The breakdown of a relationship is frequently ranked second, after the death of a loved one, as one of life’s most stressful events. With a third of all Australian marriages ending in divorce and similar statistics in other countries, it’s little wonder that “conscious uncoupling” has become the ideal divorce strategy (and not just for celebrities). But the reality for many of us is quite different. So, what if there were a way of limiting the emotional and financial fallout of a relationship split?
In fact, there is: by having a financial agreement in place before getting married or moving in together.
Romantic? Not really. It’s true that a discussion about the relationship’s possible end isn’t exactly at the top of any couple’s list when planning a life together. But there are many pluses to having an agreement, and it’s unarguably a pragmatic move.
Love tops the charts as the most popular song theme, but money ranks a close second – and of course the two are intrinsically linked, in pop culture and in life.
A prenuptial (prenup) or cohabitation agreement can benefit you both, fostering better upfront communication about financial matters and helping you to budget and plan a financial future as a couple. It can also provide a hefty ballast for your future financial stability as individuals.
In 2016, the Senate Economics Committee undertook a study of gender disparity in financial security and concluded that “a husband is not a retirement plan”. Clearly, a relationship breakdown can leave either party or both – regardless of their genders – poorer than their married or single counterparts.
So, how can we help you to plan for a “conscientious coupling”?
What does this type of agreement include?
A prenup or cohabitation agreement typically covers:
- assets – what will be treated as marital or defacto assets, such as jointly owned real estate, and what will be treated as non-marital assets (for example, this could be an asset that one party owned before the marriage or cohabitation);
- division of assets – which assets each person would be entitled to, and in what proportion, if the relationship ended;
- financial arrangements on the death of one spouse – this can be useful for blended families and where, for example, you want an inheritance to go to a person or an entity other than your relationship partner;
- future changes – whether the terms will change, for example, if children are involved; whether they are to inherit assets, etc.
Traditionally, these types of agreements are popular where one partner has significantly more assets than the other, or where the partners or their parents have businesses or an inheritance that they wish to retain if the relationship ends. An agreement can help ensure these important things are protected.
How do you make the agreement legal?
A prenup needs to be approved by the Family Court of Australia and both parties must have sought independent legal advice. For de facto agreements, we suggest you speak to a lawyer about the possibility of registering your agreement with the Family Courts in the form of consent orders.
What about tax?
We recommend that you and your partner each engage lawyers in the drafting of your agreement, but we can help with financial and tax strategy, particularly in more complex areas of tax law, which require some flexibility and skillful forward-planning. Here’s a snapshot of some of the areas to consider.
If property ownership transfer is part of an agreement, then no stamp duty is payable if the property is transferred from one partner to another or sold.
Superannuation held by each partner, whether you are entering a marriage or defacto relationship, can also be split by agreement. Self-managed superannuation funds (SMSFs) have more flexibility for restructuring than funds regulated by the Australian Prudential Regulation Authority (APRA).
Capital gains tax roll-over relief
Capital gains tax (CGT) roll-over relief may also apply. As a general rule, CGT is payable on all changes of asset ownership occurring on or after 20 September 1985. However, if you transfer an asset to your partner as a result of the breakdown of your relationship, there is automatic roll-over relief from CGT in certain cases. This can include transferring assets into or out of a family trust as part of a settlement, as seen most recently in the case of Sandini Pty Ltd v FCT  FCA 287 (22 March 2017).
Future and estate planning
Binding financial agreements provide another way to ensure your long-term financial planning goals are not destroyed by a failed relationship, helping to protect your business or inherited family assets. They can be useful in estate planning, too, as they can help achieve some security for people in second marriages or who have children from previous relationships. Provisions for children can be written into an agreement.
Need to talk it over?
While it might be an unwelcome topic to think about before it happens, the end of a relationship often forces people into making financial decisions at the worst time. We can help you minimise the possible negative consequences by helping you to plan your agreement and the ongoing management of your tax affairs.