Navigating Property Settlement: Understanding the Four-Step Process in Australian Family Law

At a Glance

Australian law follows a specific four-step framework for property division
All assets, liabilities, and financial resources are included in the pool
Contributions are evaluated across financial, non-financial, and homemaking categories
Future needs, such as health and childcare, can result in percentage adjustments
The final outcome must satisfy the court’s requirement of being “just and equitable”

The Core Logic of Australian Property Settlement

Under the Family Law Act 1975 (Cth), property settlement is far from a mathematical certainty. Many business founders or professionals mistakenly believe that assets held in their own names or property acquired before the relationship are automatically shielded. In practice, the law applies a holistic and comprehensive framework to resolve financial disputes between separated couples.

This framework is commonly described as the “four-step process”, although it is not a rigid formula and may be applied flexibly depending on the circumstances of the case. Developed through decades of case law, it is the standard procedure used by the Federal Circuit and Family Court of Australia when applying Sections 79 (for marriages) and 90SM (for de facto relationships).

Step One: Identifying and Valuing the Asset Pool

Before any division can be calculated, the parties must identify exactly what is up for negotiation. This is more than just a balance sheet: it is a comprehensive snapshot of the parties' global financial position.

The asset pool typically includes:

Real Estate: Residential homes, investment properties, and commercial premises, whether in Australia or overseas.
Business Interests: Shares in companies, partnership interests, and trust assets. For business owners, this is often the most complex area, requiring formal valuations of goodwill and tangible assets.
Financial Assets: Cash, shares, life insurance policies, and importantly, Superannuation.
Personal Property: Vehicles, art collections, jewellery, and high-value household items.
Liabilities: Mortgages, personal loans, credit card debts, and contingent tax liabilities such as Capital Gains Tax (CGT).

In the landmark case of Stanford v Stanford, the High Court confirmed that a court must first consider whether it is just and equitable to make any property settlement order at all, before altering existing property interests. This necessitates "full and frank disclosure". If one party hides assets, the court may make adverse inferences or set aside final agreements later.

Step Two: Assessing the Contributions of the Parties

Once the pool is defined, the court evaluates the contributions made by each party during the relationship and post-separation. These contributions are broadly categorised into three types:

Direct and Indirect Financial Contributions: This includes wages, inheritances, assets brought into the relationship at the start, and financial gifts from parents or family members.
Non-Financial Contributions: Examples include performing renovations on a property that increase its value, or working without pay in a family business to help it grow.
Contributions to the Welfare of the Family: This is a vital pillar of Australian law. The role of a homemaker or parent is given significant weight. The law recognises that by managing the household and raising children, one party enables the other to focus on career advancement and asset accumulation. Consequently, a stay-at-home parent is not legally disadvantaged compared to the primary breadwinner.

Case law such as Kennon v Spry illustrates how the court may “look through” complex trust or corporate structures where a party has effective control or influence. For professionals with intricate corporate setups, if a party is found to have control over or contributed to the growth of those assets, they are likely to remain within the reach of the family law courts.

Step Three: The "Future Needs" Adjustment

After determining an initial percentage based on contributions, the court performs a "forward-looking" adjustment. This step ensures that both parties can maintain a reasonable standard of living post-separation.

The Court will take into account the “future needs” factors set out under the Family Law Act., including:

The age and state of health of each party.
Their respective earning capacities and potential for future income.
Who will have the primary care of children under 18.
The duration of the relationship and its effect on the earning capacity of the parties.

For example, if one spouse is a high-earning CEO and the other has been out of the workforce for 15 years raising children, the court may make a further percentage adjustment in favour of the latter, reflecting the disparity in their post-separation earning capacities. This "adjustment" acknowledges the disparity in their ability to rebuild wealth after the divorce.

Step Four: The "Just and Equitable" Test

The final step is a "sanity check". The court steps back from the percentages and asks: "Is this overall result just and equitable in all the circumstances?"

If the first three steps lead to a 60/40 split, but that result would leave one party in financial hardship while the other remains extremely wealthy, or if it would force the sale of a multi-generational family business that could otherwise be preserved, the court may exercise its discretion to vary the orders. The goal is to reach a conclusion that is fair to both sides, considering the unique history of their partnership.

Practical Case Example

Case Study: The Manufacturing Business Owner

Mr L and Ms Z were married for 20 years with two children. Mr L founded a successful manufacturing plant during the marriage. While Ms Z assisted with bookkeeping in the early years, she eventually became the primary caregiver for the children.

Step 1 (The Pool): The pool consisted of a $3M family home, the business valued at $5M, and $1M in super and other investments. Total: $9M.
Step 2 (Contributions): Mr L argued the business was his "special contribution". However, the court found that Ms Z’s 20 years of domestic support and early administrative help were equal in weight to his financial efforts. Initial split: 50/50.
Step 3 (Future Needs): As Ms Z would be the primary carer for the children and had a lower earning capacity due to her time away from the workforce, the court applied certain adjustment in her favour.
Step 4 (Outcome): After the adjustments, to avoid selling the factory, Mr L retained the business but paid a significant cash sum to Ms Z, funded by a mortgage against the family home.

This case demonstrates that even a business you built "on your own" is viewed by the law as a joint endeavour if it was supported by the domestic stability of the home.

A Lawyer’s Perspective: Common Pitfalls

In our experience, the biggest risks involve attempts to "protect" assets right before separation. Moving money into a friend’s account or transferring business shares to a sibling often backfires. The court has power under the Family Law Act to join third parties to proceedings and to set aside transactions designed to defeat anticipated property settlement claims.

Another common oversight is the treatment of Superannuation. it is an asset that can be split by court order or agreement under the superannuation splitting regime. For many Australians, super is the second largest asset after the family home, and failing to value it correctly can lead to a significant loss of long-term wealth.

Key Takeaways

Property settlement is a balancing act of past efforts and future requirements
All assets are generally up for grabs, regardless of whose name they are in
Professional valuations are essential for business interests to avoid over-paying
Early legal intervention is the best way to secure your financial position

Frequently Asked Questions

Can my ex-partner claim property I bought after we separated?

Yes. The asset pool is usually valued at the date of the settlement or court hearing, not the date of separation. However, your post-separation contributions to that asset will be taken into account.

Does this process apply to de facto couples?

Yes. In Australia, de facto couples have largely the same rights as married couples regarding property settlement, provided they meet the statutory criteria, such as a relationship of at least two years, or the presence of a child, significant contributions, or a registered relationship.

Is my inheritance protected from a settlement?

Not necessarily. While an inheritance is often seen as a contribution by the person who received it, it is still part of the asset pool and can be divided, especially in long relationships.

What if my partner hasn't been honest about their bank accounts?

The law requires "full and frank disclosure". If a party hides assets, the court can penalise them through costs orders or by awarding a higher percentage of the known assets to the other party.

Do we have to go to court to settle?

No. Most cases are settled via a Binding Financial Agreement (BFA) or Consent Orders without ever stepping foot in a courtroom. Litigation is usually a last resort.