Naturally, there are strong emotions at play when a relationship breaks down, be it of a married or de facto nature.
There are also many financial outcomes of a relationship breakdown which should be addressed with the client as part of the financial planning process.
In working through these elements, the close collaboration of a client’s financial planner with their legal and taxation advisers is of utmost importance.
When a client is working through the practical and legal outcomes of their relationship breakdown, the importance of strategic financial advice is often overlooked.
However, there is tremendous value they can receive from their financial planner during this difficult period, which can go a long way to helping them stay on course with meeting their longer-term financial goals and objectives.
How can advice help?
Four areas where a client who is going through (or will soon experience) a relationship breakdown can be assisted by their financial planner are:
• Identifying relevant financial advice needs arising as a result of the relationship breakdown;
• Triaging advice priorities into immediate, short-term, medium-term and long-term areas that need to be addressed;
• Articulating to a client the advice areas where they may require specialist taxation and/or legal advice; and
• Attending as required any meetings (conferences) with a client’s taxation and legal advisers.
Let’s look at each of these four areas in more detail.
Financial advice needs
When working with a client whose relationship has broken down, the ‘know your client’ rule takes on a whole new significance.
As a starting position, understanding the nature of your client’s relationship and whether there are any children involved is important.
Whether a client is married or in a de facto (including registered) relationship will have an impact on their advice needs and may affect their immediacy in needing to be rectified. Also, where a client has entered into a new relationship, they may be in a position where they are considered to have more than one spouse, which can have advice outcomes, especially from a superannuation law perspective. Having more than one spouse is becoming increasingly common, leading to complexity and legal disputes.
A common misconception that some clients hold is that they are only obliged to provide ongoing financial support to the biological children of the relationship.
Depending on the dynamic of their former relationship, particularly where biological minor children of their former spouse were supported financially by a client, financial support to those children may also be required.
The best manner of structuring any resultant child maintenance obligation can involve complex taxation considerations and well-drafted legal advice.
Prioritising short, medium and long-term advice areas
Typically, a client experiencing a relationship breakdown will have short-term needs focussed on ensuring there is adequate cash-flow and liquidity to meet immediate expenses (including legal fees), as well as attending to relevant estate planning matters.
Medium-term goals will often centre on ensuring settlement matters (particularly making provision for children) are satisfactorily attended to, with longer-term advice needs geared towards ensuring they are still on track for meeting their broader goals, especially from a retirement planning perspective.
Advice areas requiring taxation and/or legal advice
Structuring a financial settlement in order to divide matrimonial property, as well as tax-effectively meeting child maintenance and/or spousal support obligations are common areas where a client will typically need specialist taxation and/or legal advice.
This is especially necessary where matrimonial assets are owned by structures such as private companies and trusts, including self-managed super funds (SMSFs).
In addition, there are practical matters relating to the relationship breakdown where specialist advice can be worthwhile (e.g. where a client is residing in another jurisdiction and their marriage breaks down).
Seeking specialist legal advice to determine the optimal filing jurisdiction for their specific circumstances may be necessary.
In the (rare and extremely unfortunate) event your client is subject to simultaneous legal dispute in both the Family Court and with the Commissioner of Taxation, the information provided to the Family Court may in certain circumstances be used by the Commissioner.
If you become aware a client is affected by a tax controversy matter, it is strongly recommended they engage their Family Law specialist for advice without delay.
Working with legal and taxation advisers
It can be very helpful from the client’s perspective for their financial planner to work with their legal and taxation advisers to help them to understand relevant advice issues as part of the settlement negotiation process, structure the settlement and brief them as required in executing the required advice outcomes.
Child maintenance trusts (CMTs) can be a useful way to provide for minor children’s maintenance needs, especially where one of the parties to the relationship breakdown is on a high marginal rate of tax.
A CMT can take many forms — as they are quite flexible, they can be structured to suit a variety of scenarios.
However, it is vital to ensure the CMT is appropriately established in order for income from the trust to be considered ‘excepted income’ (ie. taxed at ordinary adult rates) as well as meeting all requirements from a Family Law standpoint.
It is not uncommon nowadays for clients to hold considerable passive wealth within private companies.
Following the Commissioner of Taxation issuing TR 2014/5 on 30 July 2014, the Australian Taxation Office’s view is that cash payments or transfers of property made from private companies to individuals (whether they be shareholders or associates of shareholders) in order to satisfy a Family Law obligation may be treated as a deemed dividend from those companies.
This stance applies to orders/negotiated settlements made after 30 July 2014 and no ‘grandfathering’ rules apply.
Careful structuring can mean Division 7A concerns can be alleviated or minimised, though specialist tax and family law advice is essential.
A common question asked by clients is the capital gains tax (CGT) consequences of satisfying a Family Law obligation.
Broadly, CGT rollover relief exists to ensure a transferor spouse disregards the capital gain or capital loss that would otherwise arise as a result of the transfer, such that the transferee spouse will receive the asset’s cost base that existed for the transferor spouse.
This means any capital gain/loss will be attributed to the transferee spouse at the time when they subsequently dispose of the asset.
Additionally, preserving pre-CGT status for an asset can be especially useful from a taxation perspective. It can also be a helpful negotiation element within the Family Law context.
An often overlooked area is the stamp duty outcomes of affecting a Family Law outcome.
In the (rare and extremely unfortunate) event your client is subject to simultaneous legal dispute in both the Family Court and with the Commissioner of Taxation, the information provided to the Family Court may in certain circumstances be used by the Commissioner.
While stamp duty outcomes will vary across each of the jurisdictions within Australia, nil or concessional duty is broadly available for transfers of relevant assets (‘relationship property’) to a former spouse or child of the relationship, or for sale of assets due to relationship breakdown.
However, there are procedural requirements that must be met in order to receive these stamp duty concessions. Generally, these can be summarised as:
• The relationship needs to have ‘irretrievably broken down’;
• Any asset transfer or sale must have been made as a result of a Family Court order, or in accordance with a binding financial agreement; and
• The relevant duties/revenue office will need a certified copy of relevant order/agreement to finalise transfer. A financial planner’s input can be especially helpful here to ensure the identifying criteria for financial assets they have stewardship over are suitably noted in the agreement (ie. client numbers, registration details).
Advice needed after break-up
The assistance of a financial planner post-relationship breakdown will be crucial to:
• Assisting to develop a list of assets, resources, liabilities and other financial obligations of your client which will be required as part of the Family Law process;
• Appropriately briefing the lawyer engaged to review the client’s existing estate planning position and ensuring all relevant documents are drafted or reviewed to reflect their new personal circumstances. While many clients may believe a new will and Power of Attorney will be required, any SMSF or trust deeds in existence will also require review, as will any existing shareholder’s agreements and company constitutions;
• Conducting a full strategic review of the client’s existing and likely future financial position;
• Effecting superannuation split, including understanding the nature of the parties’ superannuation interests and their underlying components as part of the settlement process and completing/lodging/follow-up of paperwork required to execute split.
Catherine Chivers is the manager — strategic advice at Perpetual Private.
