Your Business and Your Family Law Property Settlement

Full and Frank Disclosure

The first step in preparing for family law property proceedings, is to identify the property of the parties. Each party must provide evidence of the ownership and value of all assets, liabilities and superannuation. This includes any business interests and any corporate structures in which they or either of them have an interest. 

It may sometimes be necessary to engage an expert to provide a formal valuation if the value of the asset cannot be agreed on but often market appraisal can be agreed on to save the expense.

Financial Disclosure

To facilitate agreement on valuation and negotiation between the parties to reach settlement, each party will prepare a financial statement and provide details of all financial assets and resources, and liabilities. This includes income, notice of assessments and tax returns for the last 3 financial years, BAS statements, credit card statements, bank statements, business records and all financial documentation. This must be current and accurate. This is an obligation provided for in the Family Law Rules.

What Type of Business Do you Have?

It is important that you are aware that your interest in a business may be valued and become part of the property pool of the parties. The value will be taken into account when negotiating how the combined property of the former spouses will be distributed in the final property settlement.

The type of business you operate, whether you worked as a partnership in the business with your former spouse or whether you were the sole director of a company that owned the business, are all questions that will have an impact on determining how to finalise the distribution of the parties’ assets in the property settlement.

Sole Trader

If you run your business as a sole trader, it is unlikely that the Court would make an order that would deprive you of your source of income, especially if it is your skills that have allowed the business to succeed. In a business structured as a simple “one-person shop”, this may be achieved in a straightforward off-set in the final settlement, where you keep your business and your former spouse keeps the former matrimonial home. A simple value could be agreed on between the parties rather than going to the expense of a formal valuation. Obviously, other matters such as superannuation, future needs, including those of children and other issues will be taken into account but you would be able to keep running the business.

However, dependent on the size of the business, it may have to be valued as a going concern. This often occurs in larger businesses where there are multiple employees and the business would have to be professionally valued.

Partnerships

Have you worked as a couple in partnership in the business? Do you want to keep the business?

Again, what happens next will depend on the size and value of the business. In circumstances where you have both used your efforts to operate a small business, this will be valued so that one of you may be able to buy out the other and retain the business. Again, all financial information will need to be made available to assess the assets, liabilities and contribution of the parties to see that this is a viable option.

A professional partnership such as an accountancy firm will have a written partnership agreement which sets out the obligations of each partner. The calculation of the partnership’s net income is based on the activities of the partnership rather than the partner. When you separate, the value of your interest in the partnership will be taken into account as an asset in the property pool with your former spouse. 

In order to settle your financial arrangements with your former spouse you may have to sell your interest in the partnership. There will be a clause in the partnership agreement relating to variation of the partnership composition. This will be equivalent to a termination of the old partnership and providing for the creation of a new partnership. 

There will be tax implications relating to the end of the partnership. You should consult your tax accountant to work out the impact of this on your income and tax obligations.

Company Business

Are you the sole director? Is your spouse a director and shareholder but not active in the business?

If you are operating your business as a family company with you and your former spouse as directors and shareholders, the business will be valued in a similar way to a simple partnership. 

If you have third party shareholders, then your share in the company will have to be valued. This can be an expensive exercise as the business itself will have to valued, its assets, liabilities and turnover. In addition, the rights of the class of shares you hold will be determined. If the company has a constitution, there may be “drag along” and “tag along” clauses which allow other shareholders to buy out your interest. This again will affect the value you achieve for your shareholding.

As third parties are involved, the value of your interest may also be affected by whether you are a majority or minority shareholder.

It is important that you understand the constitution, shareholders agreement and all information relevant to how you can dispose of your interest in the company.

Trusts

Many families have set up Family Discretionary Trusts. A number of cases have turned on the issue of who is in control of the trust. It may be a forensic advantage to one party to claim that the grandparents are in control of the trust and that his or her interest is only as a potential beneficiary.

The Trust Deed is important to determine who has actual control and whether the trust is a financial resource of that person. As well, the trust deed will have a clause that will set out the procedure to remove a beneficiary from the trust. The trust will then be able to function normally and the remaining spouse’s interest will be taken into account in the property pool of the parties.

So, Can I keep my Business?

As the above demonstrates, in simple structures such as a sole trader, the Courts will allow the remaining spouse to continue operating the business. Larger and more complicated structures may, via their constitutions or e.g. shareholders’ agreements, allow variations to the business so that the remaining partner can continue in the business and offset the value of his or her interest by paying a sum of money to the former spouse. It also depends on whether you want to retain the business or sell it and move on.

This article is for information only and is not legal advice.