If spouses, civil union partners, or people in a de facto relationship (each a Partner) separate, how is their property to be divided after separation? Who gets what?
One of the fundamental principles of the Property (Relationships) Act 1976 (Act) is that Partners are entitled to an equal share of their relationship property. This article sets out when the principle applies, the property it applies to, and its exceptions.
Qualifying Relationships
Not all Partners can benefit from the equal sharing principle. The Act requires Partners to have been married, in a civil union, or in a de facto relationship for at least three years.
Determining the length of a marriage or civil union is straightforward. But it can sometimes be tricky to work out the length of a de facto relationship. If the status of the relationship is unclear, the Court will look at factors such as:
- how long Partners have been together;
- a commitment to a shared life;
- whether Partners share a home and how they share tasks and costs;
- financial and property arrangements between Partners; and
- the care and support of any children.
Marriages, civil unions, and de facto relationships that last less than three years are defined as “relationships of short duration” under the Act. They do not qualify for equal sharing of all relationship property. However, there are special rules in the Act that might apply when dividing property between Partners to such relationships. Those rules depend on the type of relationship involved, the contributions of the Partners to the relationship, and other circumstances.
Relationship Property
The equal sharing principle does not apply to all property owned by the Partners. It only applies to “relationship property”. Identifying such property is a key part of the separation process.
Relationship property includes:
- the family home whenever acquired;
- family chattels whenever acquired;
- all property owned by the Partners jointly or as tenants in common in equal shares;
- property owned by either Partner before the relationship began, if acquired in contemplation of the relationship and intended for the Partners’ common use or benefit;
- property acquired by either Partner after the relationship began, subject to some exceptions;
- the proportion of the value of life insurance policies and superannuation scheme entitlements attributable to the relationship;
- other property that the Act deems to be relationship property; and
- the proceeds of sale of relationship property or property acquired in substitution of relationship property.
The definition extends to land in New Zealand and movable property anywhere in the world. It covers real estate, vehicles, pets, money, investments, KiwiSaver, and all other forms of real or personal property captured by the definition.
Any property that is not relationship property is “separate property”. The Act generally allows Partners to keep their separate property, without it being subject to equal sharing. An example of separate property is property received by succession, survivorship, gift, or trust (i.e. an inheritance).
Separate property can become relationship property. An example is an inheritance being applied towards the purchase of the family home. The Act has specific rules dealing with when, and to what extent, separate property can become relationship property and subject to equal sharing.
Either or both Partners must own the property before it can be considered relationship property. As such, property owned by a company or other legal entity, or property that is held on trust, is not technically relationship property for the purposes of the Act. However, for good pragmatic reasons, parties going through separations will often treat company or trust owned property as if it were part of their total pool of property that could potentially be subject to equal sharing.
Relationship Debt
The equal sharing principle applies to the net value of relationship property, after deduction of “relationship debts”. These are debts that have been incurred:
- by the Partners jointly;
- in the course of a common enterprise carried on by the Partners, whether alone or together with another person;
- for the purpose of acquiring, improving, or maintaining relationship property;
- for the benefit of both Partners in the course of managing the affairs of the household; or
- for the purpose of bringing up any child of the relationship.
Typical relationship debts include mortgage debt on the family home, loans taken out to purchase family chattels, credit card and household bills, and finance to fund business operations.
Extraordinary Circumstances / Repugnant to Justice
There are exceptions to the equal sharing principle. The most obvious is under section 13 of the Act, which is entitled “Exception to equal sharing”. It states that the rule will not apply if the Court is satisfied that there are extraordinary circumstances that would make equal sharing repugnant to justice.
When the exception applies, the Partners’ shares will be determined in accordance with their respective contributions to the relationship. Qualifying contributions are set out in section 18 of the Act. There is no presumption that a monetary contribution is of greater value that a non-monetary contribution.
As you might expect, the phrases “extraordinary circumstances” and “repugnant to justice” set a high bar before this exception can apply. In most separations, the bar will not be met. However, if equal sharing in any given case would truly be against the interests of justice, the Court can decide to go another way.
An example of a situation where the exception might apply is a Partner who uses a large inheritance to pay down the mortgage on the family home, only to have the relationship end shortly after. In such a case, it would be totally unfair for the equal sharing rule to apply to the net value of the family home.
Economic Disparity
Even equal sharing applies, many separations ultimately involve an unequal division of the Partners’ relationship property. This is because the Court has various powers to order a Partner to pay compensation or transfer property to the other Partner, to redress certain unfair situations that would result if the relationship property were split 50/50. One of the most common of these situations is economic disparity between Partners.
Economic disparity under the Act is when the income and living standards of one Partner are likely to be significantly higher than the other Partner because of the effects of the division of functions within the relationship. There must be a causative link between the disparity and the way the Partners divided functions within their relationship, such as monetary contributions, childcare, and household duties. A typical situation is where one Partner sacrificed their career and future earning potential to stay at home to raise the children, while the other Partner was free to progress their business or profession.
In determining an award for economic disparity, the Court will look at factors such as:
- the likely earning potential of each Partner;
- the responsibilities of each partner in taking care of any dependent children during the relationship; and
- any other relevant circumstances.
Awards for economic disparity can attach to the separate property of the financially better off Partner. This will be the case if the separate property has increased in value due to the actions of the other Partner.
Where there is economic disparity for the purposes of the Act, Partners going through separations will often address it by agreeing an unequal division of their relationship property, such as a 60/40 split in favour of the financially disadvantaged Partner. The extent of the economic disparity can also be valued by an expert. This provides a more accurate indication of the likely compensation amount to be awarded for economic disparity, but also comes at a cost.
Other Compensatory Orders
In addition to economic disparity, the Court can make orders to compensate a Partner if they have:
- paid the other Partner’s personal debts (i.e. not relationship debts);
- allowed their property to be used as the family home in circumstances where the other Partner has a property that could have been used as such;
- continued to make contributions to the relationship after separation; or
- had the value of their relationship property materially diminished due to the deliberate actions of the other Partner.
These are some of the more common situations where the Court can make orders that would result in an unequal sharing of relationship property. In practice, the Court’s compensatory and adjustment powers operate as exceptions to the rule that relationship property is to be divided equally between Partners.
Conclusion
Under the Act, the relationship property of qualifying Partners is to be divided equally between them. In general, the relationship must last at least three years, and the property must be relationship property and not separate property, before the equal sharing rule applies. But there are exceptions. Extraordinary circumstances can make equal sharing repugnant to justice. There are also compensatory orders the Court can make to address unfairness, such as economic disparity caused by the division of functions in the relationship. Because of the Court’s discretion to respond to these unfair situations, relationship property is often divided unequally in practice.