Many investors are familiar with the matrimonial property rules that can entitle a spouse or partner to claim 50% of relationship property assets after just three years of a relationship. This issue is often top of mind for parents seeking to assist their children in purchasing property.
The prospect of financial assistance to a child being halved due to a relationship split down the line has left many people concerned about the best way to provide this support and the tax implications of navigating relationship property rules.
A common misconception is that the three-year period for a partner’s claim begins when a couple starts living together under the same roof in a traditional de facto arrangement. However, it’s not that clear-cut. The three-year period starts when the relationship becomes “akin to a marriage,” not necessarily when you move in together.
Lawyers suggest that the determining factor is when friends and family consider you to be in a relationship with someone who has become your “partner,” irrespective of whether you live together. However, this still leaves room for interpretation and ambiguity.
In recent years, court rulings have eroded the protections that a trust provides against relationship claims. Adding a new partner as a beneficiary to a trust may be deemed a nuptial settlement. Establishing a trust while already in a relationship may not offer much protection in case of a separation.
The best safeguard is entering a formal relationship agreement, where Part 6 of the Property Relationship Act allows couples to “Contract Out” of the act. These agreements can specify the division of assets during the relationship, in the event of separation, and upon the death of a partner. However, they are void unless certain requirements are met, making it advisable to have lawyers draft them for formality and binding nature. One crucial requirement for binding agreements is that both parties must obtain independent legal advice before signing.
I have encountered situations where legal advice to one party is “don’t sign,” leading to negotiations over terms rather than the agreement being considered final. Concessions may be necessary from the wealthier party before an agreement can be reached.
Concerning taxation, Subpart FB of the Income Tax Act outlines the general rule for the division of relationship property. This section provides general rollover relief for property transferred pursuant to a relationship agreement. Specific sections FB3A and FB4 deal with land, providing rollover relief from Brightline and certain concessions from specific land taxing provisions.
The general rule is that the transferee is deemed to have acquired the land at the transferor’s cost and date of acquisition, meaning the transfer of property under a relationship agreement usually does not trigger a taxing event. However, caution is required for future plans; for instance, if a wife receives tainted property from her ex-husband’s land dealings, no tax is triggered upon transfer. Still, if she sells them within 10 years of his acquisition date, she is liable for all the tax based on her ex-husband’s cost price. Lawyers must be mindful of these potential tax liabilities when advising on separation agreements’ fairness.
For families providing funds to children for house deposits, it’s crucial to clarify whether the money is a gift or a loan. A loan can be recalled if a child’s relationship ends, but a gift may become joint relationship property. It might be appropriate to encourage a child to formalize a contracting-out agreement before making gifts or trust distributions. The optimism of youth often means these difficult conversations won’t happen without some pressure.
As always, seek professional advice, both legal and accounting, when considering land transactions that can have relationship property impacts.