Financial Mistakes During Separation
by Sarah Coombs
Separation can be a stressful time for everyone involved, but it’s important to keep emotions in check and make smart financial decisions. Here are some common financial mistakes people make during separation and how to avoid them.
There are some tax consequences when it comes to changing property in family law matters. If a property is going to be sold, there can be capital gains tax, depending if the property is not a principle place of residence. There can be GST consequences if the property’s a family property, but capital gains tax and GST are really the two biggest ones that you need to think about.
The capital-gains tax doesn’t just apply to property. It also applies if you sell other assets, like shares. For example, if you and your former spouse own shares together, it’s possible that a CGT liability will be due when they’re sold—which means you’ll need to tackle it in your divorce settlement.
During separation, it is really good to speak to a financial planner about what’s feasible for you and your accountant about what any tax consequences the various changes may be.
Changes in Income
The next one is changes to your income. As you separate emotionally, you’ll likely separate financially as well. If you’re the stay-at-home parent and rely on the other party for your income, you need to look at what options are available for obtaining an independent source of income after separation. Yes, there is spousal maintenance under family law, but that’s not always used. So it may be an instance of researching Centrelink benefits or looking into how you can obtain other income sources or potentially what work needs to be done.
Debts and Mortgages
One of the most important things to deal with when you separate from your spouse is outstanding debts. Credit card debt, mortgages, car loans, and other personal loans can all affect your credit rating. If your name is on a debt, even if you no longer live together and haven’t been making payments for months or years, it’s possible that the lender could still come after you to pay. Even if you’re struggling to make your mortgage repayments, we recommend that you do so. As long as it’s traceable, it can be added back down the track. For example, in a divorce situation, it’s normally the position of the court that the person who stays in the home pays the mortgage and outgoings. But let’s say hypothetically in this circumstance, one party stops paying—but this party’s name is also on the mortgage agreement. It’s probably in that person’s best interest to pay if he or she can because it means he or she won’t default and that will make refinancing or getting financing in the future easier. So that’s a really big one.
It goes the same for credit card debts and car loans alike: falling into arrears on those things can be really detrimental. Likewise, falling behind on your electricity bills and other fees is bad for your credit rating, so it’s best to make the payments where you can. If you’re having trouble paying, see if there is any way to sort out the issue—but make sure all your payments are traceable in case you need proof of payment later.
Keeping separate accounts is the next step in separating financially. After you separate, you may choose to keep your money accounts together or apart. Some people keep their accounts together; others separate them immediately. It all depends on your circumstances, but if you have concerns about whether the other party will take money from a joint account, keep in mind that all money transactions are traceable and can be followed through bank records.
We don’t recommend using cash. Using cash can cause problems in family law proceedings because it is so hard to trace.
The final point I’m going to raise is the importance of setting aside money for legal fees. Separation can be a very expensive process and it can be lengthy, so it’s important to build a separate fund for that purpose. Normally, you get some initial advice from a solicitor for relatively cheap, but ongoing processes can be incredibly expensive and therefore it’s worth ensuring the parties have enough funds set aside. Don’t go buying any big purchases or anything like that.