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Separations are most likely to occur in the first quarter of the year. A new year means a new life for many people, so how can accountants assist their clients going through a divorce?
Accountants: What to do when your clients divorce
12 December 2022
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5 minute read
At our family law firm, we know that the beginning of the year is going to bring a stream of new clients who want to start their new year with a new beginning.
Accountants frequently provide valuable advice in family law cases to assist couples who are negotiating the complex financial aspects of their divorce and separation.
An effective collaboration between your family lawyer and your accountant (or forensic accountant) can make all the difference in achieving a more equitable and favourable separation for all parties.
Accountants are valuable trusted advisors for both the legal teams and separating couples. However, confusion can arise about technical aspects of family law which many accountants may not be aware of.
In this article, we consider five important areas that accountants need to be across when assisting in a family law matter.
1. Time limits for property settlements
Accountants need to know that property settlement negotiations can commence as soon as a couple is separated. The time limits around separation and divorce (the 12-month rule for married couples or 2 years for de facto couples) applies as a limitation to when you can commence property proceedings. It does not apply for parenting proceedings.
2. Correctly identifying the asset pool
The Family Law Act broadly defines marital property. A property settlement in family law can include superannuation, personal injury settlements, inheritances, lottery wins, an interest in a company, an interest in a trust, as well as real estate and other tangible assets.
This extremely broad definition includes assets that may have been transferred out of one party’s name. It also includes assets held individually, jointly or included in family trusts and company structures.
For the purposes of divorce and separation, property value between parties is evaluated on the day of settlement or trial - rather than the official date of separation.
3. Value of assets can change between separation and divorce
Many accountants may mistakenly believe that the asset pool of both parties is determined at the time of separation. However, the Family Court focuses on the asset pool at the time of the finalised settlement.
The asset pool can vary considerably between the date of separation and final divorce settlement. During this period, this could be a time where parties might try to hide or minimise assets.
A good example of this is where one party might have a personal injury or inheritance which is pending at the time of separation. If the personal injury settlement is unknown at time of separation - it’s possible that either the husband or the wife could seek to delay the potential payout - so it’s not included in the asset pool. (Remembering that the asset pool is determined on the final divorce settlement).
4. Understanding how a Financial Agreement works
Financial agreements can come in the shape of prenuptial agreements (made prior to marriage or cohabitation) or after marriage. Prenuptial agreements in Australia are formally called Binding Financial Agreements (BFAs) and they typically cover:
- Real property and assets (such as your home and car)
- Superannuation
- Business or company assets (including shares or income earned
- Debts and liabilities
- Inheritance and property trusts.
A financial agreement which is established before marriage can be a useful tool to assist couples when they are commencing formal negotiations about the formal splitting of assets. Financial agreements might set out in detail what types of assets are included in the asset pool, and what types are not.
Prenups can also decide to exclude things like family inheritances or gifts or loans. Accountants skilled in estate planning should have an excellent understanding of how these agreements work in practice.
Accountants heading into divorce season should be consulting the family lawyer they are collaborating with on the divorce - to get the best understanding of the nuances around a binding financial agreement and division of assets upon divorce.
5. Understanding the Disclosure obligations in Family Court
During a divorce, each party is required to give a “full and frank disclosure” of their financial situation to the other party and to the court - for the five-step test to be correctly applied. This is where it’s important to have engaged a skilled accountant to help with their disclosure obligations (which can be complex).
The duty of disclosure includes a specific list of documents to be produced in order to ascertain the financial position of each party. Typically, these documents include: the three most recent income tax returns and assessments, superannuation entitlements (and fund statements), interests in companies, trusts or partnerships, balance sheets, profit and loss statements and depreciation information. But where there’s a more complex asset pool, this can include additional elements – particularly in high net worth divorce cases.
Accountants working in family law need to understand all the nuances around full and frank disclosure of assets as well as the significant penalties for incorrect reporting.
Considerable penalties apply if either party fails to disclose or attempts to hide assets. In addition, professional legal and financial advisors are also bound by similar rules around disclosure. Failure to do so could result in being found in contempt of court.
When a couple decides to separate it’s in both their best interests to be instructing not only skilled divorce lawyers, but also to have engaged competent accountants who understand some of the legal mechanisms involved in finalising a divorce.
Author: Hayder Shkara is the principal of Justice Family Lawyers and Melbourne Family Lawyers. His team has vast experience in family law, including financial and property settlements, divorce, child custody matters, wills and estate, consent orders and binding financial agreements.
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