The Four-Step Approach to Property Settlement in the Family Court

Couples who are married or are living together in a de facto relationship are entitled to have a property settlement.

The Family Law Act 1975 (Cth) governs property settlement for married and de facto couples, except in Western Australia the property settlement between de facto partners is governed by the Family Court Act 1997 (WA).

Both married couples and couples living in a de facto relationship have twelve months from the date of separation by which to apply to the Family Court for a property settlement.

When making a decision on how to divide a couples’ assets following the breakdown of a relationship, the Family Court will use the “Four Step Approach” as follows:-

STEP ONE - Identify and value the assets and liabilities and financial resources of the marriage

The first step in the process of a financial settlement is determining the balance sheet.

All property assets and liabilities of both spouses are included in the asset pool available for division irrespective of when acquired or by whom.  It does not matter whether a party to a marriage holds an asset solely in their name or jointly with a third party.  The interest that they hold after being identified will need to be valued, and it is then included in the balance sheet when assessing the total net asset pool.

In some cases, a party may have an interest in a company or trust.  Where a party is the sole shareholder of a company, the assets held by the company will be treated as an asset of that party and will be available for division.  Similarly, where one party controls a family trust, that entity will be treated as the alter ego of that party and the assets of the trust will also be included in the balance sheet for division.

The Family Court also treats superannuation funds as property of the parties.  Once a superannuation fund has been valued by the Court, the benefit of the fund may be left standing to the sole name of each respective party or may be split whereby a dollar amount is set aside from one party’s fund and then rolled over into a fund of the other party’s choosing.

A tax liability to the Australian Taxation Office (ATO) in the name of one of the parties should be included in the pool of assets and liabilities.  Further, where it has been found that financial losses incurred by one party in the course of a marriage, whether that loss arose from a joint or several liability, the loss is incurred by both parties, except where:

  1. One of the parties has embarked upon a course of conduct designed to reduce or minimize the effective value or worth of matrimonial assets; or
  2. One of the parties has acted recklessly, negligently or wantonly with matrimonial assets, the overall effect of which had reduced or minimized their value.

Finally, there is the concept of “Notional Property” which involves situations where one party expends monies for their own benefit which results in the diminishing of the asset pool available for division.  In some circumstances, the Court can notionally add that property back into the asset pool and treat it as if it had not been expended.  Examples include where there has been expenditure of monies for legal fees, or a gift for one’s new de facto spouse.

STEP TWO - Past contributions made by each party to the property of the marriage

In considering contributions, the Court is concerned with direct and indirect contributions of a financial and non-financial nature towards the acquisition, improvement and conservation of the property and includes:

  1. Direct or indirect financial contributions, including pre-marital contributions, inheritance or gifts, compensation payments and income applied to a mortgage and general outgoings.
  2. Direct or indirect non-financial contributions including a party’s physical efforts to a business or to the household through renovations and maintenance undertaken.
  3. Homemaker and parent contribution including contributions as homemaker and caregiver to any children of the marriage.  Whilst it is difficult to give an exact financial value to such contributions, they are generally recognized in a substantial way.
  4. The assessment of the contribution of each party is represented as a percentage of the net asset pool and there is no presumption of an equal (50/50) split when assessing contributions.  However, in cases where the parties have been married for a long period of time, contributions may be viewed as being equal as both parties have usually made significant contributions in such marriages.

STEP THREE - Consideration of Section 75(2) Factors

Section 75(2) of the Family Law Act 1975 lists various factors to be taken into account in determining the adjustment of the property of the marriage to either party.  These factors include:

  1. The age and state of health of each of the parties;
  2. 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;
  3. Whether either party has the care of a child of the marriage who under 18 years of age;
  4. Commitments of each of the parties necessary to enable them to support themselves, or a child or other person they have a duty to maintain;
  5. Any entitlement of either party to a social security benefit or entitlement under a superannuation fund;
  6. The extent to which one party has contributed to the income, earning capacity, property and financial resources of the other;
  7. The duration of the marriage and the extent to which it has effected the earning capacity of either party;
  8.  Any child support payable by one party to the other and whether it is, in fact, being received; and
  9.  Any other relevant factors or circumstances.

It is important to remember that there are no set rules or presumptions about adjustments that should be made in favour of one party or another pursuant to section 75(2).  In each case, the Court must look at each of these factors and the evidence to decide how much weight should be given to each factor and what adjustments should be made (if any) in one party’s favour.

STEP FOUR - Consider how each party is to receive their entitlement and how to divide the property

After considering the above three steps, the Family Court must look at the overall orders and determine whether such orders are just and equitable in the particular circumstances of the individual case.

This fourth step was added due to the fact that sometimes the calculation of percentages or “equal” distribution of property value does not have the fairest outcome.  For example, the husband of a marriage may have an amount saved in his superannuation fund that is equal to all of the tangible assets of the marriage.  Therefore, he keeps his superannuation and his wife is allocated all of the tangible assets, they are “technically” receiving equal property in terms of value.  However, as the husband would not have access to his superannuation for at least another ten years, the outcome becomes unfair and so other arrangements must be made (i.e. the husband receives some of the tangible property).

It is up to the judge to determine in such cases what is just and equitable.  As every matter is different, there are no standards stating exactly what is just or equitable and so it is the circumstances of each case which ultimately determine the outcome of this step.  The main consideration of the Court will be the present and future needs of each party.