For Richer or Poorer - Contracting Out the Property Relationships Act 1976
The Property Relationships Act 1976 ('the Act') is the piece of legislation that governs the classification and division of relationship property upon separation and applies to all relationships including marriages, de facto relationships and same sex relationships.
The defining feature of the Act is that it provides for the equal sharing of the assets and liabilities of the relationship irrespective of the differing financial contributions of either partner throughout the relationship. In many cases this includes situations where one party may have brought significantly more assets into the relationship than the other.
The equal sharing provisions of the Act apply to all relationships exceeding three years duration. Parties may enter into an agreement to contract out of the equal sharing provisions of the Act ("Contracting Out Agreement"). In order for a Contracting Out Agreement to be enforceable, it must be in writing. Each of the partners must also have obtained legal advice before signing the Contracting Out Agreement. Each lawyer must also sign, certifying that they have provided independent legal advice and witnessed their client’s execution of the document.
Contracting out of the Act becomes especially important when there is a disparity in the financial positions of the partners. This disparity in the financial positions of the parties arises where one party brings greater net assets into the relationship than the other. In the absence of a properly signed Contracting Out Agreement the equal sharing provisions of the Act will apply. In the event that the partners separate without entering into a Contracting Out Agreement the effect can be a net transfer of assets from the wealthier partner to the less well off partner.
This can be particularly challenging for the wealthier partner if that separation occurs close to retirement age where there is limited opportunity to recover financially.
The impact of the equal sharing provisions on the wealthier partner is magnified if that person has the misfortune of experiencing two or more separations without protecting their interests by entering into a Contracting Out Agreement. This can have the effect of halving that person’s net worth each time they separate from a three year relationship.
Inheritances and gifts are generally considered to be the separate property of the partner to whom the gift or inheritance was given. However, when for example this gift or inheritance is applied to repay the loan for the family home and the partners go on to separate, the non inheriting partner is entitled to benefit from half of the portion of inheritance applied to reduce the borrowing for the family. Assets in a Family Trust are not necessarily protected from potential relationship property claims. In circumstances where the Family Trust was settled during the course of the relationship or where relationship property has been applied to sustain trust assets, the Trust can become tainted as relationship property. This most commonly occurs when the income of one or both partners is used to meet the loan obligations for property owned by the Trust.
A Contracting Out Agreement is fundamental for anyone in a relationship wishing to secure their assets, especially a partner entering into a second or subsequent relationship.
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