Property Divisions and the Five-Step Test
Updated on Dec 30, 2022 • 5 min read • 461 views • Copy Link
Property Divisions and the Five-Step Test
The Family Law Act 1975 governs the division of assets, liabilities and superannuation in the event of separation after a de facto relationship or marriage. The court has a wide discretion under the Act to decide the property settlement entitlements of each party based on the facts of the individual case. Parties’ entitlements to an adjustment of property interests are determined through a five-step test.
5 Step Property Division Test
The five steps are summarised below:
Step 1: Is it just and equitable to make an order?
The first step in the five-step test is to determine whether or not it is just and equitable to adjust the parties’ interests in property held by either party to the relationship. It may not be just and equitable to alter parties’ interest when a relationship has been short (between three and five years) and the parties have maintained largely separate finances.
If the court finds that it is just and equitable to adjust the interests, it proceeds through the steps below.
Step 2: Identifying and valuing the property
The next step in the five-step test is to identify and value all property held by either party to the relationship, irrespective of where the property came from or when it was acquired. Property that must be identified in this step includes legal and equitable interests.
Legal property comprises all assets such as land, money in the bank, furniture, motor vehicles, insurance policies and the like that are held in the name of a party. Equitable interests comprise financial interests that a party has in assets that are not be registered in their name (for example a $50,000 cash payment made by one party onto the mortgage of a property held in the other party’s name).
A superannuation entitlement is not strictly ‘property’ but is nonetheless taken into account and can generally be split between parties. Superannuation can be considered separately from the non-superannuation assets, but any adjustments (by way of a split) are considered in the same manner.
The total value of the asset pool, as well as the particular assets of the parties, will often have an effect on how the steps below are weighed.
Step 3: Contributions
The third step in the five-step test is to consider the direct and indirect, financial and non-financial contributions made by and on behalf of each party.
Financial contributions may include the parties’ earnings and any gifts or inheritances received by either party during the relationship. Financial contributions can be direct or indirect. Direct financial contributions to a property of the relationship may include payment of the mortgage or renovations. Indirect financial contributions may consist of paying the utilities and other outgoings associated with the property.
Non-financial contributions include work done in the role of the homemaker, parent or carer. This may include raising children and doing housework and cooking.
The timing of contributions, particularly those made before the commencement of a relationship and towards the end of the relationship or after separation, is important. Depending on the circumstances of those contributions, the length of the relationship and other factors, they are often treated differently to those made during the relationship.
Step 4: Future needs
Step four in the five-step test is to assess the future needs of the parties. These must be considered by the court in determining the appropriate property division after a separation.
The future needs of parties will be assessed with reference to:
- The age, and state of health of each party;
- The income, property and financial resources of each party;
- The physical and mental capacity of each party;
- Any disparity in the parties’ income-earning capacities;
- Any instances of family violence; and
- Any commitments that are necessary for each party to support themself or any other person.
Step 5: Outcome
The final step to be taken is to consider practical effect of the proposed division of assets. Taking into account the above steps, the court must ascertain whether it has arrived at a just and equitable outcome. It may be appropriate at this stage to make further adjustments (either adding more or less weight to the matters outlined at step 3 or 4 above) to ensure the division is just and equitable in all the circumstances.
In ascertaining whether the proposed orders are just and equitable, the court will also have regard to the ‘clean break’ principle. This is the principle that where possible, orders should be made that bring the financial relationship between the parties to an end and create certainty for the future.
Time limits apply to the property divisions after a de facto relationship or marriage ends. It is important you obtain independent legal advice in relation to your property matter as soon as possible after separation.
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