A recent article by ABC News highlights the importance of asset protection where second relationships are concerned.
Millie was aware that she was in a de facto relationship but thought her home was protected because her partner, Paul never paid any bills associated with the property and was not listed on the mortgage. This was not the case.
Millie had previously been in a 10 year marriage and shared a son with her ex-husband. Mille and Paul dated on and off before they commenced a de facto relationship in 2012 when Paul moved into her home. Paul entered the de facto relationship with a tax debt. He also owned a home which he sold during the relationship and applied some of the proceeds of sale toward the family’s living expenses for the benefit of Millie and her son. He built a carport at Millie’s home. Millie maintained that his contribution toward these expenses and labour were in lieu of him paying rent or board. In 2018 Millie and Paul separated.
Millie did not realise that under Family Law, Paul’s tax debt could be considered a joint liability despite being in his name only. The first step in reaching a financial settlement in Family Law is to determine the property pool (assets and resources) available for distribution between the parties. This involves identifying all assets including superannuation and liabilities and financial resources. All assets may be taken into account including those owned jointly, individually, or by a family trust or company. What is ultimately taken into account is at the Family Court’s discretion.
Paul, a sole trader, had not been filing his tax returns. Following the separation, he filed over a decade of returns and in total owed $300,000 to the Australian Taxation Office (ATO). Prior to the commencement of the de facto relationship, Millie helped Paul write a letter to the ATO to be put on a payment plan for a $50,000 tax debt. She maintained that she never thought of it again and did not realise Paul had such a significant tax debt.
Ultimately the Family Court found that Paul’s tax debt was a joint liability which formed part of the property pool available for distribution between the parties, on the basis that Millie was aware of it or at least his reluctance to file tax returns. Millie benefited from expenses paid by Paul. His non-payment of tax enabled him to have more income to meet these expenses. Millie did however receive a 15 per cent adjustment of the net property pool in her favour in recognition of Paul accumulating an ‘unnecessary’ tax debt. Millie was ordered to pay Paul the sum of $500,000. She could not afford to do so, so her home of 27 years was sold to pay Paul out.
It is becoming more common for people in second relationships to enter into a Financial Agreement (also known as a ‘Pre-nup’ or ‘Continuing relationship’ agreements) to protect assets accumulated prior to the relationship.
A Financial Agreement is a private contract entered into by a couple that governs the financial relationship between them. They address how the parties’ property and financial resources are dealt with at separation. Importantly, Financial Agreements remove the power of the Family Court to make orders in relation to all financial matters to which the agreement applies. The common misconception that Financial Agreements ‘are not worth the paper they are written on’ is not the case when drafted correctly and carefully.
If Millie and Paul had agreed to enter into a Financial Agreement, the outcome may have been very different.
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Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.