Why earning capacity matters during divorce

During a divorce proceeding, earning capacity is a valuable commodity. That’s because what you can earn can impact how your property is divided and the amount of spousal support you could be entitled to.

By Annabel Murray, Head of Family Law at Australian Family Lawyers (Sydney)

When you’re divorcing, earning capacity matters. But what does it mean? And how will your earning capacity impact your financial situation during divorce?

What does earning capacity mean in family law matters?

Earning capacity refers to the ability of a person to earn income through their skills, experience, and training. This is sometimes very different to their actual income.

In family law matters, earning capacity is an important factor for determining property settlements, child support, and spousal support. That’s because the goal of these proceedings is to make sure that the parties are able to maintain a reasonable standard of living post-divorce. The Family Court will use earning capacity to help them determine how to divide property so that it can meet this goal. 

Loss of earning capacity

Sometimes a person might lower or lose their earning capacity during the course of a relationship. There could be many reasons for this.

• Some couples may agree that one of them will not work outside the home. This may be a cultural decision or simply be a practical decision based on home care responsibilities.
• In a situation where there is family violence, one partner might prevent the other from engaging in paid work outside the home.
• One partner may fully support the other partner, so they never feel the need to pursue outside employment. 
• One partner may support the other by giving up their own work to allow the other person to achieve larger career goals. 
• The birth of a child may drive one partner to lose earning capacity incrementally. They may take time out of paid employment after the birth of their child, return to work limited hours or fall into a more casual or less secure pattern of work in order to focus more on their children.
• Childcare is inaccessible or not affordable. 
• There is a lack of available flexible working arrangements to allow both parties to work and meet the demands of caring for family. 

Each of these makes it challenging to get back into the workforce, and that equals a loss of earning capacity.

Who is typically affected by a lower or loss of earning capacity?

In the USA there is a gender-stereotypical phrase referred to as ‘Doctor’s Wife Syndrome’. This refers to the situation where a wife has worked to pay for their partner’s medical school tuition and made compromises in their own careers to do so. Over time, the long hours spent by the husband pursuing his medical career leads to the couple divorcing and leaving the wife with limited assets and an even more limited earning capacity.

This is just one example. What we see as family law practitioners is that the loss of earning capacity can affect a broad range of individuals – not just women. Former partners of both genders might experience this, particularly when their partners are in the military, are shift workers or fly-in-fly-out workers, or otherwise have roles that require significant hours or time away from home.

We have worked with many clients who might have had wonderful career experiences and opportunities at one point in their lives, but by the time they’re in the process of separating, find themselves unable to support themselves. This is a direct result of having foregone opportunities that have led to a lowering or loss of their own earning capacity.

How does a loss of earning capacity affect child support payments, spousal payments and property division on divorce?

When a couple is divorcing and dividing up their property, the Family Law Act will consider the contributions that each party has made to the marital property when determining how to divide it. Where one party has a lower or complete lack of earning capacity, this may mean that they are entitled to a greater share of the property or spousal support.

Again, the goal is to ensure that the parties’ will be able to maintain a reasonable standard of living post-divorce—and if one party doesn’t have an adequate earning capacity, the Court will try to make this right by giving them a bigger share of the marital property.

In the same way, the Court will look at each person’s capacity to earn money to support their children. If one person has more ability to earn money, they’ll also have a greater ability to pay more to support those children. So in those cases, they will be required to pay a greater share of child support. Read our parent’s guide to child support here.

How are future earnings handled in a divorce?

Future earnings is just another way of referring to earning capacity. An economist would project future earnings by projecting the amount a person could earn if they weren’t limited by outside factors and had chosen to maximize their earnings.

When it comes to divorce, the Court will consider the future earnings of each party to ensure that each person is able to support themselves and their children (as required). To determine whether or not a person will be able to have a reasonable standard of living, the Court will also consider their future needs, and award them the percentage of the marital property pool that helps them meet those needs.

How we can help

At Australian Family Lawyers, we are experts in family laws matters. We can help you understand the impact of your or your ex’s earning capacity in terms of entitlements at separation.

We’re also on hand to offer support and guidance on any other matters of family law and divorce. Please get in touch with us via the form below. We’re here to help!