This article is designed to address the tax consequences of certain divorce related actions, such as spousal maintenance and property division. This area is very complex and nuanced, and while we will provide a broad framework for the tax implications related to divorce, should you need specific information or have questions about your situation, please consult your lawyer or a tax specialist. In fact, we advise that you consult a tax adviser even in straightforward cases, just so you will not experience any unexpected tax consequences.

Maintenance Exemption and Deduction

Maintenance payments are exempt from the receiver’s income tax if the payments are made to a person who is or has been a spouse of the one paying maintenance, to or for the benefit of a child of the payer, or to or for the benefit of a child of the other party to the marriage. This exemption extends to maintenance received by a de facto spouse, as well. The general rule is that there is no tax assessed on maintenance received.

The exemption will only apply to payments attributable to the maintenance payer – and not in situations where the payer makes the payments to divest himself or herself of an income-producing asset, or to divert ordinary income that would otherwise be taxable. Essentially, the exemption will not apply if the payer is not acting improperly.

With regard to deductions, the maintenance payer may not deduct maintenance payments from his salary or wages; spousal maintenance may not be claimed as a tax deduction.

Property Division

The tax that is sure to rear its head in the property division area is the capital gains tax. Capital gains taxes are triggered upon the happening of a capital gain event, which can be a gain or a loss of assets. There are more than 50 events enumerated in the Income Tax Assessment Act (ITAA), and they range from the disposal of a capital gains tax asset to the grant of an option or lease.

Certain assets and transactions are exempt from capital gains tax, including vehicles (that carry less than 1 tone and hold less than nine passengers), trading stock, and the disposal of a life insurance policy by the original beneficial owner of the policy. The right to payment from a superannuation fund or other approved deposit fund is also excluded from capital gains tax.

Capital gains and losses related to the dissolution of a marriage or de facto relationship are exempt from capital gains tax.

The law also provides for certain roll-over relief for transfers between spouses. For instance, if your former spouse transfers an asset with capital gains tax attributes, the roll-over relief allows you to take it as the transferor had it (with the same capital gains tax attributes). Additionally, if an asset was a personal use asset to the transferor, it will be considered a personal use asset to the transferee as well, and special rules apply to calculating capital gains for these assets.

There are specially carved out rules with regard to dwellings and capital gains taxes. Particularly if the main residence is used for business purposes as well – in this case a special exemption to capital gains tax will apply.

Superannuation, specifically the splitting of superannuation, carries it’s own tax implications. For instance, if one surrenders their rights to payment out of this type of fund, the capital gains tax provisions will not apply. Additionally, when dealing with splitting certain tax concessions like roll-over relief can apply. Moreover, certain public sector funds will even have untaxed elements or other schemes not subject to tax.

With the lengthy list of exemptions and complexity of capital gains tax law, sometimes it is necessary to make decisions as to how you and your spouse plan to treat certain capital gains tax assets. For instance, you will have to decide which dwelling will be considered the main residence, or you may chose to nominate multiple dwellings as the main residence. These choices you make will certainly have tax implications and thus should be decided prior to any transfer. Typically parties agree to these choices by signing a statement prior to transferring the property, but bear in mind that once a choice has been made, it is binding and cannot be changed or altered later.

Legal costs can also result in tax implications. They are considered in part of a capital gains calculation as incidental costs related to disposal or acquisition of a capital gains asset. These costs should be considered separately from the asset, and should be treated differently. Additionally, money spent on legal or tax advice might be deductible under the ITAA.

Property Orders

The court is given broad discretion with regard to property orders and has the power to alter property interests as it sees fit. However, the court is to consider the implications of capital gains taxes that will arise if a party is forced to dispose of property by order of the court.

Certain exemptions and concessions under capital gain tax law may be available if a property order causes a capital gains tax event to occur. For instance, an order requiring the transfer of property may trigger the marriage breakdown roll-over relief provisions.

As you can imagine the tax implications that can arise through divorce are boundless. The law is very complex; this article is merely intended to give you an idea of the implications and consequences so you may be prepared to address these issues with regard to your specific situation.

The law in Australia clearly outlines the criteria of a de facto relationship.   Section 4AA(1) of the Family Law Act, 1975 says that two people are in a de facto relationship if they “have a relationship as a couple living together on a genuine domestic basis”. Section 4AA(2) helps the courts determine if indeed a de facto relationship exists by allowing the judge to consider a number of factors, including the duration of the relationship, whether a sexual relationship exists and the degree of mutual commitment to a shared life.

In a recent court case, Kale & Karmel, the Family court was asked to determine exactly when the relationship began and ended, in order to divide the joint property fairly.   In this case, the applicant, Kale, was a 58 year old man with two grown children from a previous marriage.   He received a PhD in 1997.  Until about 2005, he was also caring for his two children on a more less equal basis with his ex-wife.   The respondent, Karmel, completed a law degree in 2000, worked for several years in business and in law and in April 2005 opened her own law practice.   There were various questions of property – a shared home, superannuation, cars – but the larger disagreement centred around when the de facto relationship between the applicant and the respondent started and when it ended.

Kale argued that the relationship started in mid-2002 and ended in October 2009, after their physical separation.  Karmel, on the other hand, argued that the relationship commenced four years earlier in 1998 and ended only in January 2010.  The court was forced to look at a number of criteria in order to determine just how long the relationship actually did last.

The court reference earlier cases, concluding that for the purposes of property issues, it must be shown that the parties lives have merged to the point that for all intents and purposes, they are living together as a married couple.   Based on this understanding, the magistrate in Kale & Karmel found that the de facto relationship commenced in late 2001.

The magistrate considered a number of factors which indicate that the de facto relationship did not begin until late 2001.  First, although the relationship started in 1998, the parties maintained separate homes until March 2002.  Kale lived in a home he had purchased some years earlier and Karmel continued to rent elsewhere.

Second, while Kale resided in this original home, he maintained equal care of his children.  The magistrate accepted that this meant that a central part of Kale’s life, mainly his children, did not yet become a part of his relationship with Karmel.

Third, the couple kept separate finances until March 2002, maintaining financial independence.   Proof of this independence was a loan which Kale gave to Karmel and which was paid back shortly after it was given.   The magistrate found this act “contrary to the notion of financial interdependence”.

Fourth, throughout 2000, Karmel pursued a job opportunity which would have required a move to Canberra.  Since Kale’s children remained in Brisbane, there was no question of his relocating.  The respondent also told the applicant that she hoped to find an overseas posting.  The magistrate held that Karmel’s decision to consider and pursue such a professional move ran “contrary to the existence of a de facto relationship”.

Taken together, these factors indicate that the parties were indeed in a relationship, but not a de facto one, since their finances remained separate, they each lived in a different home and they had no other mutual assets.

The court held that the de facto relationship actually did begin in late 2001 because at that time the couple decided that Kale would help Karmel financially so she could acquire a home large enough to accommodate him and his children.  For the magistrate, this was a mutual decision to jointly acquire property, indicating a real merger of their lives.  Significantly, the magistrate did not consider when the property was actually acquired – early 2002 – but when the parties made the decision to buy the property, late 2001.

The termination of the relationship was simpler for the magistrate – it took place when the respondent left the joint home in October 2009.  In total, the magistrate found that Kale and Karmel had maintained a de facto relationship for a period of some eight years, from late 2001 through late 2009.

Choosing a divorce lawyer should be like making any other big Should be a process like when you buy a house or choose a school for your children.  Educate yourself, ask around, ask questions, research on the internet.

Learn about the divorce laws first.  This is important for two reasons.  One, it will give you an idea of what’s involved, which in turn gives you a better sense of control.  The second reason is that it means you’re better informed, so when you start looking for a lawyer, you’ll better understand what he or she is talking about.

Do your research. 

Ask friends and family, call your local law society, ask others who have been through divorce, search the internet.  Build up a list of names, including lawyers people recommended not to use.

Figure out what kind of lawyer you need. 

Ask yourself what kind of person you want to work with.  Are you looking for an aggressive fighter who will get you everything you want and win the battle or do you want someone who can gets results with a more gentle approach?   Do you need someone who will explain everything to you each step of the way or do you prefer to let go and leave the whole burden to the lawyer?

Narrow down your list.

Do some background checking on the names you received.  Look them up on the internet.  If he or she wrote any articles or papers, read them.  This will give you a sense of who this person is and their knowledge of the field.  Ask other people who used the lawyer.  A few bad recommendations should tell you not to hire this person.

Choose a family lawyer. 

Family law is a very specialised area.   Your brother’s best friend might be an amazing criminal lawyer, but that’s not too helpful when you have a parenting dispute with your former spouse.

Start with phone call

You can learn a lot just from that first call.  How long does it take for the lawyer to call you back?  How does the lawyer treat you on the phone?  Use this opportunity to ask about fees.  You might discover immediately that their price is too high for you.  If you decide you do want to meet them, find out if they charge for an initial meeting.  Most lawyers do charge for a first consultation.

Interview before you hire.

Set up appointments with the lawyers who sound right.  Look at this as a job interview – where you are the employer.   How are you treated during the interview?   Is the lawyer answering calls or checking emails?  Is he slandering other lawyers, or worse, other clients?    Do you feel you can confide in this person?  Sometimes a first read is not correct, but sometimes it’s good to go with your gut feeling.  You know what works for you.

Consulting with other experts. 

Family law requires knowledge in other fields, such as business, wills, estates, etc.  Does the lawyer have other professionals to consult with?  You want your lawyer to give you a full picture of the situation and the possible outcomes.  Broader knowledge may be required.

When you choose, get it in writing. 

An agreement should include what the lawyer’s work will include and his or her fees.   Does he work hourly or by the case?  What about additional fees or changes in circumstances?  Emergencies?

If an asset has been purchased post separation using assets of the marriage, then there is a strong basis for claiming that both parties have contributed to the asset.

However, in a situation where one spouse acquires property several years after separation from income generated post separation, then it would be difficult to substantiate a claim.

Where a business asset is sold after separation and the asset was built up during the course of the relationship then it can be possible to claim the proceeds as an asset of the relationship.

If a claim is brought to the Court for determination, it is important to remember that the Court looks at the financial position of the parties at the time of hearing. This can be several years after separation.

The Court will also consider other issues such as future needs, income earning capacity and maintenance concerns when determining a property settlement.

Property divisions are based on the contributions made by each party to the relationship.

In a short relationship, each party will tend to leave the relationship with what they brought to the relationship.

In a long relationship, the ongoing contributions made throughout the relationship are seen to decrease the significance any financial contributions made at the beginning of the relationship by an individual party. The continuing financial and non-financial contributions made by both parties to the relationship tend to erode the ability for any particular asset to continue being owned exclusively by one party or the other.

If your relationship led to you spending time out of the paid workforce and you were contributing to the relationship by caring for children or performing domestic tasks, then you have no need to feel disadvantaged. A property settlement takes into account both financial and non-financial contributions made by each party in the relationship.

The Family Law Act recognises that many relationships operate so that one party takes time out of the paid workforce in order to perform domestic tasks or care for children. These contributions are for the most part considered equal to the financial contributions.

Sometimes both parties continue in the paid workforce, but one party may perform the majority of the domestic tasks. This contribution will also be considered in property settlements.

If you cannot reach agreement with your former partner then an application for property settlement must be filed. There are ongoing opportunities to settle proceedings before a decision is made by the Court. Where a settlement is not reached then the Court will make a decision as to how the property of the couple should be divided after a hearing. If the property is complex then the Family Court will hear the matter.

Parties are often able to reach an agreement about a property settlement with the help of their lawyers. Where parties reach an agreement they can apply to the Court for Consent Orders which is a relatively simple and inexpensive process. When Consent Orders are made the parties gain the benefit of knowing their agreement is binding and enforceable.

Financial agreements can be classified into three categories:

1. Binding Financial Agreement (commonly referred to as a pre-nuptial agreement (entered into before or during the relationship) – s 90B,

2. Binding Financial Agreement during marriage – s 90C and

3. Binding Financial Agreement after divorce – s 90D.

If you have to an agreement without obtaining independent legal advice, remember that you should find out what your legal entitlements are before you sign anything.

Gaining knowledge on your legal entitlements will help you to make an informed decision before you enter into a binding agreement.

A qualified lawyer can draft the agreement for you. This will ensure that the agreement covers all legal issues, particular those you may not be aware of. A properly drafted agreement will help to ensure the agreement is binding.

Depending on the length of the relationship, how the parties have organised their finances and their circumstances, a property settlement can be quite simple or involve complex negotiations.

Both financial and non-financial contributions are taken into account when deciding a property settlement. It is important to understand that the Family Law Act takes into account various items and factors that you may not be aware of. These include compensation payments for personal injury, ill health or disability of each party, superannuation, future needs, the future earning capacity of each party, the health of any children and the financial resources of each party such as expected future inheritances.

It is important to find out what your legal entitlements are before you sign anything.

If you are negotiating an agreement yourself, gaining knowledge on your legal entitlements will help you to make an informed decision.

There are several options for resolving property or financial disputes.

If you and your partner can reach agreement on how your assets and liabilities should be shared you can choose to formalise this agreement. Either a binding financial agreement or consent orders can record the agreement.

Where you and your partner cannot reach agreement on how your assets and liabilities should be shared, an application can be made for the Court to hear your matter. This process is costly and time consuming.

We will always try to resolve your property/financial issues by way of agreement and we will only proceed to a Court hearing as a last option.

Mediation procedures are very effective in dispute resolution and are used to assist parties to reach financial settlements. Mediation is a in a dignified, timely and cost-effective process which can achieve a co-operative result for both parties.