By Sarah Moon
6 June 2023
Keeping finances separate is increasingly common in New Zealand relationships. When this occurs, it is not unusual to discover hidden assets, structures or debts at separation. As New Zealand relationship property legislation is “no-fault”, generally misbehaviour or financial infidelity during the relationship is not relevant to the division so it is important to be aware of whether you will find yourself liable for debts you did not even know about.
Under the Property (Relationships) Act 1976 (PRA), debts are classified as either being “separate” or “relationship” debts. The person owing the debt has the onus to show that the debt is a relationship debt.
Proving a debt is a relationship debt requires one of the statutory classifications to be met. Section 20 of the PRA defines a “relationship debt” as a debt incurred:
- jointly; or
- in the course of a common enterprise carried out by the couple (with or without another person); or
- to acquire, improve or maintain relationship property; or
- for the benefit of the couple in managing the affairs of the household; or
- for the purpose of bringing up any child (provided the child lives with the couple – the child does not need to be a child of the relationship).
Debts to acquire, improve or maintain relationship property
If finance was used to acquire, improve or maintain any relationship property – it will be classified as relationship property.
If separate property becomes relationship property during the relationship – then any finance relating to that separate property will also become relationship property. An example of this is vehicle finance. As vehicles used in the relationship become relationship property under the PRA, any finance associated with that vehicle also would become a relationship debt. This applies regardless of the value of the vehicle compared with the debt.
Debts for the benefit of the couple in managing the affairs of the household / bringing up children
The Courts have tended to take a liberal approach in classifying debts incurred under these headings. Debts that have been caught include:
- a hidden loan between sisters – when a couple was having financial difficulties and the husband refused to discuss finances and money was needed for a new baby;
- legal fees associated with a partner’s separation from an earlier partner when those fees were incurred during the relationship;
- the “living costs” component of a student loan taken out during the relationship;
- a hidden income tax liability that one partner has incurred without the knowledge of the other (however – the classification of this debt was proportionate to the income bought into the relationship); and
- lavish and expensive renovation costs for a property held by a trust, when the renovation was driven by the couple’s desire to have a suitable home environment, rather than as a capital improvement pursued by the trust.
Debts that do not fall within one of the categories of “relationship debts” are classified as separate debts. The liability for the debt is not shared and stays with the partner who legally owes the debt.
Classic examples of separate debts are student loans (course fees) or debts secured over separate property (such as a mortgage over an investment property acquired before the relationship ).
Paying off a partner’s debt
It is also important to note that compensation can be awarded under the PRA when a partner has paid off their partner’s personal debt during the course of a relationship. This is increasingly common where, for example, a partner has agreed to combined income (relationship property) paying off a student loan.
How can I protect myself?
Whether you have experienced financial infidelity, or are simply concerned about your partner’s spending habits, the best way to protect yourself is first making sure that you are aware of all debts that you and your partner owe.
If you consider that it is fair that a particular debt should not fall under the classification provided by the PRA then you can enter into a Contracting Out Agreement. Contracting Out Agreements can be entered into at any stage of your relationship – whether you have been together for six months or sixty years and will be upheld by the Courts provided they are not seriously unjust or are found to have been made to defeat creditors.
Talk to us
For more information or professional advice on this topic please contact Sarah Moon or another member of our relationship property team.