Navigating a high-net-worth property settlement can be complex and emotionally challenging. While the legal process remains the same regardless of asset value, cases involving substantial wealth often come with additional complications, such as intricate business structures, offshore assets, and taxation concerns.
Understanding the legal framework and engaging financial experts can help ensure a fair and equitable outcome.
This guide breaks down the key considerations and challenges specific to high-net-worth property settlements in Australia.
Important points to remember
- The Family Law Act 1975 (Cth) outlines a statutory process for property settlements, applicable to all cases regardless of asset value.
- High-net-worth settlements often involve complex asset structures, requiring forensic accountants, business valuers, and tax specialists.
- Financial and non-financial contributions (e.g., homemaking) are given real weight by the courts in property settlements.
- Tax implications, including Capital Gains Tax (CGT) and Division 7A tax, must be carefully considered to avoid financial pitfalls.
- Mediation can provide a cost-effective and flexible way to reach an agreement, but full financial disclosure is essential before engaging in negotiations.
Understanding the property settlement process
Regardless of the value of assets involved, the fundamental approach to property settlements in Australia remains consistent. The Family Law Act 1975 (Cth) outlines a process of reasoning that the courts follow to determine a fair property settlement – in most cases, it involves 4 steps:
- Identify and value the net asset pool available for distribution.
- Assess the contributions made by each party, both financial and non-financial.
- Consider the future needs of each party, including disparities in income and financial security.
- Determine a just and equitable outcome, ensuring fairness for both parties.
However, high-net-worth settlements introduce additional complexities at each stage, which we will now explain.
Breaking down the four-step process in high-net-worth property settlements
Step 1: Identifying and valuing the net asset pool
Determining the net asset pool in high-net-worth divorces can be more complicated due to the nature of the assets involved. These may include:
- Assets held in various structures (personal names, companies, trusts, self-managed superannuation funds)
- Assets in which there is a non-controlling or minority interest
- Assets that have conditions attached to them, such as share options
- High-value items such as jewellery, artwork, luxury vehicles, and shares
- International assets
- Third-party interests in some assets
Given these complexities, expert assistance from forensic accountants, business valuers, real property valuers, and other specialists is often required to ensure an accurate valuation of assets.
Step 2: Assessing contributions
The leading case, Fields & Smith, has confirmed that the Family Court no longer recognises ‘special contributions’ by high-income earners.
This means that financial contributions, such as business success or investment growth, are not considered to have automatically increased weight in comparison to non-financial contributions, such as homemaking and caregiving.
Importantly, this means that the contribution of a high-income-earning or performing spouse will not automatically be considered greater in value than that of a homemaker/parent. In fact, there is no presumption that contributions of spouses will be considered in any proportions (equally or otherwise) at all – rather, every case is determined based on its own facts.
Step 3: Considering future needs
High-net-worth divorces often involve significant disparities in income between the parties. This typically occurs when one party has acted as the primary income earner while the other has focused on homemaking and child-rearing.
The court will consider ‘adjustment’ factors such as:
- The ongoing earning capacity of each party.
- Financial resources available post-separation.
- The impact of caring for children post-separation, including accommodation costs and how parenting responsibilities affect the carer’s ability to earn an income.
It is by virtue of these factors that the court can adjust in favour of one party or the other the contribution assessment which was completed at step 2.
Step 4: Achieving a just and equitable outcome
A fair division of assets must weigh and balance both parties’ contributions and future needs.
However, practical considerations such as taxation implications (which one party might be left with to a greater degree than the other) can require a further adjustment, and significantly impact the final outcome.
Expert financial and tax advice is crucial to ensuring that all liabilities have been taken into account and in structuring settlements in the most effective manner (tax-effective and otherwise).
Challenges in high-net-worth property settlements
Complex asset structures
Many high-net-worth divorces involve:
- Complex corporate and trust structures
- Significant inter-entity loans
- In some instances, third-party interests
In the case that one party is not forthcoming with financial information, forensic accountants may be required to trace asset ownership and movements and uncover information about the nature and characteristics of assets.
What about evasive action taken by one spouse?
If a party is transferring assets, as part of an attempt to reduce or defeat the claim of the other spouse, the court has the power under Section 106B of the Family Law Act to reverse transactions and return assets to the pool.
The court may also make adverse findings against a party attempting to defeat their partner’s property settlement claim – for example, if a finding is made that the spouse did not reveal that conduct, it is open to the Court to make a finding that it is likely that the asset pool has been diminished by other such steps which have not yet, and will never, come to light. Effectively, if the party has access to other interests, their spouse should receive a larger share of the identified property.
Non-disclosure and misrepresentation
If it is later discovered that one party misrepresented or failed to disclose assets during the settlement process, the court has the power under Section 79A of the Family Law Act to set aside an existing property settlement order, allowing further assessment of a just and equitable property settlement outcome.
A failure to have provided full and frank disclosure can therefore mean that any property settlement reached is not ‘final’.
Business and trust interests
In cases where one party has predominantly managed a business, they will often retain control over it post-settlement. The other party may receive a greater share of non-business assets to balance the settlement.
However, if both parties were involved in the business, the court has the discretion to make orders, congruent with Section 81 of the Family Law Act, to facilitate a ‘clean break’ by removing one party from the structure.
This can impact their future earning capacity, which will be taken into account. ‘Exiting’ a spouse from a business can sometimes have significant tax implications, particularly concerning loan accounts within business structures, which will also need to be taken into account in the settlement.
Tax implications of a high-net-worth divorce
Understanding tax consequences is critical in structuring a high-net-worth property settlement.
Key considerations include:
- Division 7A tax is imposed if business profits have been used for personal expenses, leaving a tax issue to be managed.
- Capital Gains Tax (CGT) on asset transfers (some transfers may qualify for rollover relief, but others may trigger a tax liability, which also needs to be managed in the settlement).
The importance of expert advice
Navigating a high-net-worth divorce in Australia requires expert assistance, including:
- Family lawyers to guide legal strategy and ensure compliance with Australian Family Law.
- Forensic accountants to assess financial records and identify undisclosed assets and their characteristics.
- Financial advisors and tax specialists to ensure a tax-effective settlement structure.
Early engagement with these experts is essential for understanding the financial and legal landscape and achieving the most beneficial and durable outcome.
Mediation as a strategic tool in property settlement
Following full financial disclosure and valuations, mediation can be an effective way to resolve disputes.
Mediation allows for more flexible and cost-effective solutions while reducing the financial and emotional toll of court proceedings. It is a forum that can open discussion about settlement options that might not be open in court.
Speak to a family lawyer to discuss whether mediation is the right strategy for your situation.
Final thoughts: Navigating high-net-worth property settlements
High-net-worth property settlements require careful consideration of legal, financial, and tax implications.
While the principles of property settlement remain the same regardless of wealth, the complexity of assets, business interests, and taxation issues necessitates specialist advice.
By engaging the right professionals early and considering mediation where appropriate, parties can work towards a fair and practical resolution that secures an optimum financial future post-divorce.
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