De facto relationships have become increasingly common in Australia, with many couples choosing to live together without formalising their relationship through marriage. While some might believe that de facto relationships offer less legal complexity than marriages, the reality is quite different when it comes to potential relationship breakdowns and property settlements. This article explores whether de facto couples need Binding Financial Agreements (BFAs) and why they might be a crucial consideration for protecting assets and providing certainty.
Why De Facto Couples Should Consider a Binding Financial Agreement
Many de facto couples operate under the misconception that without marriage, their assets remain separately protected. However, Australian law treats de facto relationships similarly to marriages when it comes to property settlements after a relationship breakdown. Under the Family Law Act 1975, de facto couples who have lived together for at least two years face similar property division rules as married couples if they separate.
The legislation gives courts broad powers to divide property between former de facto partners based on contributions, future needs, and what is just and equitable. Without a BFA in place, assets acquired before or during the relationship could be subject to division, regardless of who purchased them or whose name they are registered under.
A properly drafted BFA allows de facto couples to determine in advance how their assets will be divided if the relationship ends, thereby providing certainty and potentially avoiding costly and emotionally draining legal disputes. These agreements can specify which assets remain separate property and which will be shared, offering control over financial futures that would otherwise be left to the court’s discretion.
Legal Recognition of De Facto Relationships in Australia
The Family Law Act defines a de facto relationship as one where a couple lives together on a genuine domestic basis but are not married to each other. The court considers various factors when determining whether a de facto relationship exists, including the duration of the relationship, nature of common residence, existence of a sexual relationship, financial interdependence, ownership and acquisition of property, degree of mutual commitment, care and support of children, and public aspects of the relationship.
Once a relationship is legally recognised as de facto and has lasted at least two years (with certain exceptions), the same financial settlement principles that apply to married couples can be applied. This means that without a BFA, a de facto partner could claim against the other’s superannuation, business interests, inheritances, and other assets acquired both before and during the relationship.
This legal reality surprises many Australians who may have chosen a de facto relationship specifically to avoid what they perceive as the legal and financial complications of marriage. The truth is that de facto relationships carry similar legal implications, which makes protective measures like BFAs equally important for non-married couples.
Property Settlement Without a BFA
When de facto couples separate without a BFA in place, they may need to apply to the Family Court for property settlement orders. The court follows a four-step process: identifying and valuing all assets and liabilities, assessing each party’s contributions (financial and non-financial), considering future needs factors, and determining whether the proposed division is just and equitable.
This process can result in outcomes that neither party anticipated or wanted. For instance, assets that one partner brought into the relationship or inherited during the relationship might be included in the property pool for division. Even if a couple has kept their finances completely separate throughout their relationship, the court may still order a substantial transfer of wealth from one party to the other based on factors such as care of children, age, health, income earning capacity, and length of the relationship.
Additionally, without a BFA, the timeframe for seeking property settlements can extend up to two years after separation, creating prolonged uncertainty and potential financial stress. This period of vulnerability can be significantly reduced with a properly executed BFA that takes effect immediately upon separation.
Key Benefits of BFAs for De Facto Couples
A Binding Financial Agreement offers several significant advantages for de facto couples that go beyond simple asset protection. Understanding these benefits can help couples make informed decisions about whether a BFA is right for their specific circumstances.
Perhaps the most significant benefit is the certainty a BFA provides. Both parties know exactly what will happen financially if the relationship ends, removing the uncertainty and anxiety that often accompanies separation. This clarity can actually strengthen a relationship by eliminating financial insecurity as a source of tension. When both partners understand and have agreed to fair terms in advance, they can focus on building their relationship rather than worrying about potential financial risks.
BFAs also offer protection for existing assets, future inheritances, and business interests. For de facto couples where one or both partners have significant assets, family wealth, or business interests, a BFA can ensure these remain protected. This is particularly important for those entering second relationships later in life who may have accumulated substantial assets or have financial responsibilities to children from previous relationships.
Protection for Complex Financial Situations
De facto couples with complex financial arrangements particularly benefit from BFAs. These might include situations where one partner has significantly more wealth than the other, where there are business interests to protect, where one partner expects a substantial inheritance, or where there are children from previous relationships whose financial futures need to be safeguarded.
For example, a business owner in a de facto relationship might use a BFA to ensure their business remains solely in their control if the relationship ends. Without such protection, a court might determine that the non-owner partner contributed indirectly to the business’s success by supporting the household or caring for children, entitling them to a portion of the business value.
Similarly, a BFA can protect future inheritances or gifts from family. Without specific protection in a BFA, these assets could potentially be considered part of the relationship property pool if they were received during the relationship and especially if they were used for joint purposes such as home improvements or family holidays.
Reducing Conflict and Legal Costs
Perhaps one of the most practical benefits of a BFA is its potential to significantly reduce conflict and legal costs if the relationship ends. Court proceedings for property settlements can be expensive, often costing tens of thousands of dollars, and can drag on for years in complex cases. The emotional toll of such prolonged legal battles can be devastating.
A properly drafted BFA can help avoid this scenario entirely. By agreeing in advance how assets will be divided, couples can separate with dignity and minimal conflict, allowing both parties to move forward with their lives more quickly. The cost of preparing a BFA is typically far less than the potential cost of litigation, making it a financially prudent decision for many couples.
This conflict reduction aspect of BFAs is particularly valuable when children are involved. By minimising financial disputes, parents can focus more on cooperative co-parenting arrangements rather than being caught in bitter property disputes that inevitably affect children’s wellbeing.
When De Facto Couples Should Get a BFA
The timing of creating a BFA can significantly impact its effectiveness and the ease with which it can be negotiated. While these agreements can be made at any stage of a de facto relationship—before moving in together, during the relationship, or even when contemplating separation—there are distinct advantages to early preparation.
Creating a BFA before commencing cohabitation or early in the relationship often proves easiest. At this stage, the property pool is typically clearer, with distinct ownership of assets. Both parties can more objectively discuss what’s fair without the emotional complexities that develop over years of shared life. Additionally, the power dynamics may be more balanced earlier in the relationship, allowing for more equitable negotiations.
It’s particularly advisable to consider a BFA when moving in together if there’s significant disparity in wealth or property ownership between partners. Other triggering points might include one partner receiving a substantial inheritance, starting a business, or when the relationship reaches the two-year mark (when legal protections under the Family Law Act typically activate for de facto couples).
Specific Situations That Warrant a BFA
Certain circumstances make a BFA especially important for de facto couples. If one partner is bringing substantially more assets into the relationship, a BFA can protect these pre-existing assets from potential claims. Similarly, if one partner owns a business or has significant professional goodwill (such as doctors, lawyers, or other professionals), a BFA can safeguard these assets and income potential.
De facto couples where one partner expects a significant inheritance should also consider a BFA. Without specific protection, inheritances received during the relationship might be considered shared property, particularly if they’re used for joint purposes like home renovation or shared investments. A BFA can clearly specify that inheritances remain the separate property of the receiving partner regardless of when they’re received.
Second or subsequent relationships often present compelling reasons for BFAs. When partners have children from previous relationships, they may wish to protect assets intended for these children’s futures. Older couples who enter de facto relationships later in life often have accumulated significant assets and superannuation that they want to protect. These situations create complex financial dynamics that BFAs can effectively address and clarify.
Critical Timing Considerations
While BFAs can be created at any time, certain timing factors can affect their enforceability and practicality. Creating a BFA after a relationship has existed for more than two years can be more complicated, as rights to property division under family law may have already crystallised. However, this doesn’t make later BFAs impossible or invalid—it simply means the negotiations and drafting may need to acknowledge existing legal entitlements.
It’s also important to avoid creating BFAs under duress or with inadequate time for consideration. Courts may invalidate agreements signed immediately before moving in together or during relationship crises when one party feels pressured to sign. For maximum legal protection, both parties should have sufficient time to consider the agreement, seek independent legal advice, and negotiate terms without undue pressure.
Life transitions represent optimal times to consider or revisit BFAs. These might include purchasing property together, combining finances, having children, or experiencing significant changes in financial circumstances such as career advancements, business success, or receiving inheritances. These transition points often change the financial dynamics of a relationship and warrant reconsideration of how assets would be handled in a potential separation.
Essential Elements of a Valid BFA for De Facto Couples
For a Binding Financial Agreement to provide the protection intended, it must meet specific legal requirements outlined in the Family Law Act. Failing to satisfy these requirements can render the agreement unenforceable, leaving couples in exactly the situation they sought to avoid—subject to the court’s discretion regarding property division.
First and foremost, a valid BFA must be in writing and signed by both parties. The document must clearly identify the parties and specify whether it applies to an existing de facto relationship or one contemplated in the future. It should explicitly state that it is made under the relevant section of the Family Law Act (specifically Section 90UB, 90UC, or 90UD, depending on when it’s made relative to the relationship).
Perhaps most critically, both parties must receive independent legal advice before signing the agreement. This advice must cover the effect of the agreement on their rights and the advantages and disadvantages of entering into it. The agreement must include certificates signed by the lawyers confirming they provided this advice. Without these certificates, the agreement cannot be binding.
Content Requirements for Comprehensive Protection
Beyond the formal requirements, an effective BFA needs to include specific content elements to provide comprehensive protection. The agreement should clearly identify all assets and liabilities owned by both parties at the time of signing, including real estate, investments, superannuation, business interests, and significant personal property. This creates a baseline understanding of what each person brought into the relationship.
The BFA should explicitly address how property acquired during the relationship will be treated upon separation. This includes specifying whether joint property will be divided and how, whether superannuation will be split, and how joint debts will be handled. It should also address how assets acquired after the agreement is signed will be treated—for instance, whether they remain separate property or become joint regardless of whose name they’re in.
Comprehensive agreements often include provisions for spousal maintenance (financial support after separation), specifying whether it will be provided, in what amount, and for how long. While not required, these provisions can prevent future disputes about financial support. The agreement should also include mechanisms for resolving disputes about the interpretation or implementation of the agreement, potentially specifying mediation before litigation.
Common Pitfalls That Can Invalidate BFAs
Australian courts have invalidated numerous BFAs due to specific technical and substantive deficiencies. Understanding these pitfalls is crucial for creating an enforceable agreement. One common error is imprecise or ambiguous language that leaves room for interpretation disputes. BFAs should use clear, specific language about asset division and avoid vague terms that could create confusion.
Failure to make full and frank disclosure of all assets and liabilities presents another serious risk. If one party conceals significant assets or debts, the court may set aside the agreement for fraud or non-disclosure. Each party must provide comprehensive financial information, ideally supported by documentation such as valuations, financial statements, or tax returns.
Courts may also invalidate agreements deemed unconscionable or that make insufficient provision for changing circumstances. For example, an agreement that leaves one party destitute while the other retains significant wealth might be set aside. Similarly, agreements that fail to account for major life changes such as having children, significant illness, or substantial inheritance may be vulnerable to challenge.
Technical errors in the execution process represent another common pitfall. These include failing to ensure both parties receive genuinely independent legal advice (using lawyers from the same firm, for instance, is problematic), rushing the signing process without allowing adequate time for consideration, or failing to properly certify the provision of legal advice as required by the legislation.
When a BFA May No Longer Be Appropriate
In some circumstances, couples might determine that maintaining a BFA no longer serves their interests. Perhaps the relationship has evolved to a point where complete financial integration feels more appropriate, or maybe the circumstances that initially motivated the agreement (such as protection of a business that has since been sold) no longer exist.
If both parties agree to terminate the BFA without replacement, they must follow a formal termination process similar to the creation process. A termination agreement must be drafted, signed by both parties, and each party must receive independent legal advice about the implications of ending the BFA. The termination agreement should explicitly state that the parties understand they will now be subject to the provisions of the Family Law Act regarding property division in the event of separation.
Couples considering termination should fully understand the consequences. Without a BFA, property division upon separation would be determined according to the principles in the Family Law Act, which might result in very different outcomes than those originally contemplated in the BFA. This is particularly significant for couples who have been together for many years, as the court would likely consider the long duration of the relationship in any property settlement.
Need Help Creating a Binding Financial Agreement?
Navigating the complexities of Binding Financial Agreements requires careful consideration and expert guidance. While BFAs can provide essential protection for de facto couples, they must be properly drafted, executed, and maintained to be legally enforceable. Poor execution or inadequate legal advice can result in agreements that fail to protect assets when needed most.
As binding financial agreement lawyers in Australia, we can help you create a comprehensive, legally sound Binding Financial Agreement tailored to your specific circumstances at a transparent, fixed fee cost. Our team understands the nuances of the Family Law Act and can ensure your agreement meets all requirements for validity and enforceability. Contact our team today by calling 1300 529 888 to discuss how we can help protect your financial future with a properly drafted BFA.