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De facto financial disputes coming to the Federal Courts

By Paul Doolan and Amy Nolan[1]

It's here.  After years of negotiations, promises, and false starts the Family Law Amendment (De Facto Financial and Other Measures) Bill 2008 ("the Bill") has - finally - been introduced into the federal parliament.  The Bill will, if passed in its current form, amend several pieces of commonwealth legislation[2], most notably by means of landmark changes to the Family Law Act 1975 (Cth) ("the Act"). 

Upon enactment, the legislation will bring new financial causes arising out of the breakdown of de facto relationships into the Family Court and Federal Magistrates Court system.

The end of the bifurcated system, that saw de facto couples able to use the federal system to resolve parenting cases but locked into the state and territory courts for financial matters, is hoped to improve access to justice, reduce legal costs and streamline litigation.

Referral of powers

Participating jurisdictions - who is in and who is out?

To date, New South Wales, Queensland, Tasmania and Victoria have passed legislation referring power to the Commonwealth[3].  Existing constitutional power over the territories enables the commonwealth to legislate in relation to the Australian Capital Territory and the Northern Territory.

Both Western Australia[4] and South Australia are still in discussions with the commonwealth over their position in relation to this Bill.

The effect of the Bill commencing will be to overtake the provisions of any existing state legislation in participating states in relation to many, but not all, financial disputes.  The state legislation will be retained insofar as it will apply to those couples not covered by the federal legislation.

Transitional arrangements

Part VIIIAB and Part VIIIB of the new Act will not apply to parties to a de facto relationship that broke down prior to its commencement.

This means that state and territory law will apply in relation to orders and/or injunctions in force at commencement in relation to maintenance and distribution of property.  Proceedings already instituted in relation to such orders and/or injunctions, proceedings arising out of the breakdown of the relationship about financial matters or agreements made in relation to financial matters arising out of the breakdown of the relationship will also continue to be governed by existing state and territory legislation[5].

A state may transition into a participating jurisdiction following the commencement of the Bill.  Such a state will be known as a "later participating jurisdiction".  If a de facto relationship breaks down prior to the state's transition into a later participating jurisdiction, then Part VIIIAB and Part VIIIB will not apply to that de facto relationship and the parties' remedy would be via state law.

Pre-transition time agreements made in contemplation of a de facto relationship, or pre-transition time agreements made during a de facto relationship that are valid under state and territory law, may still be brought under the ambit of the new Act via s 91 and s 92 respectively of the Bill.

When will the new laws take effect?

The Bill was introduced to the House of Representatives on 25 June 2008.  On 26 June 2008, it was referred to the Senate Legal and Constitutional Affairs Committee for Inquiry and Report.  The Senate Report is due to be completed by 27 August 2008.

No proclamation date has yet been set, and it is not possible to forecast when the law will take effect as this remains entirely dependent on its successful passage through both houses of the parliament.

General Overview of the Bill


Definitions

The Bill introduces several new concepts and terms into section 4 of the Act:

    * De facto financial cause: proceedings for maintenance and/or property settlement, financial agreements and third party proceedings in relation to financial agreements.

    * Non-referring state de facto financial law: a law of a non-participating jurisdiction relating to financial matters consequent upon the breakdown of a de facto relationship.

    * Property: defined identically for both parties to a marriage and parties to a de facto relationship, being property to which one or both of the parties are entitled, whether in possession or reversion.  This includes superannuation interests.

    * Spouse party: with reference to a Part VIIIAB financial agreement, a spouse party is a party to the contemplated de facto relationship or de facto relationship to which the agreement relates.

    * De facto relationship: two people who are not legally married to one another, and not in a prohibited relationship, that are living together as a couple on a genuine domestic basis (s 4AA(1)).  In deciding whether a de facto relationship exists, the Court will have regard to specified factors giving such weight as appropriate to these circumstances[6], but none of which is essential to a finding that a de facto relationship exists.  Most importantly, such a relationship can exist between two persons of the same or opposite sex, or if one is legally married to another person or in a de facto relationship with a third party.  The Court has the power to make a declaration as to the existence of a de facto relationship, the period of such a relationship, where the parties were ordinarily resident during that relationship and whether one party made substantial contributions to the relationship (being direct or indirect financial, direct or indirect non-financial, or as a homemaker or parent)[7].

Jurisdiction

What Courts - s 39B(i) of the Act

The Family Court, Federal Magistrates Court, Supreme Court of the Northern Territory and each court of summary jurisdiction of each Territory has jurisdiction to deal with de facto financial causes.

It is intended that the de facto financial provisions apply to the exclusion of any state or territory law, unless:

    * the relationship is not covered by the legislation; and

    * they are not parties to a Part VIIIAB financial agreement[8].

What parties- s 39A(2) and 39Fof the Act

One of the parties to the proceedings must be a citizen, ordinarily resident in Australia or present in Australia on the day an application is filed, unless the proceedings are instituted in a court of a territory in which case a party must be ordinarily resident in that territory when proceedings are instituted or transferred.

What relationships are covered - s86 of the Bill

The legislation will not apply to parties to a de facto relationship that breaks down prior to the commencement of the law.  Those disputes remain governed by state and territory law[9].

Limitation period - s 44 of the Act

Applications for maintenance, declarations of property interests or property settlement must be made within 2 years of breakdown of the relationship (s 44(5)).

A party may make application for leave to apply out of time, and the court is to take into account those factors specified in s 44(6).

Application - Declarations regarding the existence of a de facto relationship

Declarations can only be made if a person to the alleged de facto relationship was ordinarily resident in a participating jurisdiction when the proceedings commenced[10].

Application - Maintenance and property proceedings

Financial Agreements exclude claims - s 90SA(1)

Application cannot be made for maintenance or property settlement if such matters are covered by a financial agreement between the parties.

Threshold test - s 90SB

Application can only be made if:

    (a) the period, or total periods of the relationship, is at least 2 years; or

    (b) there is a child of the relationship; or

    © the applicant party made substantial contributions to the relationship and a failure to make orders would result in a serious injustice; or

    (d) the relationship was registered under state or territory law.

Geographical requirement - s 90SD and s 90SK

    (a) Either or both parties to the relationship must be ordinarily resident in a participating jurisdiction at the time of the application; and

    (b) (i) Both parties were ordinarily resident during at least one third of the relationship in a participating jurisdiction at the time the      application was made; or

          (ii) The applicant made substantial contributions in a participating jurisdiction to the relationship.

Financial Agreements[11]

Spouse parties entering into a financial agreement must be ordinarily resident in a participating jurisdiction when they make the agreement.

Binding financial agreements available to de factos

    * Spouse parties will be able to enter into binding financial agreements prior to entering into a de facto relationship (pursuant to s 90UB), during a de facto relationship (pursuant to s 90UC) or following breakdown of that relationship (pursuant to s 90UD) relating to the distribution of property and financial resources, and payment of maintenance.  The agreement will cease to have effect if the parties later marry (s 90UJ(3)).

    * Part VIIIAB financial agreements must meet the same requirements as under s 90G in order to be binding.  

Separation declarations (s 90UF)

    * Separation declarations are required for provisions dealing with property or financial resources to have effect. 


Setting aside agreements (s 90UM)

The Court may set aside a financial agreement in similar situations as apply for Part VIIIA financial agreements.  Two further grounds will also be relevant:

    * where the agreement was entered into by one party for the purpose of defrauding, or defeating the interests of, a de facto partner of the other spouse party to the agreement, or with reckless disregard to their interests; or

    * where the agreement was entered into by one party for the purpose of defrauding, or defeating the interests of, the married partner of the other spouse party to the agreement, or with reckless disregard to their interests.

Existing domestic relationship or cohabitation agreements made under the law of a participating jurisdiction

Written agreements valid under state or territory law at commencement and made in contemplation of, or during, de facto relationships will become Part VIIIAB financial agreements if that state or territory is a participating jurisdiction at commencement.

Property settlement

If the geographical requirement (s 90SK) and 2 year rule (s 90SB) are met, the Court may:

(a)    declare title or rights in property (s 90SL); and

(b)   if just and equitable, make orders altering property rights (s 90SM).

Contributions and future needs

In considering what order is appropriate, the Court will have regard to similar contributions factors as found in s 79(4).  The court must also have regard to similar future needs factors (s 90SF(3)) as found under s 75(2).  For NSW practitioners, the latter requirement is a fundamental change to the position under the Property (Relationships) Act (NSW).

Adjournments (s 90SM(5))

The court may adjourn property proceedings if there is likely to be a significant change in financial circumstances and having regard to the time when that change is likely to take place, it is reasonable to adjourn the case.

Interestingly, s 90SM(7) includes the circumstances where a party may in future become entitled to property by the exercise of discretion by the trustee of a discretionary trust.

Other provisions

Similar powers to set aside/vary orders (s 90SN), grant injunctions (s 90SS(1)(k) and (5) and s 90TA) are given to the Court.

There is also a duty to make such orders as will finally determine the financial relationship between de facto partners (s 90ST).

Extension of Part VIIIAA (s 90TA)

The operation of Part VIIIAA will extend with modifications to orders and injunctions in de facto financial causes.

Maintenance (Part VIIIAB, subdivision B)

If the geographical (s 90SD) and 2 year rule (s 90SB) are met, the Court may make such order as it considers proper for maintenance (s 90SE(1)).  The obligation to maintain applies (s 90SF(1)):

    (a)  only to the extent that the payer is reasonably able to do so; and

    (b) only if the applicant for maintenance is unable to support themselves adequately whether:

        i.              by reason of care and control of a child of a de facto relationship (s90SB) under 18;

        ii.            by reason of age or physical or mental incapacity for appropriate gainful employment; or

        iii.          for any other adequate reason.

In applying the principle, the Court must take into account factors in s 90SF(3) that largely reflect those in s 75(2), with some important additions.

The Court has power to make urgent maintenance orders (s 90SG), and to modify maintenance orders (s 90SI) including for example where the payee has entered into a new stable and continuing de facto relationship.

A maintenance order will terminate upon death and except in special circumstances will also cease if the payee remarries (s 90SJ).

Stamp Duty - s 90WA

An exemption from stamp duty will apply to deed and instruments executed by a party in accordance with a de facto property/maintenance order or a Part VIIIAB financial or termination agreement.

Capital Gains Tax - changes to Income Tax Assessment Act 1997

Rollover relief for CGT will apply to transactions effected under de facto financial orders and binding Part VIIIAB financial agreements.

Court Resources

Given the existing workload of the Family Court and Federal Magistrates Court, there is a concern amongst practitioners that the referral of powers will lead to even longer waiting lists, and already strained resources will have to spread even thinner.  Practitioners expect that the number of filings will spike following the commencement of the law, much like what happened when the Family Law Act was originally introduced in the mid 1970's.

A spokesperson for the Attorney-General stated that funding was provided in the 2008 Budget for the appointment of one additional Family Court judge and 4 additional federal magistrates to be allocated amongst participating jurisdictions, to cover increased workloads that may flow from the reforms.

Conclusion

The new laws will grant parties to a de facto relationship largely the same financial rights and remedies as enjoyed by parties to a marriage.

It aims to remedy the long standing injustice faced by partners in same sex relationships, and brings much needed national uniformity to the laws governing those in domestic relationships.

[1] Paul Doolan is a partner at Barkus Edwards Doolan Family Lawyers in Sydney.  Amy Nolan is completing a BSci/LLB degree at UTS and works at the same firm.

[2] A New Tax System (Family Assistance) Act 1999, Child Support (Assessment) Act 1989, Child Support (Registration and Collection) Act, Federal Magistrates Act 1999, First Home Saver Accounts Act 2008, Income Tax Assessment Act 1997, Proceeds of Crime Act 2002, Veterans' Entitlements Act 1986

[3] Commonwealth Powers (De Facto Relationships) Act 2003 (NSW); Commonwealth Powers (De Facto Relationships) Act 2006 (TAS); Commonwealth Powers (De Facto Relationships) Act 2004 (VIC); Commonwealth Powers (De Facto Relationships) Act 2003 (QLD)

[4] The Western Australian Parliament has passed the Commonwealth Powers (De Facto Relationships) Act 2006 which refers power to the Commonwealth to legislate only in relation to superannuation interests following the breakdown of a de facto relationship.  The Commonwealth Bill does not implement this referral, as a participating jurisdiction must have referred its power without limits or conditions.  The Family Court of Western Australia has an existing jurisdiction to resolve financial disputes between de facto couples, but cannot make orders in relation to superannuation entitlements.  The Attorney General for Western Australia has indicated in a submission to the Senate Committee reviewing the Bill, that the Family Court Act 1997 (WA) can be amended to reflect the same substantive law (excluding provisions relating to superannuation) as implemented in the federal legislation.

[5] Pursuant to s86 of the Bill

[6] Duration of relationship, nature and extent of common residence, whether a sexual relationship exists, degree of financial dependence and interdependence, arrangements of financial support, ownership, use and acquisition of property, degree of mutual commitment to a shared life, whether registered with a state or territory, the care and support of any children, reputation and public aspects of the relationship

[7] See s 90RD

[8] s 90RC

[9] State/territory law continues to apply to proceedings to enforce, discharge, suspend or vary any existing de facto property/maintenance order.  State/territory law will continue to apply to pending de facto cases.  After commencement, state/territory law will continue to apply if the parties to the de facto relationship have made, or make, an agreement about financial matters arising out of the breakdown of the de facto relationship.  (See the notes to s 86 of the Bill)

[10] s 90RG

[11] Pursuant to s 90UE, there will be a mechanism by which agreements made in non participating jurisdictions can become financial agreements.  The following conditions must be met:

o        a written agreement about the division of property and/or financial resources and/or the maintenance of one party in the event of breakdown must have been entered into by the parties under a non referring state law;

o        as a result, the Court cannot make an order inconsistent with that agreement or make an order with respect to the division of property and/or financial resources and/or the maintenance of one party;

o        at the time the agreement was made, the couple had not entered into a Part VIIIAB financial agreement;

o        at a later time the couple's circumstances changes such that they now qualify under the legislation to have orders/declarations made ("the transition time");

o        immediately prior to the transition time, the agreement was in force under the non-referring state law, and the couple was not married.

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