The COVID-19 lockdowns and associated economic downturn and job losses have had a devastating impact on many workers and their families. People going through a separation are being affected by the uncertainty of asset valuation as well as the change in their own and their spouse’s financial circumstances.
Divorce is profoundly stressful at the best of times and that stress is augmented for families going through separation at the present time. If you find yourself in this situation right now, seek guidance from a family lawyer to help you navigate uncharted waters in these unprecedented times.
Potential Impact on Property Settlements
As we all know from the news, from the queues outside Centrelink, and from our friends’ and family’s own experiences, a large number of industries have been decimated by the COVID-19 social distancing measures. Many people have lost their jobs or their freelance work, and are struggling to survive day to day until government payouts materialise – if they are entitled to them.
When a relationship breaks down, it is necessary to ascertain what assets the couple owns, their value and how to split them fairly between the separating parties. Every stage of this process will be impacted by the present COVID-19 situation.
Valuing your assets
COVID-19 will have had an immediate impact upon the valuation of many assets, whether a business, real estate or superannuation.
Valuing a business involves several calculations, based on asset value and on earnings. We have already seen the devastating impact of COVID-19 on businesses, with impacts not only those businesses forced to close, but also the knock-on reduction in foot traffic to those still able to open. These difficult conditions will adversely affect such a business’s value, at least until the economy re-opens – whenever that may be.
The government is hopeful that effects on many businesses will be temporary, but we are still looking at potentially over a year of social distancing measures. Earnings on many businesses will continue to be impacted negatively for this period and using the earnings test, the value of such a business will be less than it would otherwise have been. Assets are less likely to be affected so strongly, provided that a fire sale does not become necessary. Businesses that can hold on to their assets for the short-medium term will likely be able to recover their value when the economy begins to re-open.
The effect of COVID-19 on property values is unclear. There may be less people looking to buy a property, which would decrease demand. At the same time owners may hold off from selling, leading to less properties on the market, which would increase demand. People who have lost their jobs will find it hard to obtain a mortgage, others may try to downsize. All of these aspects and more have an impact on property values across the board.
In a family law situation, the couple’s home is often sold to free up money to share out in the settlement. The timing of when a property is to be sold will be a decision the parties will have to make jointly and in the current situation the parties may not agree on the best timing, given all the uncertainties.
Ultimately, if one party wants to sell the property and the other party does not, then the only way to resolve the disagreement is to commence proceedings and ask the Court to make an Order that the property be sold. If you find that you and your ex can’t agree on the right course of action, consider family mediation to try and find a way through before applying to the Court.
The value of superannuation held in a superannuation fund may not be affected in the short term, but it may be affected in the long term depending on what asset classes the fund invests in.
If you hold your superannuation in a Commercial Fund, there is not much an individual can do to control the asset classes the fund invests in, as they have no power to make the investment decisions in such a fund.
If you have a Self-Managed Super Fund, presuming you are a trustee of your fund (or director of the corporate trustee) you will have more decision-making power as to which asset classes to invest in. You can decide to change the type of assets owned by the Fund and as with businesses, you can decide to delay valuing the Fund until it recovers from the effects of COVID-19.
Alternatively, you may wish to use the fund’s current value to do a super split as part of your property settlement and each take a share of the assets at their present value.
Alteration of Assets – deciding who gets what
In ascertaining the alteration of a couple’s assets under the Family Law Act 1975 (Cth), the court follows an established process. One aspect considered by the court is the parties’ respective income earning capacities, both now and into the future.
The key word in this consideration is ‘capacity’. If it can be successfully argued that you have lost your earning ‘capacity’ then this may affect the overall division that you receive in property proceedings.
A sudden loss of income does not necessarily represent a loss of earning ‘capacity.’ If someone loses their job but is able to obtain a similar job at a similar level of income, then they have not lost their earning ‘capacity.’ Looking at current circumstances, in a situation where a party is not currently able to work but is perhaps eligible for the JobKeeper allowance under the Federal Government’s assistance schemes, that person may not be considered to have lost their earning capacity, depending on the individual circumstances. Depending on their pre-COVID-19 income, however, they may have taken a wage cut and this would potentially impact on their earning “capacity” at least until the economy begins to open up again.
In another common scenario in the present crisis, a person who has completely lost their ability to earn money for the foreseeable future, such as an artist or musician who relies on the gig economy for their income, or a waiter or bartender whose workplace has been almost completely shut down by the current COVID-19 restrictions, would likely be considered to have lost their earning capacity for at least as long as those restrictions apply.
So what to do?
It may be sensible to delay valuations and therefore your property settlement until the economy has started to recover from the effects of COVID-19. Such a decision would mean that you would wait until such a time that there is more certainty in the financial impact of the crisis on your business, real estate and superannuation interests and your earning capacity, and would usually be in both party’s interests. However, we do not know when such recovery will happen and many people may not be in a position to be able to wait.
If you find yourself in this situation, consult a lawyer and be prepared for the property settlement process to take longer than it might have pre-COVID. Otherwise, you may find yourself with a much smaller pool of assets to divide and a skewed party-party earning capacity.