When parties separate, the first step in determining the division of property is to work out the pool that is to be divided. Real estate, motor vehicles, bank accounts and investments such as share portfolios and superannuation and other assets of value comprise examples of property that may be included in the asset pool. Liabilities including mortgages, loans and credit card debt are also factored in to establish the net divisible pool. Consideration needs to be given as to how the Federal Circuit and Family Court of Australia treats redundancy payments received during the course of a marriage or following separation when dividing up the property pool.
Are redundancy payments considered property or income?
In the case Ferraro and Ferraro , the Full Court of the Family Court of Australia (as it was then known) defined property, in relation to parties to a marriage, as those things in which parties are in possession of or entitled to. In the case of Burke (1993), the Family Court held that “a redundancy payment is capable of being regarded as a contingent right” and “for the purpose of s79 of the Family Law Act, that contingent right is therefore an accruing potential financial resource”. Accordingly, if a separating party has received a redundancy, it would be considered to be part of the asset pool. If a separated party will receive or is entitled to receive a redundancy payment, it would be considered as a financial resource of the recipient party. This may in turn impact on the adjustment of the existing property pool in favour of the non-recipient party.
If in the event that a redundancy payment includes a component for loss of future wages or as compensation for benefits such as accrued sick leave and annual leave, the Court may find that component of the redundancy payment to be severable and should be categorised as income. If so, that portion will not be included in the asset pool for division but may still impact on the division of the property as it may be deemed to enhance the earnings of the recipient party.
What about redundancy payments received after separation?
If a redundancy payment is received shortly prior to the commencement of cohabitation with a partner, it is likely that it may be considered an initial contribution to the relationship. Redundancy payments received after separation, however, may be viewed differently. The Court may determine that the non-receiving partner has made an indirect contribution to a redundancy payment received after separation. Consequently, it may also be included in the property pool for division if a property settlement is yet to be effected even if parties have already separated.
It is advisable for parties to organise and finalise their property settlements soon after separation by way of Court Orders or a Financial Agreement. A properly-documented property settlement will enable parties to sever their financial relationship and redundancy payments received in the future (which are not contingent at the time of separation) will not form part of the property pool.
If parties fail to disclose a redundancy payment, even if it has not yet been paid, there is a risk that any final property settlement may be set aside.
Parties should also note that a change in income by way of employment termination or receipt of redundancy payment may also impact on spousal maintenance and child support payments. As ‘every case turns on its facts’ and circumstances differ, parties should seek legal advice from an experienced family lawyer to understand their rights and obligations if a redundancy is in the mix!