their assets without any legal documentation. This is a risky approach that should be avoided because these arrangements can be challenged by either party subsequently and may be void in future if one of the parties becomes bankrupt. Furthermore, any transfer of real estate using this arrangement will be subject to stamp duty, unlike the other methods listed below. However, these arrangements can be suitable if the assets of the relationship are nominal.
2. A binding financial agreement (BFA) which is an enforceable legal contract between the parties. However, a BFA does not have the force of a court order which means that either party can later seek to challenge it and the court may set it aside or overturn it, pursuant to s90(j)(k) of the Act. There are various forms of a BFA which can be entered into before, during or after a relationship, pursuant to s90 (b)(c) and (d) of the Act.
3. Consent orders are drafted by the parties’ lawyers and approved and sealed by the court. This is usually performed without any need for the parties to appear in court. This is the most secure method to settle the division of property and any attempt to alter this requires an application to court to set aside the orders, pursuant to 79(a). There are very strict requirements that must be satisfied before this can occur.
4. Litigation is where the Family Court determines the division of assets. This usually occurs when couples and their lawyers are unable to agree on the division of assets and requires appearance in court at one or more hearings. The decision on how property is distributed will be made by the court. Litigation can involve considerable legal expense. There is also a risk that either or both parties will be dissatisfied with the decision made by the court.

As stated, s79 of the Family Law Act 1975 (Cth) is the primary authority regarding property settlements in family law matters. Although legislation doesn’t define a process to deal with all the matters addressed in s79, it is well established in case law that there is a three stage process by which property settlements are achieved.

1. To establish the value of the assets of the parties
2. To consider the ‘contributions’ of the parties (s 79(4) a-c of the Act
3. To consider the matters generally referred to as ‘section 75(2) factors’ which are discussed below in the third stage.

The concept of a Just and Equitable outcome

Once these three assessments are completed, the overall result must be reviewed to ensure it is in accordance with s79(2) which states that the court must be satisfied that the order is ‘just and equitable’. Indeed, the court does not have the discretion to make an order ‘unless it is satisfied that in all the circumstance it is just and equitable to make the order’. Property settlements that come before the court, that is via consent orders or litigation can not be made unless the court is satisfied that the settlement is just and equitable.

In the case of non-legal arrangements the principle of a just and equitable distribution may not apply as they are not reviewed by the court. These are therefore strongly discouraged unless there are nominal assets.

In the case of binding financial agreements, the principle of a just and equitable distribution should apply. However, BFAs are private contracts which do not come before a court and are therefore not reviewed from this point of view. It is important to note that a BFA can be overturned if either party later challenges the agreement and it comes before a court. In this case the concept of a just and inequitable comes into play.

First Stage

The first stage of identification and valuation of property is often the most highly contested issue in proceedings.

Identifying Property

Section 4(1) of the Act defines property as “property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion”. This has been considered by the Full Court in Duff v Duff 1977 which ruled that the term property should be given a broad meaning. In coming to this decision, the court referenced Jones v Skinner 1835 which stated “It is well known, that the word property is the most comprehensive of all the terms which can be used, inasmuch as it is indicative and descriptive of every possible interest which the party can have”.

This broad definition can therefore include such things as shares, bonds, inheritances, redundancy packages, lottery wins, superannuation, compensation payments, an interest in partnership, a licence to conduct a trade, business rights arising under a contract, cars, household contents, jewellery and real estate. It also includes financial resources that will result in a financial benefit to one or both parties. Examples of this are future pension entitlements, an interest in a trust or an anticipated inheritance.

It also takes into account liabilities which includes anything that one or both of the parties are financially accountable for such as debts, mortgages, personal or business loans, personal guarantees or taxation liabilities.

Valuing Property

Generally, assets, particularly assets of a high value such as companies and real estate  are valued by an independent valuer. In some circumstances, the court may determine value as the value of the asset to the relevant party rather than the realisable marketplace value, KD v PA Reynolds 1984. The future value of an asset may also be taken into account.

Although s79 of the Act requires the court to consider property at the time of trial, it sometimes occurs where one party intentionally or recklessly disposes of shared assets prior to trial. This may be in an attempt to diminish the pool of shared property contested in court and may be done through selling assets or gambling funds. Townsend v Townsend 1995 held that “where one of the parties has sold an asset and disbursed the proceeds prior to the trial, that asset ought to be treated as part of the pool of property”. Assets which are disposed of in such a way are commonly referred to as ‘waste’.

Second Stage

The second stage involves consideration of the contributions of the parties. This generally involves balancing the financial and non-financial contributions to the marriage/relationship. Often cases arise where one party is the breadwinner, while the other fulfils the majority of the other non-financial contributions such as cooking, cleaning and childcare.

The law seeks to protect the latter from unjust treatment, through the inclusion of s79 (4)(b) and (c). This gives the court power to make orders in property settlement proceedings which consider various categories of contribution. This includes

• direct financial contributions to the acquisition, conservation or improvement of a property; and
• non-financial contributions, such as to the welfare of the family, including home making and parenting, which sometimes enables the other party to work full time and earn an income.

Case law commentary on these subsections includes the statement by Justice Evatt in the matter of Rolfe 1977 “The purpose of s79 (4)(b), in my opinion, is to ensure just and equitable treatment of a wife who has not earned income during the marriage, but who has contributed as a home-maker and parent to the property…. the Act clearly intends that her contribution should be recognised not in a token way but in a substantial way”.

Many cases discuss how to balance the weighting of non-financial contributions. For instance, in Rolfe 1977 the court noted that “While the parties reside together, the one earning and the other fulfilling responsibilities in the home, there is no reason to attach greater value to the contribution of one than that to the other…..the contribution of each should be given equal value”. Zdravkovic 1982 supported this, stating “after a long marriage, where both parties have worked together and built up such an asset as the matrimonial home by their joint efforts, even if  the efforts of one were that of homemaker alone, equality should be considered the normal starting point”.

The Concept of Special Skills

There have been cases where the courts have favoured the breadwinner who has utilised their ‘special skills’, particularly in high wealth relationships. The High Court of Australia stated in Mallet v Mallet 1984 that there is no presumption that the property of a marriage will be divided equally between the husband and wife, and that each matter is to be decided on its merits. The concept of ‘special skills’ was also upheld in Ferraro v Ferraro 1993 where the court found that the husband had increased the value of their combined property due to his “special skills”.

It is important to note that the wealth achieved via “special skills” is considered to be different to a “windfall” such as a “lottery win” or an “inheritance” in these matters.

However, the more recent cases of Fields v Smith 2015, Kane v Kane 2013 and Hoffman v Hoffman 2014 indicate that the legal principle of “special skills” has become redundant.

In Hoffman v Hoffman 2014, the husband argued that the couple’s considerable assets should be split 70:30 in his favour in recognition of his special contribution, described as his “skill” and “entrepreneurial flair”. He claimed his wife, who raised their four children and did paid work over four decades of marriage was indifferent to his money making ventures and “preferred to play mah-jong and read books”. Federal Circuit Judge Brewster rejected this argument and said the concept of “special contributions” was not part of Australian law. He said the 1984 Mallet v Mallet case was “infected with gender bias” and it’s ghost was “standing in the path of a just and equitable outcome”. Comparing financial and non-financial contributions to a marriage was like “comparing apples and carrots” and that it was “offensive” for home-making and child-rearing to be regarded as “menial” work.

In the landmark case of Fields v Smith 2015, the Full Court of the Family Court, in assessing the contributions of the parties determined that there was equality of contributions during the marriage and that one type of contribution should not be treated as less important or less valuable than the other. Put simply, the wife’s significant contributions as homemaker were not to be treated as less important or less valuable than the husband’s contributions as breadwinner.

In summary, the court’s general view is that, particularly in a longer marriage/relationship, there is no greater weight given to financial contributions compared to non-financial or parent/homemaker contributions.

Third Stage

Stage three involves consideration of matters listed in s79(4) of the Act. Examples of this include financial and non-financial contributions made directly or indirectly by either party.

Section 79(4)(e) references the matters referred to in subsection 75(2).

Subsection 75(2) lists categories for consideration and includes

• the age and state of health of each of the parties
• the income, property and financial resources of each of the parties and the physical and mental capacity of each of them for appropriate gainful employment
• whether either party has the care and control of a child of the marriage
• commitments of each of the parties that are necessary to enable the part to support himself or herself and a child
• the responsibilities of either party to support any other person
• the eligibility of either party for a pension, allowance or benefit under any government scheme or superannuation fund
• the extent to which payment of maintenance would increase the earning capacity of that person by enabling them to undertake education or training to obtain an adequate income
• the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt
• the extent to which the party whose maintenance is under consideration has contributed to the income, earning capacity, or property and financial resources of the other party
• the duration of the marriage and the extent to which it has affected the earning capacity of the party whose maintenance is under consideration
• the need to protect a party who wishes to continue their role as a parent
• if either party is cohabiting with another person, the financial circumstances relating to the cohabitation

Conclusion

The division of assets is a process that involves three broad stages which are;

1. Identification and valuation of the net asset pool. This encompasses a broad range of asset types
2. Assessing the contribution of each party. The most recent family law cases value non-financial contributions as equal to financial contributions.
3. Consideration of specific factors set out in s79 and s75(2) of the Family Law Act

In addition, this must result in a property distribution that is ‘just and equitable’ s79(2). If the matter comes before a court through consent orders or a hearing, a court will not approve a property distribution unless it is just and equitable. In non-legal arrangements and binding financial agreements the courts do not review these. However, the principle of just and equitable distribution will apply if these are challenged by either party at a later date.

The process of property settlement can be complex and can have significant financial consequences. It is important to seek expert legal advice.

Brander Smith McKnight has the legal expertise to guide you through the property settlement process and support you during this very stressful process to ensure that you receive your fair entitlement and that any stress you are experiencing does not contribute to a decision that you later regret.