Accountants: The Financial Disclosure Obligations for Divorcing Clients

If your client is going through a property settlement, documents held by you as their accountant (or other professional advisor) are considered to be within their control so may have to be disclosed as part of this process.

Exchange of documents and information during a property settlement is important to ensure transparency and assists the Court to identify the asset pool, income, contributions and future factors of the parties to determine their entitlements.

Oftentimes clients rely on you as their accountant to assist with collating the documents they are required to disclose. Sometimes clients may not recall, for example, whether trust deeds have been amended over the years or whether there are documents, such as minutes amending the terms of a trust, in existence. They will often rely on you as their accountant to clarify these issues and provide the documents if you have copies. 

Documents need to be provided in a timely manner and in some matters there may also be a Court Order specifically providing that disclosure be provided to the other side by a certain date. It is important that you are aware if there are any Court Orders in place setting out specific time frames for compliance to ensure that your client is not in breach of the Orders.

Part 13.1 of the Family Law Rules 2004 and Part 14 of the Federal Circuit Court Rules 2001 set out the rules in relation to parties’ obligations for disclosure. However, with the pending merger of the Family Court and Federal Circuit Court in mid to late 2021, we are anticipating that a unified set of rules will soon be produced. We will share updated information with you as this unfolds. 

Assisting a client with the financial disclosure process

When negotiating a property settlement, the idea is that both parties should come to the table ‘with their cards facing up’. The aim of disclosure is to help each party to focus on genuine issues, reduce costs and encourage settlement of the case. 

As their accountant, you may be asked questions to clarify certain aspects of the documents that have been  produced, for example, to provide particulars about figures that appear in the balance sheet. 

In the event you have a client whose property settlement proceeds to Court, they will also be required to file a Financial Statement which particularises their income and the source of the income, their property, liabilities, superannuation interests, financial resources and if relevant, their reasonable weekly needs. In collaboration with their family lawyer, your client may require your assistance to complete aspects of this document.

Documents that are produced during a property settlement must only be used for the purpose of the case and it is important that clients understand that the documents, or contents of the documents, must not otherwise be disclosed or given to any other person without the Court’s permission.

There are some circumstances where a party may object to the production of certain documents requested to be produced, this might arise in circumstances where the party is claiming privilege from production or the party is unable to produce the document. However the client would need to seek specialised family law advice in relation to the particular document before doing so.

The disclosure process can often be quite overwhelming for some clients especially in more complex property settlements where the volume of disclosure required is significant. As their accountant, you can assist your client by helping to collate the documents and information required from your records.

If you are concerned that your client is trying to avoid compliance with their disclosure obligations, it is important that they understand that there could be significant consequences for them for failing or refusing to disclose, as detailed below.

What is required for full and frank financial disclosure?

The Family Law Rules set out what comprises full and frank disclosure of a party’s financial circumstances. This includes information and documents relating to:

• the parties’ earnings, including income that is paid or assigned to another party, person or legal entity;
• any vested or contingent interest in property;
• any vested or contingent interest in property owned by a legal entity that is fully or partially owned or controlled by a party;
• any income earned by a legal entity fully or partially owned or controlled by a party, including income that is paid or assigned to any other party, person or legal entity;
• the parties’ other financial resources;
• any trust of which a party is the appointor or trustee;
• any trust of which a party, their child/ren, spouse or de facto spouse is an eligible beneficiary as to capital or income;
• any trust of which a corporation is an eligible beneficiary as to capital or income if the party, or their child/ren, spouse or de facto spouse is a shareholder or director of the corporation;
• any trust over which a party has any direct or indirect power or control*; 
• any trust of which a party has the direct or indirect power to remove or appoint a trustee*;
• any trust of which a party has the power (whether subject to the concurrence of another person or not) to amend the terms*;
• any trust of which a party has the power to disapprove a proposed amendment of the terms or the appointment or removal of a trustee*; or
• any trust over which a corporation has a power mentioned in any of points above (marked with an asterisk), if a party, or their child/ren, spouse or de facto spouse is a director or shareholder of the corporation;
• any disposal of property (whether by sale, transfer, assignment or gift) made by a legal entity that a party has a vested or contingent interest in, a corporation or a trust mentioned above (marked with an asterisk) that may affect, defeat or deplete a claim:

                              (i)  in the 12 months immediately before the separation; or

                             (ii)  since the final separation; and

• liabilities and contingent liabilities. [check with FMC/TP whether they think take this bit out]

What are considered relevant documents to disclose?

In summary, as explained in an earlier article written by my colleague Rebecca O’Brien, the relevant documents that need to be disclosed include those that:

1. Verify the nature and extent of the assets, liabilities and financial resources of one and/or both of the parties (often referred to as ‘the asset pool’) that will be the subject of division of the parties including:
   1. assets and liabilities held in each party’s separate and/or joint names;
   2. assets and liabilities held within any companies or trusts in which either or both parties have an interest;
2. Verify the nature and extent of the current and any future income of the parties including income:
   1. from employment; 
   2. from other sources such as a company or trust;
3. Relate to an issue in dispute in the property settlement (i.e. if the document/information could prove or disprove an issue in dispute) which may include:
4. 1. the contributions each person has made to the asset pool; and
   2. factors relating to what each party may ‘need’ to support themselves in the future often referred to as ‘future factors’.

Although this list is not exhaustive, the relevant documents required to be disclosed include the following:

• Evidence of income (3 most-recent pay slips);
• Last 3 tax returns;
• Bank statements for the 12 months prior to separation to the current date (including accounts in the sole name of each party or in which a party holds jointly with another person);
• Documents to verify any interest in a trust or company (including trust deeds, any variations to those deeds, tax returns for the trust/company for the last 3 financial years; financial statements for the last 3 financial years; bank statements for all accounts held by the trust/company for the 12 months prior to separation to the current date);
• Current superannuation fund statement;
• If superannuation is self-managed, the trust deed and financial statements for the fund for the last 3 financial years;
• Documents to evidence any assets disposed of or sold in the 12 months prior to separation;
• Documents that provide evidence of any inheritance, gift from a family member or friend, a redundancy payment, personal injury award or lottery winnings (including documentation to verify the receipt and application of the asset/funds);
• Documents to evidence any future asset transfer or income that is likely to come a party’s way (for example, share options, trust distributions, inheritances); as well as
• Documents that verify both people’s financial position when they began living together (e.g  valuations or purchase documents for assets owned, bank statements to demonstrate savings held or superannuation statements to prove entitlements at the time parties began living together).

What happens if my client does not produce or refuses to disclose all relevant documentation?

If relevant financial documents are not produced, your client should be aware that the other party may commence Court proceedings seeking orders for disclosure and/or file a subpoena in the Court to obtain copies of the documents directly from third parties. 

There can be consequences for your client if they refuse to provide disclosure of relevant documents and their matter comes before the Court. For example, the Court could:

1. Make an order for the person who has failed to provide disclosure (‘the non-disclosing party’) to pay the legal costs of the other party (in full or in part);
2. Refuse to allow the non-disclosing party to rely on a document if it has not been previously disclosed to the other party;
3. Stay (i.e. place on hold) or dismiss all or part of the non-disclosing party’s application;
4. Find the non-disclosing party guilty of contempt of Court and issue a punishment of a fine or a term of imprisonment (although this is rare and only in extreme circumstances);
5. If non-disclosure is only revealed after the Court makes a final property settlement Order, the Court may set aside the Order (even if the non-disclosure is discovered several years later).

If the cost of complying with their disclosure obligations would be oppressive to the client and Court proceedings are on foot, the Court has the power to order that the other party pay the costs, contribute to the costs or give security for costs. However this would only be in limited circumstances and your client should seek specialised family law advice about this if costs of complying are a significant issue.

Generally speaking, family lawyers are happy to work with you directly during this process as you are a helpful point of contact for us to ask questions about a client’s financial circumstances and the existence of documents. Your role in assisting your client through this process is an important one so if you have any questions about the process, do not hesitate to reach out to your client’s family lawyer as early as possible.