Dealing with Divorce When Income Levels Differ
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When it comes to divorce property settlement, especially in cases where one partner has a higher earning capacity, it’s crucial to understand how assets will be divided. The process can become more complex when significant financial disparities exist, and knowing the key steps to navigate these settlements is essential. This guide will help you understand the 4 proven steps involved in handling divorce property settlements over $1 million, ensuring a fair and equitable outcome.
In property settlements the Family Courts follows a 4-step approach which is particularly important in where there are assets over $1 Million.
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High-Value Divorce Property Settlements: Key Steps
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STEP 1 – Establish the Asset Pool
Identify and value all marital assets, including properties,
investments, businesses, and superannuation. This creates
a comprehensive picture of the total asset pool.
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STEP 2 – Contributions Made During the Marriage/Relationship
Evaluate both financial contributions (income, investments)
and non-financial contributions (homemaking, parenting).
Both types of contributions are important and need to be considered.
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STEP 3 – What Are the Future Needs for Each of the Parties?
Assess future needs such as income potential, age, health,
and responsibilities for children. This step ensures that the
settlement accounts for disparities in earning capacity and ongoing needs.
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STEP 4 – Is the Decision Just & Equitable?
The final settlement should be fair and equitable, considering all factors.
The court will ensure that the division of assets is just,
reflecting both contributions and future needs.
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Many of our clients have property settlements over $5 Million, however the steps are still the same. In this article, we will explain the steps for you and give you case study examples.
We will also help you by answering questions like those asked by our clients:
In Australia, in divorce property settlements with asset pools over $1 Million, the Family Law Courts have to make a determination as to the settlement between separated couples if they cannot agree. If couples do reach an agreement, it has to be within the percentage range of the asset pool that the Court considers just and equitable for the settlement to be made binding into Orders by the Court.
As mentioned, we will apply the Family Law Courts 4 step approach to some example case studies later in the article so you can see how this 4-step rule is applied to a property settlement over
$1 Million.
STEP 1– Establish the asset pool
The first step of a property settlement is both parties need to go through their financial records and see how much their assets are worth, irrespective of whether assets are held in their own individual names, held jointly or in the name of a company, trust or partnership that either person has an interest in. Whether it is property settlement $100k or $10 Million it is the same step.
This means all of your assets (either in joint or sole names or anything you have an interest in) including cash, motor vehicles, superannuation, what is in your bank accounts, the value of properties and shares, any interests you have in any businesses, companies, or trusts.
Then you look at the value of all debts for both parties.
STEP 2 – Contributions made during the Marriage/Relationship
The second step of a divorce settlement is to understand what contributions each of the parties made during the relationship.
This includes financial or non-financial contributions. Financial contributions can include wages, government payments, any gifts or inheritances received. Non-financial contributions include doing housework, looking after the children, and maintaining or renovating the house.
STEP 3 – What are the future needs for each of the parties?
The third step of a divorce property settlement is to gain an understanding as to what the future needs are of each party.
After deciding on the respective shares of property based on the above contributions, the Court then make what it calls an ‘adjustment.’
The Court will look at making a percentage adjustment based on a variety of things, such as future earning capacities, the health of each person, each person’s age, employment prospects, responsibility of caring for the children or other dependents to support.
You may need different living requirements and need to have specific finances to maintain your health or a certain standard of living.
STEP 4 – Is the decision just & equitable?
The fourth and final step of the divorce property settlement is where the Court looks at whether their decision will be just and equitable to both of you.
The Court will also look at things like one party living alone post-divorce can experience a drastic fall in living standards. An adjustment may be applicable if they have significantly less earning capacity and in less years until retirement.
The Court is likely to say that one person retaining all the cash based assets and the other taking all of the superannuation that they can’t access until retirement is not just and equitable.
Here is an example of what the court may consider the adjustment should be made in a property settlement in the wife’s favour, the husband had a greater earning capacity.
Property Settlement Examples
Example 1
Case Facts
- The husband is aged 48 and the wife aged 54
- Married for 20 years
- Have three now adult children
- The husband was the main income earner, and the wife was the homemaker and primary carer of the children.
- The property pool was valued at $1.5 million.
- The husband had a yearly income of $250,000
Likely Court Findings:
- The wife is likely to be unable to support herself in separation or later years towards retirement.
- The wife is entitled to a 14% adjustment in her favour since the husband had a significantly higher earning capacity over a long marriage.
Likely Court Orders:
- The wife receives 64% of the property pool and the husband 36%.
- Property pool of $1,500,000 then likely $960,000 to the wife and $540,000 to the husband
Example 2
Bob and Kay have over $1 Million in their asset pool.
The pool includes bank accounts, properties, and debts.
Bob & Kay Balance Sheet:
Net Total of Asset Pool = Assets – Liabilities + Superannuation = 1,710,000 – 840,000 + 300,000
In this divorce property settlement example, the net asset pool is $1,170,000.
Facts about Bob and Kay relationship
- Bob and Kay have been separated for 13 months and wish to do the financial settlement in their divorce using the above figures.
- Bob and Kay have been married for 9 years.
- Before they met each other, Bob owned a property in Melbourne valued at $1 Million and had a mortgage of $500,000 on it.
- Bob and Kay both had superannuation and kept their accounts separate.
- They are both working and earning similar amounts.
- They have one child together, Emma, who is 3 years old.
Step 1– Identify the net asset pool i.e. what is available to divide between the parties
$1,170,000
Step 2– Identify the contributions of the parties
Bob and Kay have negotiated and then calculated what their contributions were to the relationship.
As the parties were in an average medium marriage length (9 years), they will have to look at their financial and non-financial contributions and see if there are any special adjustments warranted.
As Bob entered the relationship with an asset worth $500,000, he is significantly higher on financial contributions, having contributed around 43% of the asset pool at the commencement of their relationship. However, over time the percentage adjustment for his initial contribution diminishes somewhat.
Bob and Kay have calculated that their contributions would be around 65% to 75% to Bob and 25% to 35% to Kay.
Step 3 – Future Needs to each Party. What are the future needs of the parties?
As there is one child, there will need to be an adjustment to the parent who is looking primarily after the child.
Generally, an adjustment is made for each child of between 2-5% per child. Kay will look after Emma and therefore is adjusted 5% as she is only 3 years old.
If there were no children, there will be no adjustment towards either parent.
Step 4– Is this just and equitable?
The settlement appears just and equitable as both parties are walking away with a significant proportion of the pool.
The outcome of the divorce property settlement example
The parties have agreed the divorce property settlement split is to be divided 70%/30% in Bob’s favour, meaning Bob will receive 70% of $1,171,000 ($819,700) and Kay will receive 30% of property asset pool of $1,171,000 ($351,300).
Example 3
Let’s look at another example with the following questions asked by many of our clients:
- What you do with superannuation funds in divorce valued over $500K Million dollars?
- What happens if you have a house is worth $1.5 Million dollars?
- What happens if the younger partner earns more than the older partner – younger one earns $180k per annum and the older partner earns $100K per annum.
- How are parents’ inheritance or substantial gifts counted in a settlement over $1 million dollars?
Peter and Lillian have over $1,000,000 in their asset pool.
This includes all bank accounts, properties, and debts.
Peter & Lillian Balance Sheet:
Net Total of Asset Pool = Assets – Liabilities + Superannuation = 1,420,000 – 1,010,000 + 640,000
In this divorce property settlement example, the net asset pool is $1,050,000
Lillian and Peter have been separated for 2 months and wish to do the financial settlement in their divorce using the above figures.
Facts about Lillian and Peter relationship
- Lillian and Peter have been married for 19 years.
- Before they met each other, Lillian owned a property on the Sunshine Coast valued at $380,000 and had a mortgage of $150,000 on it. Lillian sold the property and made a profit of $200,000 which was the deposit for Lillian and Peter’s first home.
- Peter has been salary sacrificing super from his pay for 17 years to his superannuation of $411 a fortnight contributing $25,000 a year while they have been married. His employer matches the salary sacrifice to super.
- Lillian stayed home full time for 10 years taking care of the 2 children, while Peter built his career. Lillian was a full-time mum for the 2 children in their younger years before returning to work when the children started high school.
- Both parties have had gifts and inheritances while married. Lillian’s mother left her $200,000 and Peter’s dad gifted $50,000.
- Lillian is 5.5 years younger than Peter.
- Peter has been building his career to a high level and now is earning $160,000+ per annum with a salary to rise yearly with a guarantee increase in income over the next 20 years of working. His superannuation is in a defined benefits scheme.
- Lillian currently works full time currently earning $110,000 p.a
- They have two children together, both in final years of schooling.
Step 1– Identify the asset pool i.e. what is available to divide between the parties – $1,050,000
Step 2– Identify the contributions of the parties
As the parties were in a longer marriage length (19 years), they will have to look at their financial and non-financial contributions and see if there are any special adjustments warranted.
As Lillian entered the relationship with an asset worth $200,000, and inherited her mother estate of $200,000, 15 years into the marriage she is higher financial contributions. Peter’s father gifted him $50,000.
As Peter and Lillian have been married for such a long time, the adjustment to Lillian for her initial contribution from the sale of her property would be minimal. However, there would be such adjustment to Lillian for the greater amount inherited being so late in their relationship.
Peter and Lillian have agreed that these factors make their contributions to be around 60% to 75% to Lillian and 40% to 25% to Peter, depending on the weight given to Lillian’s inheritance being around 20% of the asset pool.
Step 3 – Future Needs to each Party.
As there are two children, normally there will need to be an adjustment to the parent who is looking primarily after the child. They have agreed to split the custody and costs evenly with one-week rotating children between parents’ homes. No adjustments.
Peter has an extremely secure high earning potential together with a defined benefits scheme.
Lillian is nearly 6 years older and at 53 years old has fewer earning years ahead and a lot less superannuation than Peter. An adjustment of 5% for capacity to earn less and save less towards retirement.
Peter and Lillian have agreed for the split to be 70%/30% in Lillian’s favour.
Step 4 – Is this just and equitable?
The settlement appears just and equitable as both parties are walking away with a significant proportion of the pool built over nearly 20 years of marriage while taking into consideration lump sum contributions.
The outcome of the divorce property settlement example
The divorce property settlement over $1,000,000 split example suggests:
- There will be no adjustment with the children with all costs halved and expenses while looking after them shared, except private schooling.
- There be an adjustment for the $400,000 cash contribution by Lillian;
- There will be an adjustment for the disparity in earning capacities;
- Lillian will not seek adjustment for the children given their age and as Peter is going to pay for the final years of private schooling for the children;
- Therefore, after consideration of the Property settlement over $1 Million dollars including the adjustment for additional cash contribution and potential earning differences Lillian will receive $735,000 (70%) and Peter $315,000 (30%).
How is that going to paid out?
- Both parties agree to keep individual cars as valued the same, they each keep their own cars. ($35k each – 70k)
- House to be sold and net sale proceeds to be split $200,000 to Lillian and $100,000 to Peter (currently valued at $1,350,000 with a mortgage of $970,000) has equity of $350,000. After selling costs, paying the mortgage, paying the credit card out, the profit is expected to be $300,000. The selling costs reduce the net asset pool by around $40,000, leaving around $1,010,000.
- Super split from Peter to Lillian will be needed $432,000.
| Lillian | Peter | |
| Car | $35,000 | $35,000 |
| House sale / equity | $200,000 | $100,000 |
| Superannuation split to Lillian | $432,000 | – |
| Superannuation | $40,000 | $168,000 |
| $707,000 | $303,000 |
Ultimately it is up to the parties to make decisions as to how they would like to receive the funds and divide the assets and debts and what they would be happy with.
If both parties cannot make an agreeable decision, then the Court will make it for them.
How we can help you?
We have experienced family lawyers who have practiced in the area of family law and property settlement for over 20 years.
Our mission is to help you.
If you want to formalise your separation agreement to make it legally binding, we can help you do that to ensure that there are no further financial claims and you are receiving what you are entitled to as a just and equitable settlement.
For legal advice about Divorce and Property Settlements over $1 Million please contact our office on (07) 3172 377 to arrange an appointment.
Reviewed by: Tracey McMillan, Principal at Queensland Family Law Practice.
