Are Businesses Part of the Asset Pool?

When couples separate or divorce, they usually must also separate their finances and divide their “asset pool”. If one spouse is a business owner, then there will likely be questions over whether that business is included in the asset pool. Couples can resolve these questions in private negotiation or mediation but, if necessary, the courts can make orders about the division of property. This article looks at whether businesses are typically included in the asset pool during property settlement proceedings.

Are businesses part of the asset pool?

The Family Law Act 1975 governs property settlements in Australia, assigning jurisdiction for family law matters to the Federal Circuit and Family Court of Australia (the “court”).

The court has broad discretion to decide property settlement matters, including the power to determine whether a business is part of the asset pool, and if so, how it should be valued and divided between parties. The court’s main concern in a property settlement is ensuring that both parties receive a fair and equitable share of the total asset pool, taking into account factors such as financial and non-financial contributions to the relationship, the future needs of each party and their ability to support themselves, and the welfare of any children of the relationship.

The first step in a family law property division is for the parties to report all of their assets and debts and list them in an asset pool. The asset pool should include all tangible and intangible property, liabilities and financial resources that can be divided between the parties in settlement. This commonly includes real estate, vehicles, savings and superannuation, and may also include businesses owned by either party. When determining whether a business should be included in the asset pool, the court will have regard to the ownership structure of the business and the extent to which the business is intertwined with the family’s finances. A business is typically included in the property pool regardless of whether it was established before or during the marriage and whether it is legally owned by only one of the parties. The rationale behind this policy is that both parties are likely to have contributed, either directly or indirectly, to the value of the business over the course of the relationship. 

The second step of a property settlement is for the court to determine the contribution of each party to acquiring and retaining the assets, including the business. This includes consideration of initial contributions to the relationship, and contributions during the relationship. At this stage, the court will consider whether both spouses contributed to the success of the business through either financial or non-financial contributions. Therefore, even if only one spouse was directly involved in the running of the business, their spouse may have indirectly contributed to the business by managing household responsibilities and caring for their children.

Valuing a business

The issue at dispute in a family law property matter is often not whether a business should be included in the asset pool, but what value to attach to the business. Unlike other assets, such as real estate and superannuation, valuing a business is often a multi-step process.

A major part of the value of many businesses are its tangible assets (such as vehicles, stock and tools). These assets can usually be valued based on market resale. The intangible assets, by contrast, such as intellectual property, goodwill, ongoing contracts and future earning potential, are more complex to assess. The court may require independent expert valuers to determine a fair market value for the intangible aspects of the business.

Businesses can take a variety of forms, including companies, partnerships and sole traders.

The form of the business will affect the value it has for property division. The court is likely to see a sole trader business with no employees, for instance, as a future income stream for the person working in the business rather than a saleable going concern. The court is usually reluctant to force the sale of a business, especially when it is the primary source of income for one spouse.

Ownership of a business

It is not unusual in a family law matter for one of the parties to claim that the other has failed to disclose a valuable interest in a business. The court has the authority to look into complex businesses structures (such as holding companies and trusts) to discover whether a spouse has beneficial ownership of a business. This is known as “piercing the corporate veil”. With discretionary family trusts, the court will look at whether the trust was established with the intention of protect assets from a fair property settlement.

In Australia, businesses are generally treated as part of the asset pool in property settlements, but valuing these assets and assessing contributions can be a complicated process. Contact Go To Court on 1300 636 846 for advice about the inclusion of businesses in property divisions.