The general rule applying to property division between couples is once you have been in a qualifying relationship (de facto, marriage or civil union) for three years or more, in the event of separation all relationship property should be equally divided. Property that is not classified as relationship property is the separate property of the owner, and not subject to equal sharing.
Some couples are happy for the general rule to apply. Those that are not can opt-out of the general rule by signing a Contracting Out Agreement — commonly referred to as a “prenup”, this type of agreement can cover all property owned by a couple or only some of their property. A Contracting Out Agreement allows couples to record what they think is a fair division of their relationship property, having regard to the circumstances of their relationship.
Below are some common scenarios where couples may wish to consider a Contracting Out Agreement:
When they are entering a relationship on an unequal financial footing
If one partner has significantly more assets than the other, they may wish to sign an Agreement outlining which items of property will be shared and which will be kept separate. It may be that one partner wants to keep pre-relationship assets separate but wishes for any future property acquired during the relationship to be shared. A Contracting Out Agreement could protect pre-relationship assets in that way.
When they move into a home, one partner already owned, or they are contributing unequally to a property purchase
The law is clear that the family home is relationship property regardless of when or how it was acquired.
Couples may not want this law to apply to them if, say, for example, one partner already owned the home before the relationship began, or is contributing 80% of the purchase price. A Contracting Out Agreement would be needed in either of these situations to protect the home (or part of it) as separate property.
When one person receives an inheritance that they wish to protect
Inherited property is classified as separate property. However, it may become relationship property if it becomes intermingled with relationship property or is used for shared purposes.
It is common for inherited funds to be used to reduce the mortgage debt on the family home, in which case the separate status of those funds is ordinarily lost. In this situation, a Contracting Out Agreement could be entered into to record that the inherited funds are to remain separate property despite being put into the family home.
When one partner wishes to protect themselves from the others debt
Under relationship property laws, debts are either classified as relationship or personal debts. Both partners are liable for relationship debts, even if they are only in one person’s name, and the other person did not know about them. Personal debts are the responsibility of one party. Whether a debt is classified as a relationship or personal will depend on the circumstances.
If one partner has substantial debts that the other does not wish to share in, or they do not want to potentially become liable for any future debts without knowing about them, it is sensible to enter into an Agreement clarifying this.
Where they wish to achieve certainty about how the property was to be divided upon separation or death
While the general rule of equal division seems quite straightforward, there can be uncertainty about what it applies to (i.e. whether the property is classified as relationship property or separate property), and there are exceptions to the general rule. Signing an Agreement can reduce the potential for uncertainty.
If a qualifying relationship ends upon death, the surviving spouse or partner can choose to either take what that is left under the deceased’s Will or to make a claim for the division of relationship property. If there is a valid Contracting Out Agreement, this will usually continue to apply following the death of one or both partners to the relationship, ordinarily determining what is separate property, what is relationship property and how such property is to be divided. Entering into a Contracting Out Agreement can achieve certainty regarding property division in the event of death as well as in the event of separation.
For more information
Whatever your circumstances, obtaining expert advice in respect of a Contracting Out Agreement is essential to ensure your agreement is as watertight as possible. Contracts of this nature should be reviewed (with the benefit of legal advice) both regularly and when circumstances change.
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