Other Assets & Debts
Remember, you need to divide all your assets and debts. You can’t hold assets and debts with your former partner long-term. To understand the reasons for this, read how splitting finances works.
We’ve already discussed how to divide the house and super.
Here we discuss other assets and debts you should be aware of - some of which can often be overlooked.
When there are joint bank accounts, the common way of dealing with these is to close the joint bank accounts.
You can agree on how the money in the joint account should be divided.
Furniture and Personal property
In most negotiations, separating furniture and personal effects is the least controversial and most straightforward part.
When putting a value on furniture, use second-hand value (not what you paid for it). In other words, how much can you get for the furniture if you sold it at a garage sale or on gumtree etc.
This means that if you or your former partner wants to keep the fridge that was purchased for $2,000, the fridge is only worth its current second hand value, say $500, not $2,000.
Value the furniture each person keeps as a group. You don't need to value each piece of furniture individually unless it's particularly valuable.
Some ideas to consider when it comes to furniture is:
- If one of you is keeping the house, that person could keep all the furniture in it. A second-hand value is then allocated to that furniture. The total value of the furniture is then considered as an asset of the person who keeps it.
- You and your former partner can each take different items, such as a fridge for one person, or table for the other. You both then estimate the total second-hand value of the furniture you are each keeping.
- Both you and your former partner agree to sell all or some of the furniture. You can sell it on Gumtree, Facebook marketplace or have a garage sale. You can then agree to split the sale proceeds. Just remember you will likely get far less for your furniture than you paid for it. Then it may cost you more to replace the furniture you sold (especially if you’re buying it new).
Here are some ideas if you cannot agree on how to divide your furniture or personal belongings:
- One way is each of you gets a different coloured dot and you go around one by one marking which items you wish to keep. You pick one item, then your partner picks one item. Keep doing this until everything has been divided.
- Another way is to try and agree on values for each item and take turns picking items and trying to keep as close to each other’s total values as possible.
- For higher valued items, like art, collectables or ornaments, an expert valuer could be hired. The valuer can assign individual values to each item. You both could then try and split these items according to the overall value.
Collecting Your Personal Belongings
Usually, you and your former partner would keep your own personal belongings, even if they are at a joint house. If one person is remaining in the house, that person should not make it difficult for the other person to enter the house and reclaim their personal belongings.
In saying that, you and your former partner should agree on a convenient time for this to occur.
If you are worried for your safety, you could:
- Arrange for a third person to be present; or
- Leave the keys with a trusted third person who can take the other person through the house.
Capital Gains Tax (CGT)
Capital Gains is when you sell an asset for more than you purchased it for.
For example, if you buy an investment property for $400,000 and then sell it for $500,000, you have made a Capital Gain of $100,000. This Capital Gain then becomes part of your taxable income for that financial year and therefore is called Capital Gains Tax.
Capital Gains Tax does not apply on your primary residence. However, if you have investment properties, a unit trust or shares, these may incur Capital Gains Tax.
After separation, if you and your former partner transfer any property which could incur Capital Gains Tax, it may be rolled over. This means that instead of paying Capital Gains Tax when the transfer occurs, it is payable when the person who has received the property sells it. For Capital Gains Tax to be rolled over, the transfer needs to occur via a Family Court order (eg consent orders) or a financial agreement.
If you and your former partner think Capital Gains Tax may be payable, you should see a tax accountant or accountant to get proper advice.
If you and your former partner have a business, this becomes a relevant asset.
If one of you wants to keep a business, a valuation should be obtained (if the business is worth a significant amount). The value of the business is important to determine the fair price of the business.
A business valuer does the valuation. They look at the size of the business, the number of employees, revenue, profits, assets and a number of other factors.
As with a real estate agent, the business valuer should be independent and have no previous relationship with you or your former partner.
Depending on the business structure, you or your former partner may be a manager, director or trustee of the business. It is common in this situation for the person not keeping the business to step down from these positions.
You or your former partner may also be a shareholder of a company, unit holder of a unit trust or beneficiary of a family trust of the business (depending on its structure).
Again, it is common practice for the person not keeping the business to transfer their interest in the business to the person keeping it. This means transferring their shares, units or being removed as beneficiary of the family trust.
Some people have a micro business (just a company with them as the only employee). If this business has no assets, no staff, and is just a tax-effective vehicle – then it may not be worth much and you may not need a valuation. In this situation, you can agree on the value between yourselves.
You should get tax advice to anticipate any capital gains consequences of transferring the business.
You and your former partner may have signed guarantees for your children's mortgage, on behalf of a business, for an investment loan or for each other.
Upon separation, you may not want to continue with these guarantees.
You may have given a guarantee for the business or business loans. If you or your former partner are not continuing with the business, removing the person not keeping the business from all guarantees is important. Both you and your former partner should agree to do everything necessary to remove the other person from the a guarantee
You need the written permission from the lender to remove someone from a guarantee. This may require a refinancing to occur.
For all guarantees, it is important you understand the terms of the guarantee and how you can remove yourself as a guarantee. If you are unsure, legal advice should be sought.
You and your former partner need to decide who will be responsible for the debts, whether they are joint or not.
Examples of debts are mortgages, credit cards, car loans and personal loans.
Do not forget to discuss who will be responsible for what debt in your negotiations.
In most joint debt situations, you and your former partner are ‘jointly and severally’ liable. This means that the lender can recover the money owing from either both of you, or from just one of you (it's the lender's choice). If the lender gets the money from just one of you, it is up to whoever has paid the money to get contributions from the other person (a complicated process).
If only one of you is taking over a joint debt, you and your former partner must do everything necessary to make sure the lender gives their permission to remove the other person from those debt obligations (in writing). This is normally done with the loan being refinanced into one person’s name. This should be recorded in consent orders or a binding financial agreement.
To make a clean break from each other, you should not have any joint debts moving forward.
When discussing who will take over which debts, it is also normal for the person taking over a debt to give an indemnity to the other person.
Let’s break this down with an example.
If Sally is taking over the joint personal loan, Sally will agree to do all things necessary to remove John from the joint personal loan (e.g get the loan refinanced into her sole name). In addition to this, Sally can also give John a promise to ‘indemnify’ John for any loss he may suffer if Sally fails to remove John from the joint loan (this is the indemnity term).
An indemnity is a promise to repay another person for losses they have suffered as a result of some act occurring (e.g if a person breaches the consent orders or a binding financial agreement).
So in the above example, if Sally fails to remove John from the joint loan, and the lender goes after John for failed loan repayments, John can then recover from Sally any financial loss he has suffered (under the indemnity Sally has given to John).
For an indemnity promise to be effective, it must be properly recorded in consent orders (or a binding financial agreement) otherwise it’s worthless.
When you’re splitting debts, it’s a good idea to also get an indemnity term included regarding that debt.
This type of indemnity can only be recovered against your former partner. So, if they declare bankruptcy in the future, and they don’t have any money, the indemnity they have given you isn’t worth much.
A cash adjustment is just a payment from one person to the other.
A cash payment from one person to the other, can help you reach your agreed percentage split of your total assets.
Say John and Sally are doing their property settlement. They have agreed to a split of 55% of the net assets to Sally and 45% of the net assets to John. After they have divided all the assets (car, house, super etc), they are at 40% to Sally and 60% to John.
They can use a cash adjustment to get Sally to 55% (e.g John makes an appropriate cash payment to Sally to get them to their agreed division).
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