Turbulent times and property settlements
We have a pandemic, the sharemarket is in a bear market, the Australian dollar is at an historic low. It’s not great news. If you are going through a property settlement you are probably already alert and concerned about these issues. Here are some practical things to consider.
What’s it Worth?
Property Settlements essentially involve 4 steps, see “The How-to’ of Property Settlement”. The first step requires all the property of the separated spouses to be valued – this is often the most challenging. The relevant value for property is its fair market value.
‘Property’ has a very broad definition, so there are various items that may require valuing in a property settlement, including real estate, shares, companies, furniture, superannuation etc. There are some specific methodologies that apply to valuing some of these assets, such as companies and superannuation so it is essential to get legal advice.
It is also important to understand that once the ‘pool of property’ is collated and a value attributed, it is then necessary to determine the appropriate percentage split and the Family Law Act does not have a mathematical guideline for doing that. The ‘contributions’ of each spouse are considered and that makes it a rather ‘inexact science’.
At the moment there are significant changes happening in the economy so this will have a major impact on the valuation of certain assets.
Here are some tips when considering common asset types:
When valuing real estate, such as the matrimonial home or an investment property, the key word to remember is “negotiate”. Often a common mistake people make in a property settlement is to jump straight into obtaining a valuation (from a Registered Valuer). The problem with this is that once a valuation has been obtained, the value is all but “set in stone” and this can make ongoing negotiations difficult, particularly if one spouse believes the value is incorrect or has since changed.
Ideally, you should look at trying to negotiate an estimate of what the property may be worth before locking in the value by obtaining a valuation. By negotiating, it is up to the parties to decide what the property is worth and if an agreement is reached, the court will rarely interfere with that.
Furthermore, if negotiations are not initially successful, a real estate agent appraisal (usually free) can be obtained. If a few appraisals are obtained, an average can be obtained. This may assist negotiations regarding “value” and avoid the time and cost of a valuation being obtained.
If a valuation is to be obtained it is important that spouses and their legal representatives provide property valuers with accurate information about the property, and if the market is changing that the valuation is updated.
Furniture and Contents
The furniture and contents of a home is often mistakenly valued for its insurance value. In family law property settlements, furniture and contents are valued on a second-hand dealer basis. The contents of the average home, including furniture and white goods (excluding antiques and collections) is usually approximately $10,000.
For married and defacto couples negotiating property settlement, superannuation funds can be split and rolled over. The split can be in any percentage (i.e. 80/20, 70/30, 60/40, etc.), it need not be a 50/50 split, but it can be if the parties decide upon this.
There are different types of superannuation funds, including accumulation funds and defined benefit funds. Their method of valuation is different.
For complex superannuation funds, private superannuation funds or funds in the payment phase, it is recommended an accountant be engaged to determine the value of the fund in accordance with Family Law formulas.
If the sharemarket is changing it is important that up to date values are used.
Business and Shares:
Businesses and shares in public or private companies may fluctuate as a result of local, national or global events. In particular, in the case of a significant sharemarket drop, not only will this require up to date values of listed shares but also be very careful if getting a valuation done on a private (non-listed) business, while the sharemarket is so volatile. It is important that careful consideration is given to the valuation methodology used.
A common methodology used by accountants for ‘small to medium’ sized businesses is the Future Maintainable Earnings method. As the name suggests, the method looks at the earnings which can be maintained in the future and takes into account historical operating results and any upward and downward trends. Most industries will be affected by the current world economic crisis so it would be wise to delay getting a valuation of a business until a more realistic value can be obtained. When a valuation does occur it may be more appropriate for an Accountant, in valuing the business, to consider results pre the economic crisis along with industry projections and other factors.
It is important that business owners are aware of their financial records and what genuine affect the share market drop or market sentiment will have had on their operations and earnings for the relevant period.
‘Clean Break’ Principle
Also keep in mind that when looking to make a property division the policy of the Family Law Act is quite clear, that there should be financial finality – meaning a ‘clean (financial) break’ between spouses with no ongoing financial connection. With that in mind and the current sharemarket conditions you may want to give careful consideration to delaying a final property settlement.
Once the process of attributing values to all property is complete, the other steps of a property settlement can be considered. The moral of the story is that considering values is not straight forward and legal advice should be obtained.
If you have any questions about this article or would like to make an appointment to discuss your personal circumstances, please telephone us on 3221 4300 or emails us at [email protected]