As an accountant, you are often one of the first professionals to have the knowledge that a couple is considering separation or have already decided to separate. Depending on the circumstances, you may be in the position where you are assisting both people involved in the separation. Other times it might be just one person that you have the client relationship with.
In this article we explore what you need to know as an accountant to assist your clients and minimise financial risk as they work through the property settlement process.
Your professional relationship with both clients
What we often see in Family Law is that there are two types of clients that approach us for representation. Either the client is the party who is in control and has all the knowledge of the asset and liability position, as well as any corporate and/or trust structures. Or, we are approached by the party who has limited to no knowledge and/or control of their net asset position and structures.
You might have seen this first hand in your experience with a couple. Most parties would ordinarily have the one accountant while in the relationship. But this can often change after separation, as ordinarily one of the parties is giving the direction to and meeting the fees of the accountant. While the other is in the passenger seat and this can rightly or wrongly, lead to a level of distrust by the non-controlling party toward the joint account. So we often see one of the parties retains a new accountant after separation and to assist during the course of the negotiations.
Regardless of your relationship as an accountant with either party or both, what we do know is that it is important for a client’s accountant and family lawyer to work closely together when negotiating a property settlement. By opening up the lines of communication from the very beginning we can ensure we are implementing strategic and protective measures from both an accounting and legal perspective.
How an accountant can minimise risk during the property settlement process
As an accountant there are plenty of helpful things you can do when your clients are going through a separation. The first is to ensure your client’s personal tax returns and financial statements and tax returns for their corporate and trust entities are up to date. The types of documents we usually ask you to produce on behalf of clients include financial statements, tax returns, general ledgers, management accounts, cash flow ledgers, and any source documents you may have to verify the information in these documents together with trust deeds (and variations), company constitutions and any shareholders agreements.
Defining the asset pool is the first step to progress a property settlement matter before negotiations can even start and these documents will assist the parties to resolve early on what the assets and liabilities of the relationship are.
As family lawyers, we would ordinarily enlist your assistance to prepare a balance sheet that sets out the asset pool including all assets, liabilities and financial resources in the parties joint and separate names.
These assets can include real property, all corporate and trust entities in which either or both parties have an interest, and superannuation. Liabilities can include general debt such as bank loans, as well as tax liabilities of either or both parties, and may include loans between or within entities (unless they are loans related to either of the parties and/or the entities either of them control).
A financial resource means something that either party does not necessarily own but has available to them currently or in the near future. A financial resource can include a beneficiary’s interest in a discretionary trust from which he/she has received distributions.
The parties involved in the separation have a duty to provide copies of all documents that are relevant to their property settlement. When complex financial setups and considerable wealth are involved often these documents are held and managed by their accountant. You can greatly assist during this process in terms of collating and providing the documents and also assist to ‘bridge the gap’ in any disagreements or allay concerns by answering questions of either of both of the parties.
As an accountant you are also best positioned to review and advise either party on the tax implications of a potential settlement including tax and realisation costs, CGT rollover relief, stamp duty concessions and the potential restructure of assets for clients as part of that property settlement.
If proceedings have commenced, assistance to complete a Court form called a financial statement which sets out the income, assets, liabilities and financial resources of each party will often be required.
What a family lawyer may seek out with their client from an accountant
Depending on whether the lawyer is acting for a client who has considerable knowledge of their finances or if they are acting for someone who has limited or no control over the financial set up, there are a number of things that might be sought out with the assistance of an accountant. This can include:
- Checking who has access to accounts, and look at if any accounts need to be ‘frozen’ or have the authority changed to both signatures to release funds as this helps to avoid the risk that one party can access and expend funds without the other’s knowledge;
- Checking the level of control each party has over assets. For example, a lawyer might work with the accountant to seek to source out documents of trust deeds, perform searches for who is director/shareholder, determine who is appointor and trustee of trust;
- Ensuring all tax issues (for example, division 7A loans) are looked at closely and if needed ‘clean those up’ as part of settlement;
- If the separating couple own a business together, and they are both employed by the business, risks need to be considered regarding the ongoing roles in business, the impact on staff, and any employment law issues if one party is required to cease their role and employment. It is also important (particularly if you are assisting the party that is not in control of/working in the business) to monitor the management accounts for the business in terms of any noticeable changes to the profit and loss and/or general ledgers following separation as there have been occasions that one party in particular has been misusing assets or reducing profits as a means to reduce the profitability and ultimate value of the business.
- There may be a large portion of the parties assets held within corporate/trust structures (meaning there may not be sufficient liquid assets outside of those structures to meet a client’s entitlement) and in those circumstances assets or cash may need to be extracted from the structure/s which as you know may incur tax and realisation costs about which we and the client would require your advice in terms of mitigating these tax and cost consequences.
The key element when it comes to minimising your client’s financial risk during divorce and property settlement, is to ensure you are having early conversations with your client’s family lawyers. This will give you the opportunity to run through a range of different scenarios as to how the distribution of assets may occur and how you can assist and protect your client in the interim and going forward.
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Phillips Family Law is an award winning Family Law practice serving clients across Australia and abroad. Regardless of where you are in your decision making process, we can make you aware of your options. To discuss your situation confidentially phone +61730079898 or secure a time by clicking here.