Breakups are devastating, especially when kids are involved. It can be overwhelming to even begin to process all of the paperwork and legal implications that come with the breakdown of a relationship. Knowing how the process works can make sure that everyone involved has less stress and financial burden.

That being said, not all relationships end on bad terms. What happens if you and your partner separate but you’re still on good terms, friends even? There are many benefits to this, according to the Family Court of Australia, reaching an agreement outside of court can greatly reduce the financial and emotional costs of legal proceedings amongst other advantages. There’s no doubt that maintaining a good relationship with your partner helps you both to move forward, which can make it tempting to agree to informal arrangements on how to divide up your property or assets. The downside is that informal arrangements like this can cause issues especially if either of you has other assets (or liabilities) acquired before your relationship. In the majority of cases, even if you are a ‘happily separated couple’, it’s in both of your best interests to seek out Legal advice and make sure that your financial agreements are legally finalised. Here are just a few reasons why:

Tax implications

Getting to grips with how your tax return might be affected by your property settlement is fundamental. Capital Gains Tax (CGT) is considered assessable income and must be included in your tax return. In their recent blog post, experts in family law Falzon Legal explain that “although the transfer of a matrimonial home between a separating couple does not generally attract CGT under the main residence exemption provisions, CGT liabilities may be triggered when transferring assets such as investment properties, collectables and certain other personal items.” So what does this mean? Effectively it means that any CGT liability can be deferred until later down the track when the asset is transferred. Always make sure that you take potential future CGT liability into account when negotiating a property settlement, and when possible, seek out trusted Legal and Financial advice on the risks and implications to avoid any nasty surprises.

Generally speaking, when you transfer property or real estate, you need to pay stamp duty. However, transactions that are documented in a financial agreement or a consent order may be exempt under the Family Law Act 1975 (Cth). These exemptions can vary across different jurisdictions in Australia, so it’s important to check with your family lawyer to see if you can benefit from them. Having an informal agreement with your partner will not meet the specific requirements needed to be eligible for these exemptions and could actually lead to financial loss. Having a clear and legally binding financial agreement or consent order could actually help you both save on stamp duty fees.

Even when put in writing, an informal property settlement is not enough in the eyes of the law. Aside from missing out on potential stamp duty and tax exemptions, an informal agreement can leave you open to a number of other risks. For example, if one party falls into financial difficulty and becomes bankrupt and the ownership of assets hasn’t been separated, the other partner could risk losing their home, savings, or other properties.

Another one of the biggest risks with an informal property agreement is that both partners retain some claim to future income or assets. That’s right, without a legally binding property settlement, your partner could lay claim to any assets or property that you acquire after the separation, including inheritance.

Next steps

If you find yourself in this situation or you currently have an informal agreement with your ex-partner, it might be time to make that agreement legally binding. Don’t forget, as long as you are joined in the eyes of the law, your finances are intertwined. No matter how harmonious the separation, it’s key that both parties understand the financial implications of the separation, adjust their tax return accordingly, and protect any future finances or properties with a legal settlement.

Turning your informal property settlement into a legal agreement may sound like a daunting task, but it doesn’t have to be. In fact, Falzon Legal, experts in Family Law Parramatta say that “Court proceedings can prove to be an emotional and expensive avenue for clients” and, where possible, the goal should be “to settle matters out of court in order to improve the emotional and financial well-being of our clients.” By making your informal arrangement legally binding, both you and your partner can move forward without the stress of financial or legal implications down the line and focus on being a happily separated couple.