Aitken & Aitken (No 3)
[2022] FedCFamC1F 496
Federal Circuit and Family Court of Australia
(DIVISION 1)
Aitken & Aitken (No 3) [2022] FedCFamC1F 496
File number(s): SYC 5021 of 2019 Judgment of: WILSON J Date of judgment: 15 July 2022 Catchwords: FAMILY LAW – MAJOR COMPLEX FINANCIAL PROCEEDINGS LIST – parties agreed on equal contributions – major taxation liabilities – proper treatment thereof – interlocking corporate structure – inter-connected trusts – declaration of dividends. Legislation: Family Law Act (1975) Cth ss 75 and 79
Income Tax Assessment Act (1936) Division 7A and ss 109C, 109E, 109N, 109RB, 109T and 109Y
Limitation Act (1969) NSW s 14
Cases cited: Ashton v Pratt (2015) 88 NSWLR 281
Bacall & Zagar [2020] FamCA 350
Berghan v Berghan (2017) 57 Fam LR 104
Chorn & Hopkins (2004) 32 Fam LR 518
Giumelli v Giumelli (1999) 196 CLR 101
Howtrac Rentals Pty Ltd v Thiess Contractors (NZ) Ltd [2000] VSC 415
John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1
Kuhl v Zurich Financial Services (2011) 243 CLR 361
La Costa & La Costa (2007) 38 Fam LR 412
Ogilvie v Adams [1981] VR 1041
SMB & MFB [2006] Fam CA 46
Stanford & Stanford (2012) 247 CLR 108
Strand & Strand (No 2) [2018] FamCAFC 247
The Juliana [1822] 165 ER 1560
Trevi & Trevi [2018] FamCAFC 173
Upper Hunter Country District Council v Australia Chilling & Freezing Co Ltd (1968) 118 CLR 429
Division: Division 1 First Instance Number of paragraphs: 164 Date of last submissions: 8 June 2022 (Melbourne) Date of hearing: 8 March 2022 – 17 March 2022 Place: Sydney Counsel for the Applicant: Mr M. Kearney SC Counsel for the Applicant: Mr N. Ford Solicitor for the Applicant: Nolan Lawyers Counsel for the Respondent: Mr S. Lloyd SC Solicitor for the Respondent: Avondale Lawyers ORDERS
SYC 5021 of 2019 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 1)
BETWEEN: MS AITKEN
Applicant
AND: MR AITKEN
Respondent
order made by:
WILSON J
DATE OF ORDER:
15 July 2022
THE COURT ORDERS THAT:
1.On or before 4:00pm on 27 July 2022 the parties must bring in a minute that gives effect to these reasons.
2.The further hearing of this proceeding is adjourned to 10:00am on 29 July 2022 or earlier by agreement.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 10.14(b) Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 10.13 Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth).
Section 121 of the Family Law Act 1975 (Cth) makes it an offence, except in very limited circumstances, to publish proceedings that identify persons, associated persons, or witnesses involved in family law proceedings.
IT IS NOTED that publication of this judgment by this Court under the pseudonym Aitken & Aitken is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
WILSON J
Introduction
Despite the magnitude of the sums involved in this litigation, the issues to be determined are tolerably confined, both parties agreeing that it is just and equitable to alter the parties’ property interests as to 50% each.
The major point on which the parties were opposed related to whether the business of D Pty Ltd (“D Pty Ltd”) should be sold or whether the husband should retain it. Some other items on the balance sheet were not agreed, mostly as to amount.
As these reasons explain, in my view –
(a)the parties must forthwith regularise their tax liability;
(b)the dividend method addressed by Mr XX is an acceptable manner for the parties to address their tax liabilities;
(c)the wife should become the sole registered proprietor of the Suburb C property;
(d)the husband should become the registered proprietor of AA Street, Suburb BB;
(e)the husband should become the sole registered proprietor of the balance of the real estate;
(f)the accounts of D Pty Ltd should be regularised in accordance with these reasons;
(g)once D Pty Ltd’s accounts are regularised, the husband must acquire the wife’s shareholding in D Pty Ltd;
(h)the husband must pay the wife, in cash, half the value of D Pty Ltd for the wife’s 50% shareholding in D Pty Ltd; and
(i)Mr X’s acreage in 1 YY Street, Suburb BB must be recognised by the husband with the husband indemnifying the wife in relation to any claim by Mr X against her.
SOME BACKGROUND
A number of factual matters were agreed. Those may be recorded in the manner set out immediately below –
(a)at the date of trial the husband was 52 years of age and the wife was 50 years of age;
(b)the husband and the wife married and commenced living together in 1990 then separated about 28 years later, divorcing on 24 February 2020;
(c)the parties have three adult sons aged 23, 25 and 29;
(d)in mid-1994 the parties purchased real property situated at and known as B Street, Suburb C where they lived between 1997 and 2018 and since December 2018 the wife has lived there without the husband;
(e)in 1995 D Pty Ltd was incorporated;
(f)the husband and the wife are and at all material times have been the shareholders in and directors of D Pty Ltd;
(g)D Pty Ltd owns plant and equipment as well as stock, carrying on business manufacturing and repairing equipment;
(h)Aitken Pty Ltd (“Aitken Pty Ltd”) is the trustee of The Aitken Unit Trust and owes substantial amounts to D Pty Ltd; and
(i)the unit trust was settled on 7 October 1997 and each of the husband and the wife hold 10 of the 20 issued units in the unit trust.
Several parcels of real estate were of relevance in this litigation. They included the following –
(a)1 YY Street, Suburb BB the registered proprietor of which has at all material times been Aitken Pty Ltd;
(b)AA Street, Suburb BB the registered proprietor of which has at all material times been Aitken Pty Ltd;
(c)2 AA Street, Suburb BB the registered proprietors of which have at all material times been the husband and wife as joint tenants;
(d)3 AA Street, Suburb BB the registered proprietor of which has at all material times been Aitken Pty Ltd;
(e)ZZ Street, Suburb AN the registered proprietors of which have at all material times been the husband as to a 25% share as tenants-in-common with the wife who at all relevant times held another 25% as tenants-in-common together with the balance being held by unrelated third parties;
(f)UU Street, Suburb H of which the husband and wife at all relevant times were registered proprietors as joint tenants;
(g)J Street, Suburb H of which the husband and wife at all relevant times were tenant-in-common in equal shares;
(h)2 G Street, Suburb H the registered proprietors of which have been the husband and the wife as tenants-in-common in equal shares; and
(i)1 G Street, Suburb H the registered proprietors of which have been the husband and wife as tenants-in-common in equal shares.
It was common ground that D Pty Ltd has conducted its commercial operations from properties at –
(a)UU Street, Suburb H;
(b)J Street, Suburb H;
(c)2 G Street, Suburb H;
(d)1 G Street, Suburb H;
(e)3 G Street, Suburb H; and
(f)4 G Street, Suburb H.
In late1997 the Aitken Family Superannuation Fund (“the Private Superannuation Fund”) was constituted of which the husband and wife were and remain trustees and sole members. It seems that the beneficial interest in the real property at 3 G Street, Suburb H is held for the beneficiaries under the Private Superannuation Fund, or at least I have drawn that from paragraphs 2.11.1 and 2.11.2 of the written submissions dated 17 March 2022 prepared by counsel for the wife.
In mid-1999 U Pty Ltd (“U Pty Ltd”) was incorporated. The husband and the wife have been and remain the directors of U Pty Ltd and each owns one of the two issued shares in the capital of U Pty Ltd. According to the wife’s counsels’ written outline of final address, U Pty Ltd owns –
(a)real property at 1 AC Street, Suburb KK;
(b)real property at 2 AC Street, Suburb KK; and
(c)real property at 3 AC Street, Suburb KK.
While not quantified in precise terms, according to paragraph 2.12 of the wife’s counsels’ written outline of final address, U Pty Ltd owes a debt to D Pty Ltd. The detail of that debt was not given, especially whether it was an arms-length transaction, although no point was taken by the husband’s counsel on the issue.
In mid-2015 Aitken Pty Ltd was incorporated with the husband and wife being its office holders and each the holder of 1,000 of the 2,000 shares in the capital of that company. Whereas the husband and the wife were trustees of The Aitken Unit Trust from October 1997, in mid-2015 Aitken Pty Ltd became the trustee of The Aitken Unit Trust as successor to the husband and the wife.
In early 2017 settlement of the acquisition of the property at 1 YY Street, Suburb BB was effected with Aitken Pty Ltd, as trustee of The Aitken Unit Trust, the purchaser. The real property at 1 YY Street, Suburb BB was over 30 acres in size.
Land at YY Street, Suburb BB was over 70 acres in size. In late 2018, Aitken Pty Ltd in its capacity as trustee of The Aitken Unit Trust acquired the real property at YY Street, Suburb BB, settlement of which was effected in mid-2019.
After settling the acquisition of the land at YY Street, Suburb BB, Aitken Pty Ltd engaged in title alterations. Specifically, it –
(a)realigned a boundary in relation to four acres of adjoining land at 1 YY Street; and
(b)consolidated the titles to properties previously known as 2 and 1 YY Street into one title known as 1 YY Street, Suburb BB.
Pursuant to orders made on 23 March 2021 by Rees J two significant matters emerged. First, an expert called Mr XX was appointed as a single expert to negotiate on behalf of the parties with the Commissioner of Taxation in relation to issues that arose from the loan between D Pty Ltd and the trustee of the unit trust. The second matter was the parties’ acknowledgment about the equality of their respective contributions. It was in the following terms –
4.It be noted that the parties acknowledge and agree that for the purposes of the property settlement proceedings that a finding as to equality as to contributions of the property of the parties ought be made and that each party have a (sic) contribution based entitlement of one half of their (sic) net assets.
Issues in dispute
On 15 March 2022 the parties agreed on the issues in dispute. The issues were set out in the following terms –
1. as to the Orders to be entered:
1.1whether title to the [Suburb C] property ought be transferred to the wife as the wife seeks;
1.2whether the ATO Division 7A issues are to be attended to by the transfer of specified properties by the trustee of the [Aitken Unit Trust] [the Trust] to [D Pty Ltd] [[D Pty Ltd]] as is now understood to be a position common to the parties;
1.3the amount to be paid to the wife by the husband to satisfy her entitlements pursuant to s.79;
1.4whether the husband is to take all interests of [D Pty Ltd] as is the wife's primary position or all interests save for the Business of [D Pty Ltd] as is understood to be a position common to the husband and to the alternate position of the wife;
1.5 if the Business of [D Pty Ltd] is to be sold:
1.5.1 those interests which the sale is to include;
1.5.2the terms upon which any sale is to occur, including determining the identity of any broker to be appointed;
1.5.3whether injunctions are to be entered as sought by the wife to seek to preserve the value of the Business pending and upon any sale;
1.5.4whether the proceedings are to be adjourned in part to await the completion of the sale of the Business as is understood to be a position common to the husband and to the alternate position of the wife;
1.5.5consequent upon the above, the deferral of a consideration of any taxation impost arising consequent upon the sale of the business is to be met as is understood to be a position common to the husband and to the alternate position of the wife
1.6whether an order is to be made for the distribution of the 'excess cash' in [D Pty Ltd] and the terms and amount of the same as the wife seeks.
2. as to the interests to be considered by the Court:
2.1the value to be ascribed to the interests of the husband and the wife in [D Pty Ltd], including:
2.1.1the value to be ascribed to the stock of [D Pty Ltd] and whether all such stock has been identified and valued;
2.1.2the value to be ascribed to the plant and equipment of [D Pty Ltd]; and,
2.1.3the amount of the superannuation owed by [D Pty Ltd] to the superannuation fund of the husband and the wife;
2.2the value to be ascribed to the interests of the husband and the wife in the Trust including:
2.2.1the value to be ascribed to the plant and equipment of Trust; and,
2.2.2the extent and value of the interest of the Trust in [1 YY Street, Suburb BB] and the indebtedness of the parties and/or the Trust to [Mr X] and/or his interests;
2.3whether there is a debt owed to the parties by [Ms AD] and whether any such debt is 'statute barred';
2.4whether the livestock identified and valued by the single expert represents the entirety of that in which the parties have an interest;
2.5whether the husband disposed of [Motor Vehicle 2] at an undervalue and, if so, the amount foregone and the manner in which the same is to be called to account;
2.6the manner in which any funds received by the husband from insurance claims is to be called to account;
2.7whether the amounts expended by the wife on legal fees is to be notionally included and, if so, in what amount;
2.8whether the amounts expended by the husband on legal fees has been disclosed and is capable of quantification and, if so, whether such amount is to be notionally included and, if so, in what amount;
2.9the manner in which the taxation arising to the wife in the 2022 financial year in respect of the $1million received by the wife pursuant to the Orders of 17 September 2021 is to be brought to account and the amount of the same.
3.as to matters arising for consideration pursuant to s.75(2), whether any findings are to be made consequent upon the findings made in relation to the identified interests and, in particular, the approach adopted to the issues identified in paragraph 2 above.
The parties’ assets and liabilities
Consonant with the observations of the High Court in Stanford & Stanford[1] as one of the three fundamental tasks a court making orders under s 79 of the Family Law Act must undertake, I must identify the legal and equitable interests of the parties in property. The parties produced an extensive agreed list of assets and liabilities. No shortcut exists but to set it out in precise terms in the manner that follows –
[1] (2012) 247 CLR 108.
Ownership Description Applicant wife’s value Respondent husband’s value ASSETS 1. J B Street, Suburb C $ 4,800,000 $ 4,800,000 2. J E Street , Suburb F 2,900,000 2,900,000 3. H/W Shares in D Pty Ltd[2] – incorporating interests in: 45,514,742[3] 45,514,742 3a. Term Deposits/cash at bank at 14.03.2022 of $15,316,288 3b. - stock at 30.6.21 of $103,530; single expert valuation $628,277 3c. - plant and equipment: $410,264[4] 3d. - loan owed by U Pty Ltd of $217,945 3e. - loan owed by Aitken Unit Trust of $17,559,675 3f. - loan owed by the wife of $27,845 3g. - loan owing to the husband/wife of $277,288 3h. - superannuation payable of $33,495 3i. - goodwill of $11.1million 4. H/W Loan payable by D Pty Ltd to the Husband and the Wife 277,288 277,288 5. W Loan payable by wife to D Pty Ltd (27,845) 6. H/W Units in The Aitken Unit Trust[5] incorporating interests in each of: 19,567,471[6] 19,567,471 6a. Cash at bank at 14.03.2022 of $169,335 6b. - J Street, Suburb H; 1 G Street, Suburb H; 2 G Street, Suburb H: $9.22million 6c. - ZZ Street, Suburb AN (as to 50%): $497,500 6d. - AA Street, Suburb BB: $4.5million 6e. - UU Street, Suburb H - $8.9million 6f. - AA Street, Suburb H: $3.9million 6g. - 1 YY Street, Suburb BB: $4.535million 6h. - AA Street, Suburb H: $5.3million 6i. - plant and equipment: $187,909[7] 6j. - loan owing to D Pty Ltd of $17,559,675 6k. - loan owing to Mr X: $1,048,713[8] 6l. - unpaid distributions owing to the husband and the wife: $812,017 and $811,104 respectively. NIL no such distribution owed 7. H Loan payable by Aitken Unit Trust to the husband 812,017 NIL[9] 8. W Loan payable by Aitken Unit Trust to the wife 811,104 NIL[10] 9. H/W Shares U Pty Ltd[11] incorporating interests in each of: 2,061,599 2,061,599 9a. - 1 and 2 AC Street, Suburb KK: $1.12million 9b. - 3 AC Street, Suburb KK: $930,000 9c. Cash Reserve account: $5,002 as at 14.03.22 9d. Westpac Property Bank Account: $32,047 as at 14.03.22 9e. Westpac Term Deposit: $192,495 as at 14.03.22 9f. Less loan to D Pty Ltd: ($217,945) 10. J Loan owing by Ms AD 144,000 NIL 11. J Westpac Bank account…33 as at 04.02.2022 NIL 12. W Westpac Bank account…55 as at 07.03.2022 8,681 13. W Westpac Bank account…09 as at 07.03.2022 58,588 14. W Westpac Bank account…23 as at 04.02.2022 NIL 15. H Westpac Bank account…11 as at 18.02.2022 231,778 231,778 16. H Westpac Bank account…33 as at 24.02.2022 29,830 25,191 17. J Plant and equipment (not included above) 391,200[12] 391,200 18. J Diamond ring 8,000 8,000 19. W Motor Vehicle 1 124,381 124,381 20. W Motor Vehicle 3 1,000 1000 21. H Motor Vehicle 4 500 500 22. H Household contents 5,000 5,000 23. H Other personal property 25,300 25,300 24. J Livestock 43,470 43,470 25. J Balance of amount owing by Mr X for the purchase of acreage, Suburb BB 1,698,635[13] NIL 26. H Husband’s leave entitlements as at 30.06.2021 23,763 Total $ 79,510,502 $ 75,976,920 OTHER INTERESTS TO BE ACCOUNTED FOR 27. H Proceeds of sale and shortfall of Motor Vehicle 2 sold by husband $ 100,000 100,000 28. H Proceeds of sale of livestock sold by husband NK NIL 29. H Funds due to wife pursuant to interim orders for expert’s fees paid by wife for which husband liable 15,901 NIL 30. H Costs Order dated 21.12.2021 4,437 4,437 31. W Paid legal fees - $1,121,884 Not include 1,121,884 32. W Fund in solicitor’s trust account Not include 303,769 33. H Paid legal fees Not include 763,219 34. H Fund in solicitor’s trust account NIL NIL 35. W Money taken by wife from business since 10 April 2017 NIL E 47,225 36. W Purchase of Machine 1 NIL E 28,000 37. W Purchase of Machine 2 NIL 30,000 38. W Part property settlement directors loan NIL 1,000,000 Total $ 120,338 + NK $ 3,398,534 LIABILITIES 39. J Taxation due to ATO in respect of loan account borrowing by Aitken Unit Trust to D Pty Ltd per ATO Notice of Decision $ 3,834,383[14] $ Expert report 40. J Tax implications of sale of issued share capital in D Pty Ltd N/A Expert report 41. W Taxation payable in respect to $1million received by wife pursuant to Orders of 17.09.2021, accounted for by husband as a dividend 470,000[15] Nil this is a loan. No tax debt 42. W Westpac credit card - $2,084 Not included 43. J Debt to Mr X for the Suburb BB property NIL 1,220,000[16] 44. J Loan to AH Holdings NIL Total $ 4,304,383 $ 1,220,000 + tax liability SUPERANNUATION Name of Fund Applicant wife’s value Respondent husband’s value 44. Aitken Family Superannuation Fund comprising: 44a. Cash Citibank term deposit as at 14.03.22 $ 1,142,332 $ 1,142,332 44b. 4 G Street, Suburb H 2,300,000 2,300,000 44c. 3 G Street, Suburb H 1,040,000 1,040,000 44d. Westpac Bank account…94 as at 14.03.22 2,020 2,020 44e. Westpac Bank account…07 as at 14.03.22 104,042 104,042 44f Debt owed by D Pty Ltd 11,115 Total $ 4,599,509 $ 4,588,394
[2] The husband and the wife are each the directors and hold 1 of the 2 shares on issue. Per valuation of JJ Group (Mr AE) dated 4 March 2022, adjusted per items 3a and 3b.
[3] Calculated by adjusting JJ Group valuation report 05.03.2022: to reflect the increase of $1,886,465 from the balance at bank of $13,429,823 as at 30.06.21 recorded in Financial Statement per item 3a and stock values of $628,277 per item 3b.
[4] AF Valuation dated 11.02.2022, page 47 summary by entity.
[5] Of which Aitken Pty Ltd is the trustee, the husband and the wife each being the directors of that entity and each holding 1,000 of the 2,000 shares on issue. The husband and the wife are the sole unit holders of the Trust.
[6] Calculated by adjusting JJ Group valuation report 05.03.2022: $18,458,000, being Alternative C, adjusted per item 6a, being the increase of $121,971 from the balance at bank of $47,364 as at 30.06.2021 recorded in the Financial Statement, and item 6c, being 50% of the value of Suburb AN property ($497,500) and 6g, being wife’s contention as to value of the parties’ interest in 1 YY Street after value of Mr X’s acres is deducted.
[7] AF Valuation dated 11.02.2022, page 47 summary by entity.
[8] Financial Statement of the Aitken Unit Trust as at 30.06.2021 and JJ Group valuation report 05.03.2022: Schedule E1.
[9] Husband says the trust does not hold such funds and are not available for distribution.
[10] Ibid.
[11] The husband and the wife are each the directors and hold 1 of the 2 shares on issue.
[12] AF Valuation dated 11.02.2022, page 47 summary by entity.
[13] Purchase price of 1 YY Street, Suburb BB (… acres), being $2,100,000 plus stamp duty and legal fees of $103,634.88, plus value of … acres, being $325,000 (see AG Company Valuation dated 28.11.2019), less amount paid by Mr X to date, being $830,000.
[14] Property transfer approach, comprising: CGT (H + W) $3,047,467, less deductible interest (H + W) ($961,447); tax on interest (D Pty Ltd) $1,022,815; and Transfer Duty (D Pty Ltd) $1,195,975
[15] If the loan is not repaid in full by May/June 2023 or made the subject of a loan agreement that complies with section 109N on or before the lodgement date the entire amount of the loan will be deemed to be an unfranked dividend received by the W and included in her 2022 assessable income.
[16] Mr X agreed to accept $1,220,000 as to $610,000 each.
Summary Gross assets 79,510,502 75,755,881 Addbacks 120,338 + NK 3,398,534 Liabilities 4,304,383 1,220,000 plus tax debt as per expert Net assets 75,326,457 77,934,415 Superannuation 4,599,509 4,588,394 Net assets and superannuation 79,925,966 + NK 82,522,809 minus all tax liabilities as per expert
It will be immediately apparent from a cursory reading of the above list that several details were incomplete or, in relation to some specific entry, that the parties have attributed a different amount to the entry. In the passages below I have examined each item in which no amount was attributed by the parties or where disagreement arose. For present purposes I have used the item number that appeared on the document colloquially called the “balance sheet”. On most issues counsel for the wife advanced specific submissions including submissions on credit. Counsel for the husband did not adopt a similar approach leading to an outcome where the husband’s position on certain specific items was unstated.
Attributing a value to the shares in D Pty Ltd
The parties each identified in item 3 on the balance sheet that the value to be attributed to D Pty Ltd’s shares was $45,514,742. That figure emanated from a report dated 4 March 2022 in which Mr AE of JJ Group ascribed that value on the basis that the business being conducted was a going concern. In valuing D Pty Ltd’s shares at $45,514,742, the wife argued that the valuer had omitted several issues. It became necessary to address each in turn.
The first related to item 3(a), namely a term deposit in the form of cash-at-bank in the sum of $15,316,288. The wife contended that according to Mr AE, the cash-at-bank as at 30 June 2021 was $13,349,822. On the wife’s behalf, it was put that as at the date nearest the date of trial, namely 14 March 2022 (not 30 June 2021) the correct figure for cash-at-bank was $15,316,288. The wife’s counsel submitted that item 3(a) required updating.
The husband did not advance any submission to the contrary.
The main point urged by the husband in relation to D Pty Ltd was his application to sell the shares in D Pty Ltd to a third party. The wife opposed that application. In the passages below I have addressed the issue. Having regard to the fact that there was an increase in the value of the shares in D Pty Ltd from the value recorded as at 30 June 2021 ($13, 429,822) to the amount as at 14 March 2022 ($15,316,288), that increase represented an enhancement in the value of an asset in which each equally shared. Further, the wife’s counsel submitted that the effect of the enhancement in the share value between 30 June 2021 and 14 March 2022 was to render inapplicable the injunction made on 20 May 2022 which called for the preservation of assets. It seemed to me that D Pty Ltd’s assets were in fact being not only preserved but enhanced. In those circumstances, especially having regard to the fact that no real opposition was agitated to increasing the amount referable to cash-at-bank from $13,429,822 to $15,316,288, it is appropriate to increase the balance sheet entry for item 3(a) to $15,316,288
Next, item 3(b) was said to represent the book value of stock as at 30 June 2021, namely $103,530, according to Mr AE’s 4 March 2022 report. As with the share value in D Pty Ltd, the correct date for any valuation was nearer the commencement of the trial. The report of Mr TT dated 7 March 2022 attributed a value to the stock, albeit incomplete, as at 7 March 2022 in the sum of $628,277 rather than the figure for 2021 in the lower sum of $103,530. Even accepting that obstacles presented themselves in the conduct of valuations, Mr TT’s evidence relates to an incomplete stocktake undertaken more temporally proximate to the trial, and, based on that stocktake, the value had substantially increased from $103,530 to $628,277. In those circumstances, and consistent with the logic behind the attribution of an increased value on account of the proximity of the evidence to the trial date, it seems to me that the correct figure for item 3(b) is not $103,530 but rather $628,277. The balance sheet should more properly reflect that greater amount. As with item 3(a), the increase of the amount in relation to item 3(b) has the effect of enhancing the overall asset position of D Pty Ltd.
Item 3(c) described on the balance sheet as “plant and equipment” was shown on the balance sheet as $410,264. Counsel for the wife submitted that the figure of $410,264 for plant and equipment was based on valuation evidence prepared by the valuer, AF Company, yet the valuation given by AF Company did not include all plant equipment owned by D Pty Ltd nor the totality of the plant and equipment appearing on the latest version of D Pty Ltd’s depreciation schedule prepared on behalf of the husband following the completion of Mr AE’s report. On behalf of the wife it was submitted that the late provision of the valuation evidence prevented her from receiving her own valuation evidence on plant and equipment. She said the husband’s late provision of the depreciation schedule prevented her from meaningfully reconciling the AF Company against the depreciation schedule.
The husband did not dispute the wife’s contentions in that regard. In those circumstances, the best evidence presently available for plant and equipment is the AF Company in the sum of $410,264. However, in recording that observation it must be recognised that the figure of $410,264 is unlikely to be accurate because it was prepared without the benefit of the husband’s depreciation schedule and without the wife having an opportunity to reconcile that depreciation schedule against the AF Company documentation. As to the precise monetary sum that may have been derived had that process been undertaken, I am unable to say nor did counsel for the wife suggest any such precise sum. Accordingly, the known amount of $410,264 should be adopted.
Item 3(d) is recorded on the balance sheet as a loan in the sum of $217,945 owed by U Pty Ltd to D Pty Ltd. The wife’s counsels’ written submissions did not address this item. By the same token, the husband did not address this issue either. In the absence of any contest on that item it should remain in the balance sheet on the basis that it is a chose-in-action and thereafter an asset in the sum stated, namely $217,945. No suggestion was made that the amount was unrecoverable or somehow otherwise irretrievable. Accordingly, it seems to me that the amount of $217,945 is properly recorded as an asset in D Pty Ltd’s balance sheet.
Item 3(e) is a substantial amount of $17,559,675. It is described in the balance sheet as “loan owed (to [D Pty Ltd]) by [Aitken Unit Trust]”, which I took to mean that the trustee of that trust owed that sum to D Pty Ltd. No dispute emerged about the identity of the trustee even though it is to use infelicitous language to record that the unit trust owed money. That is for the simple reason that a unit trust is not a legal entity and therefore the unit trust cannot be a creditor or debtor, whereas the trustee of that unit trust can.
The evidence about the loans between D Pty Ltd and The Aitken Unit Trust was given at an expert level by Mr XX, a solicitor practising in the field of taxation law for over 40 years. The parties appointed Mr XX as a single expert on 31 January 2022. On 7 March 2022 Mr XX made his single expert report which he exhibited to his affidavit made that day.
In his expert report, Mr XX explained that on 6 Aril 2021 the husband and wife appointed Mr XX to advise the parties and to liaise with the Australian Taxation Office (“ATO”) “in relation to the taxation consequences as a result of loans from [D Pty Ltd] to the [Aitken Unit Trust]”. The more important matters that emerged from Mr XX’s report may be condensed as follows–
(a)in the financial years between 2008 and 2021 loans were made by D Pty Ltd to The Aitken Unit Trust from D Pty Ltd’s retained earnings;
(b)funds advanced pursuant to those loans were applied predominantly in property acquisitions by The Aitken Unit Trust;
(c)as the husband and wife are unit holders in The Aitken Unit Trust and The Aitken Unit Trust is an associate of shareholders in D Pty Ltd, the loans are susceptible to the deemed dividend provisions set out in Division 7A of the Income Tax Assessment Act1936;
(d)Division 7A operates to include an unfranked dividend in the assessable income of the borrower equal to the amount of a loan which is repaid to a lending company by the date of the lodgment of the income tax return of the company for the income year in which the loan is made;
(e)the borrower must be a shareholder in the company or an associate of a shareholder;
(f)the amount of the loan which can be treated as a dividend is limited to the company’s “distributable surplus” as it existed at the end of the income year in which the loan was made;
(g)section 190Y of the Income Tax Assessment Act sets out a formula for determining the distributable surplus;
(h)in broad terms, the distributable surplus is the net assets of the company with adjustments which can only recognise certain provisions for liabilities;
(i)a borrower and lender can enter into a loan agreement which either has a term of up to seven years or, if first mortgage security is given over real property, 25 years over which term the loan must be repaid by meeting annual principal and interest repayments;
(j)the requirements of a “complying loan agreement” are set out in s 109N of the Income Tax Assessment Act;
(k)interest is determined by reference to the “benchmark interest rate” being the “indicator lending rates – bank variable housing loans interest rates” published by the Reserve Bank of Australia before the start of the relevant income year;
(l)section 109E(5) of the IncomeTax Assessment Act provides the formula for ascertaining the minimum annual repayments to be made under a complying loan;
(m)if a complying loan has been entered into the loan principal is not deemed to be an unfranked dividend for the income year in which the loan was made but if the minimum annual repayment is not made or is short-paid, the shortfall will be a deemed dividend arising in the income year of the shortfall;
(n)where there has been a failure to comply with Division 7A, the Commissioner has a discretion set out in s 109RB to either disregard the operation of Division 7A or to allow the deemed dividend to be franked;
(o)the threshold requirement for the operation of the discretion is that the failure to comply would otherwise give rise to the deemed dividend that was the result of an honest mistake or inadvertent omission by the recipient of the loan, the company or a third party whose conduct contributed to the result; and
(p)once the threshold requirement has been satisfied, the Commissioner may impose conditions on the parties, one of which is that the recipient or another entity must make specified payments to the company or another entity, called “corrective action”, and the Commissioner will usually require such corrective action by requiring the making of the payments which should have been made if there had been compliance with a complying loan agreement including the payment of principal and interest compounded to the date of actual payment.
Mr XX expressed the opinion that in this case, D Pty Ltd advanced loans between 1 July 2008 to 30 June 2016 at which times the company had a distributable surplus in each financial year and no evidence existed that a complying loan agreement was entered into for any of those income years.
Mr XX was asked several specific questions. They were as follows –
(a)to report on exactly what he had done on behalf of the parties and the ATO;
(b)to provide his opinion as to the range of likely liabilities of the parties informed by his dealings with the ATO;
(c)to identify any taxation liabilities in relation to the loan from AJ Pty Ltd to The Aitken Unit Trust and the estimated quantum of any taxation liabilities;
(d)to identify any taxation issues in relation to a director’s loan from D Pty Ltd to the wife in the amount of $1,000,000;
(e)to identify any taxation issues in relation to the sale of real properties set out in appendix B and in appendix K to Mr XX’s report;
(f)to identify any taxation issues arising in relation to the sale of the issued shares in the capital of D Pty Ltd;
(g)to identify any taxation issues arising in relation to final orders sought by the wife and the estimated quantum of any such taxation liabilities; and
(h)to identify any taxation issues arising in relation to final orders sought by the husband and the estimated quantum of any such taxation liability.
While elongating these reasons, it is utile to record Mr XX’s responses to the several questions posed for his opinion.
As to the first question, namely, what he had done on behalf of the parties and his dealings with the ATO, several matters emerged. Among them was the following –
(a)by 30 June 2022, payment of the sum of $17,861,617 must be made to the ATO together with an additional sum of compound interest of $4,091,259.36 assuming the current balance due remains at $17,559,674.68 and if that is the fact, then the sum to be paid by 30 June 2022 will be $17,559,674.68 rather than the slightly higher amount of $17,861,617; and
(b)further, there is scope for the compound interest amount to be reduced if the payment due on 30 June 2022 is paid on time.
As to the second question, namely Mr XX’s opinion as to the range of likely liability of the parties to the ATO, several matters emerged. Among them was the following –
(a)The Aitken Unit Trust must pay D Pty Ltd an amount to meet the principal component of the corrective action amount, namely $17,861,617;
(b)when compound interest of $4,091,259.36 is added to the $17,861,617 the grand total is $21,952,876.36;
(c)the transfer of properties from The Aitken Unit Trust will crystallise a taxable capital gain in the unit trust and the unit holders in the unit trust, that is to say, the husband and the wife will be assessed on the net capital gain and they will need to meet the tax liability on the gain;
(d)in order to meet the corrective action payment, the parties’ accountant discussed with Mr XX transferring certain properties by The Aitken Unit Trust to D Pty Ltd the values of which aggregate $22,020,000 that is to say an amount sufficient to meet the sum of $21,952,876.36 required by the ATO;
(e)estimated capital gain from those transfers was $10,966,124 on which the husband and wife would pay tax on the net capital gain of $5,483,060 rendering each liable to tax in the sum of $1,143,161;
(f)D Pty Ltd will be assessed on the interest component of the corrective action payment of $4,091,259.36 resulting in a liability for tax in the hands of D Pty Ltd in the sum of $1,022,815 so long as the relevant payment was made by 30 June 2022;
(g)The Aitken Unit Trust will be entitled to a tax deduction for the interest paid to D Pty Ltd so, applying the figures recorded above, the interest component of $4,091,259.36 can be deducted against the undiscounted capital gain of $10,996,124 made by the unit trust with the consequence that the net capital gain is reduced to $6,874,865 and the discounted capital gain assessable in the hands of the husband and wife each is brought to $3,437,432 resulting in a tax liability calculated at 47% being reduced to $807,796 each;
(h)The Aitken Unit Trust will be liable to pay GST of $2,001,818 to the ATO;
(i)duty (elsewhere beyond New South Wales known as stamp duty) is also payable so where the dutiable value is $22,020,000, the duty payable on the transfers is $1,195,975; and
(j)total tax payable in that scenario is $3,834,383.
In response to the second question posed, Mr XX also expressed his opinion concerning the consequences of D Pty Ltd paying a fully franked dividend to the husband and wife of $21,952,876 and for them to lend that money to The Aitken Unit Trust for the purposed of enabling the unit trust to make the corrective action payment. Mr XX offered the opinion that the dividend would not be physically paid in cash or by direct deposit into a bank account but rather, that the loan would be by journal entries. He said the franking credit attached to the dividend would be in the amount of $7,317,625 and that D Pty Ltd had sufficient franking credits to permit the dividend to be fully franked. Mr XX expressed the opinion that the husband’s and wife’s total tax liability on the dividend of $21,952,876 grossed up by the franking credit would be $6,439,570. He said the fully franked dividend could be paid to The Aitken Unit Trust rather than to the husband and wife so long as an order was made to that effect.
Mr XX expressed the opinion that D Pty Ltd will be subject to tax on the interest component of the corrective action and although interest will be deductible for The Aitken Unit Trust, no significant immediate deduction will be available as no capital gain will be generated. No transfer duty is incurred in that approach.
Mr XX also offered the opinion that it was not practical for funds totalling almost $22,000,000 to be borrowed from a commercial lender to enable The Aitken Unit Trust to pay the sum of $21,952,876. That was because the lender would require security and ultimately a dividend would be required to be paid by D Pty Ltd to repay the lender. Further, such a proposal did not allow the parties to separate their interests and was in conflict with the orders each sought.
Mr XX made observations about the husband’s proposal for all shares to be sold to a third party. According to Mr XX, such a sale would trigger a tax liability of $9,306,000. Mr XX said that a purchaser is unlikely to want to buy shares in D Pty Ltd in circumstances where D Pty Ltd retains the retained earnings and in a more conventional commercial acquisition the attached earnings, so far as they are not represented by the assets, would be paid to shareholders as franked dividends. Further, Mr XX stated that an arm’s length purchaser of shares in D Pty Ltd would most likely want to purchase the real properties on which the business was conducted. A sale of the real properties would trigger a further capital gain.
As to the third question, namely the tax issues arising in relation to the loan from The Aitken Unit Trust to AH Pty Ltd and the estimated quantum thereof, Mr XX recorded that AH Pty Ltd was the trustee of the Mr X Family Trust, the trustee having changed its name to AK Pty Ltd on 10 December 2021. Mr XX recited that his investigation of various financial statements revealed that AJ Pty Ltd advanced funds to the Mr X Family Trust (more properly, to the trustee of that trust) pursuant to a loan made between them and then the trustee of the Mr X Family Trust advanced funds to the trustee of The Aitken Unit Trust. The reframed form of question 3 was as follows –
Question 3: any taxation liabilities arising in relation to the loan from [AJ Pty Ltd] through the [Mr X Family Trust] to [The Aitken Unit Trust] and the estimated quantum of any taxation liabilities
Mr XX reported that his examination of the relevant financial statements between 2018 and 2021 revealed that the trustee of the Mr X Family Trust owed AJ Pty Ltd in 2021 the sum of $1,573,496. Mr XX also reported that his examination of the relevant financial statements over the same period revealed that the trustee of The Aitken Unit Trust owed the trustee of the Mr X Family Trust in 2021 the sum of $1,048,713. Further, the financial statements revealed that D Pty Ltd owed AJ Pty Ltd $293,785 in 2019 yet zero in 2021. Mr XX provided the following evidence in his report in relation to key relationships involving Mr X, the son of the husband and wife –
22.4 The Current accountants for [AJ Pty Ltd], the [Mr X Family Trust], the [Aitken Unit Trust] and [D Pty Ltd], [PP Group] have advised me that there is an arrangement between [D Pty Ltd] and [AJ Pty Ltd] that [AJ Pty Ltd] was paid a management fee of $300,000.00 per annum by [D Pty Ltd] for the services provided by [AJ Pty Ltd] for 2017 and 2018 financial years. I have also been advised that [Mr X] as a Director of [AJ Pty Ltd] has directed fees to be paid to [The Aitken Unit Trust]. So far as a loan has been recognized as made by [AJ Pty Ltd] to the [Mr X] Family Trust and on-loaned to [The Aitken Unit Trust] it represents the direction of the management fee paid by [D Pty Ltd] to [The Aitken Unit Trust].
It seemed that certain complications arose from Mr X’s direction to pay management fees. Those were recorded by Mr XX at paragraph 22.6 of his report in the following terms –
22.6 The management fees payable to [AJ Pty Ltd] which have been directed by [Mr X] to be paid to [The Aitken Unit Trust] have been given effect to in the accounts of [AJ Pty Ltd] and the [Mr X Family Trust] as a loan by [AJ Pty Ltd] to the [Mr X Family Trust] and then on-loaned to [The Aitken Unit Trust]. … As noted in paragraph 22.5 the management fees paid by [D Pty Ltd] to [AJ Pty Ltd] were incorrectly recorded as loans made by [D Pty Ltd] to [The Aitken Unit Trust]. The increase in the loan made by the [Mr X] Family Trust to [The Aitken Unit Trust] during the 2020 income years reflects the adjustment made to correct the incorrect treatment in the 2017 And (sic) 2018 financial accounts.
Mr XX stated that the management fees paid by D Pty Ltd to AJ Pty Ltd were incorrectly recorded as loans advanced by D Pty Ltd to The Aitken Unit Trust. He said the increase in the loan made by the Mr X Family Trust to The Aitken Unit Trust during the 2020 income year reflected the adjustments made to correct incorrect treatments in the 2017 and 2018 financial years.
Mr XX provided an analysis of s 109T of the Income Tax Assessment Act and the application of that provision to the inter-positioning of an entity between the company and the ultimate borrower for the purposes of the deemed dividend regime under Division 7A of the Income Tax Assessment Act. Mr XX stated that the interposed entity provision would cause the loan to be treated as being an unfranked deemed dividend assessable in hands of The Aitken Unit Trust and, as with the cases of the assessment of the deemed dividend attributable to the loans made by D Pty Ltd to The Aitken Unit Trust, the ultimate tax liability would be borne by the husband and the wife as unit holders in The Aitken Unit Trust.
Mr XX pointed out the requirements of s 109T stated that the section required the interposed entity (the Mr X Family Trust) to make a payment or a loan to the target entity (The Aitken Unit Trust). Here, there was no payment or loan made between the two entities in the sense that cash flowed between the entities. Instead Mr XX said the loans were effected by accounting entries “whereas the entitlements to payment by [D Pty Ltd] moved from [AJ Pty Ltd] to [The Aitken Unit Trust]” (Mr XX’s words). Mr XX cited the High Court decision in Brookton Co-Op Society Ltd v Federal Commissioner of Taxation.[17] He said that if there had been such an arrangement then s 109T of the Income Tax Assessment Act would operate to treat the loan as an unfranked deemed dividend to be included in the assessable income of The Aitken Unit Trust and ultimately in the assessable income of the husband and wife rather than the deemed dividend being assessed to Mr X.
[17] (1981) 147 CLR 441.
Mr XX stated that the husband’s and wife’s total tax liability was $673,609. He also said that if the Commissioner was prepared to exercise his discretion under s 109RB, the required corrective action involved repaying AJ Pty Ltd $1,048,713 and paying compound interest of about $235,000 although no penalty or shortfall interest was likely to be payable.
Mr XX offered the opinion that AJ Pty Ltd would incur a tax liability on interest in the sum of about $58,780 and The Aitken Unit Trust would be entitled to a deduction in respect of interest thereby providing a tax benefit of about $110,450 to the husband and to the wife.
In addressing question four, Mr XX examined the loan by D Pty Ltd to the wife, said to be a director’s loan, and the tax consequences of that transaction.
He said that unless that loan is repaid by 30 June 2022 it will be taken to be a loan relevant to s 109C of the Income Tax Assessment Act. He said that if the loan were not repaid in full by the lodgment date of D Pty Ltd’s 2022 income tax return or if the loan were not made the subject of a loan agreement that complies with s 109N on or before the prescribed lodgment date, the entire amount of the loan will be deemed to be an unfranked dividend received by the wife in respect of which a liability for tax in the sum of $470,000 would arise. But if a loan agreement compliant with s 109N were to be entered into of a seven year term, benchmark interest would apply resulting in a requirement for the wife to pay $169,821. If that amount were not paid, Mr XX said the shortfall of $169,821 would be deemed to be the wife’s taxable income thereby generating a tax liability of $79,816 and D Pty Ltd would need to pay tax of $11,300 on the interest.
In respect of question five, namely, taxation issues arising from the sale of various parcels of real estate, Mr XX recorded his calculations as appendix K to his report. In that appendix Mr XX identified 17 separate parcels of real estate by street address, book value, market value less GST, the owner, the gain and taxpayer, the tax liability along with specific observations on each.
So far as question six was concerned, Mr XX addressed taxation issues arising in relation to the sale of the issued shares in the capital of D Pty Ltd. He said any sale of the shares will give rise to a taxable capital gain. According to a valuation conducted by Mr AE of JJ Group dated 14 May 2021, the valuation was stated as being $39,600,000. On a sale at that value, Mr XX said the husband and wife would have a net capital gain of $19,800,000 resulting in a tax liability each of $4,653,000.
Under question seven, Mr XX considered any other tax issue arising from the final orders sought by the wife. He pointed out that a roll-over of CGT assets ordinarily does not attract tax where the roll-over is from one spouse to another pursuant to an order made under the Family Law Act. So far as the wife’s application in her proposed final orders for the sale of various parcels of real estate was concerned, Mr XX said a tax liability was thereby generated in the manner recorded in paragraph 26.12 of his report. It was in the sum of $3,326,477. Aside from 1 and 3 AC Street, Suburb KK the husband and the wife were to bear the main burden for the tax thereby payable.
Question eight raised a similar consideration but arising from the final orders sought by the husband. He pointed out –
(a)the CGT payable on the sale of the shares in D Pty Ltd was $9,306,000;
(b)a tax liability may arise on the transfer to the husband of 1 AC Street, Suburb KK in the sum of $328,534;
(c)a tax liability may arise on the transfer to the husband of 3 AC Street, Suburb KK in the sum of $272,800;
(d)on the sale of units in The Aitken Unit Trust, 10 parcels of land identified in appendix J to Mr XX’s report would go with the sale of those units carrying with any such sale a net capital gain of $19,858,740 with a tax liability of $9,333,608; and
(e)D Pty Ltd will pay tax of $1,022,815 on the interest component of the corrective action.
Mr XX summarised his various opinions on the imposition of tax in paragraph 29 of his report.
Many of the sums mentioned by Mr XX were premised on lodgments or payments by 30 June 2022. On 8 June 2022, when this matter was before me last, Mr Lloyd SC announced the following[18] –
MR LLOYD SC: Your Honour, can I bring your Honour and my friend up to date. As of yesterday, the Commissioner for taxation has granted the parties an extension of time to 31 December in which to comply with the Division 7A issue.
HIS HONOUR: Okay.
MR LLOYD: So that issue has gone away as it were, for the moment. And in respect of the balance of the application, your Honour, there’s many things I would like to say about it, but I would reserve my comments until such time as Mr Kearney identifies which part of it he intends to proceed with.
HIS HONOUR: Well, first things first. I have – I don’t know if this is of any use to both of you – you’re enormously busy silks – but is it the sort of thing we should be embarking on now? Before you answer that, let me say that the judgment is all but written, so I’ve got a tiny bit to insert but I don’t imagine that will take terribly long. Are we able to deal with it this afternoon?
MR LLOYD: Well, for my part, I can deal with the balance of it, now that the ATO problem has disappeared
[18] Transcript 8 June 2022 P-2.
Loans to and from D Pty Ltd
Returning to the balance sheet, item 4 recorded in mirror terms by both the husband and the wife the sum of $277,288 said to be a loan payable by D Pty Ltd to the husband and the wife. Expressed in those terms, the sum is to be construed as meaning that the husband and wife jointly advanced to D Pty Ltd the sum of $277,288. Counsel for the wife in their written submissions submitted that they did not know why item 4 was put in issue. They argued that item 4 appeared in Mr AE’s report and in the financial statements of D Pty Ltd. In his final address, Mr Lloyd SC did not advance any argument by which it could be said that the husband challenges the consideration given to item 4 by Mr AE.
In those circumstances, it seemed to me to be prudent to proceed on the basis that item 4 was not in fact opposed and that both parties were contending that D Pty Ltd owed them jointly the sum of $277,288.
Item 5 was said to relate to a loan of $27,845 payable by the wife to D Pty Ltd. Expressed in those terms, the liability arose by reason of D Pty Ltd having advanced loan funds in that amount to her. Curiously, the sum was shown in the list of assets of the husband and wife rather than it being shown as a liability (which would more correctly reflect the status of the sum as a debt due to D Pty Ltd) although the amount is shown in the balance sheet as an asset whereas the numbers are in brackets as if a liability. Be that as it may, in written submissions the wife’s counsel made the same contention in relation to item 5 as they made in relation to item 4, namely, that the entry appears in Mr AE’s report as well as in the financial statements of D Pty Ltd and no issue was made of item 5 in the final address by Mr Lloyd SC with the consequences that the item should be accepted in the manner in which it appears on the balance sheet.
If it is a liability in the hands of the wife then it should not appear as an asset on the balance sheet. For that matter, if its true status is a chose-in-action in the hands of D Pty Ltd, then it may very well appear as an asset in the book of accounts of D Pty Ltd but not as an asset of the husband and wife.
Item 6 on the balance sheet records the units in The Aitken Unit Trust being valued, by both parties in identical terms, in the amount of $19,567,471. The footnote corresponding to that entry pointed out that the trustee of The Aitken Unit Trust is Aitken Pty Ltd. While that is presently true, the trustees of The Aitken Unit Trust were once the husband and the wife. Currently, the husband and the wife are the sole unit holders in that trust and they are equal directors of and shareholders in Aitken Pty Ltd. So far as the submissions of the wife’s counsel were concerned in relation to item 6, they pointed out that Mr AE valued the units in the trust on three alternate scenarios in respect of which the husband currently relies on one only. That scenario involves a valuation of the unit trust on the basis that the trust (or, more properly Aitken Pty Ltd) owns the whole of the land at 1 YY Street, Suburb BB and that any claim by Mr X or entities owned or controlled by him, is recognised as a liability of the trustee of The Aitken Unit Trust to Mr X or entities owned or controlled by him. Counsel for the wife submitted that the evidentiary basis for that position adopted by the husband was unknown.
DISCLOSURE ISSUES
On behalf of the wife Mr Kearney SC advanced forceful submissions about what he described as the husbands dereliction of duty in relation to disclosure. Consistent with the authority I surveyed in Bacall & Zagar[19] it was contended that by reason of the husband’s breach of duty in his disclosure obligations I should adopt a robust approach towards the wife’s property adjustment application for the simple reason that the husband’s very poor approach to disclosure thwarted my task, as adumbrated in Stanford & Stanford,[20] of identifying the legal and equitable interests of the parties.
[19] [2020] FamCA 350.
[20] (2012) 247 CLR 108.
Mr Kearney SC was highly critical of the husband in relation to disclosure. He put illustrations of breaches of duty in relation to disclosure to the husband in cross-examination.
In making the comments that follow I recognise that the husband gave evidence that he had a medical condition and he struggled with stress.[21] I also recognise that the husband encountered difficulty running the business of D Pty Ltd once his son departed in late 2021. Equally, he gave unmistakable evidence to the effect that he does not know what he wants anymore.[22] He also vacillated in his evidence on the issue of staying in the business if the business were sold, whether he would work for any new purchaser, or whether he might set up in competition with any purchaser. While expressing a wish to sell D Pty Ltd none of the mechanics of any proposed sale had been the subject of any detailed consideration by him, especially as to the price, precisely what was being sold and the terms pursuant to which the sale was to be effected, debate about which emerged in final addresses.
[21] T-151.
[22] T-150.
So far as disclosure deficiencies on the husband’s part were concerned, Mr Kearney SC submitted that the husband made a conscious and deliberate election to disobey orders for disclosure.[23] I am willing to accept that the husband may very well have been shouldering a large burden once his son left the business and that the task of operating the business consumed enormous amounts of the husband’s time. Nevertheless, all litigants in a proceeding under the Family Law Act are bound by duties of disclosure. Compliance with those duties underpin, at least in part, the administration of justice, as I surveyed in Bacall & Zagar. Conversely, non-compliance with those duties interferes with the administration of justice. In this case, for whatever reason, the husband’s compliance with his duty of disclosure was less than adequate. While the husband disputed his non-compliance in some instances, or offered an explanation for his non-compliance, I took the view that he failed to discharge the totality of his duties in respect of disclosure. The following illustrates the point –
[23] T-309.
(a)he admitted Mr AE, the valuer, sought information that the husband had not provided;[24]
[24] T-165.
(b)he initially gave evidence that Mr AE’s requests for information were not passed on to him[25] then he conceded[26] that certain question were in fact asked of him;
[25] T-177 and T-178.
[26] T-179.
(c)he said he was probably too busy at work to devote himself to responding;[27]
[27] T-183.
(d)he denied he decided not to cooperate with Mr AE once he decided to sell;
(e)he denied he failed to comply with orders in relation to stocktakes;[28]
[28] T-188.
(f)he denied he failed to provide a depreciation schedule;[29]
(g)he admitted to delaying for six weeks in signing and returning documentation for Mr XX;[30]
(h)he said it was not possible for him to address all stock held by D Pty Ltd because he was not permitted on site;[31]
(i)he was unable to say whether the SS Company report captured all stock owned by D Pty Ltd;[32]
(j)he admitted he did not provide particulars of all livestock in accordance with orders of this Court;[33]
(k)he admitted to providing no documents in relation to the sale of the Motor Vehicle 2;[34]
(l)he did not attend to enable a full audit to be done in respect of D Pty Ltd;[35]
(m)he has not identified assets that will form part of any sale of D Pty Ltd;[36]
(n)he said the person appointed to do a stocktake turned up on a particular day without notice leading to the police being called; and
(o)the husband disputed that he took no steps to ensure a stocktake could occur on a particular day.
[29] T-189.
[30] T-200.
[31] T-223.
[32] T-224.
[33] T-255.
[34] T-252.
[35] T-258.
[36] T-275.
The above demonstrated to me that the husband’s approach towards disclosure was cavalier. On important issues such as the information sought by Mr AE and by Mr XX, the husband either was tardy in its provision or worse, non-compliant. In order for me to make a just and equitable order altering property interests, both parties were required to have been diligent in complying with their disclosure obligations. The husband did not so comply.
Mr Kearney’s submission went beyond that, however. He said the husband’s conduct revealed a deliberateness to disobey certain orders, for example, the order made on 11 February 2022 requiring the husband to unlock gates so as to render the premises accessible which the husband did not do.
Mr Kearney also submitted that the husband’s conduct when answering questions was anything but straight forward. Mr Kearney submitted that the husband deliberately obfuscated.[37] While it remains true that the husband entered the work force at a very young age and he is an unsophisticated person, he has been enormously successful in business. Nevertheless, he was not direct in his responses to question put in cross-examination. Mr Kearney characterised that as obfuscation. I am unwilling to describe the husband as a dishonest witness. However, he used every opportunity to make a speech that most favoured his circumstances rather than directly responding to questions. Mr Kearney submitted that the husband failed to do so as the High Court said in Kuhl v Zurich Financial Services[38] that a witness must do, namely tell the whole truth and not give mere excerpts of the whole truth. Mr Kearney submitted that the husband’s evidence was internally inconsistent and that it was given by a man with cunning (Mr Kearney’s words).[39]
[37] T-307
[38] (2011) 243 CLR 361 (at [62)]. Mr Kearney SC submitted that the husband “failed dismally in the course of not only his oral evidence but also his affidavit evidence in this case” (T-304).
[39] T-306, L-21-25.
It must at once be recognised that the husband has been highly successful in his chosen occupation. No evidence was addressed about his qualifications and no submissions were addressed about his sophistication in matters beyond his chosen occupation. I agree that the husband was loquacious in his answers to question put to him in cross-examination. I also accept that on many themes put to him in cross examination by Mr Kearney SC the husband failed to answer directly, in some instances requiring Mr Kearney to ask the same question many times before the husband squarely confronted the question and answered it. Mr Kearney argued that those episodes were demonstrative, not of a person confused, but of “someone who was deliberately obfuscating”.[40] Mr Kearney submitted –
This was a gentleman who had ample opportunity on multiple occasions and elected to change his evidence to suit what he perceived to be the purpose.[41]
[40] T-307, L-23.
[41] T-307.
Having carefully read and reread the transcript of the husband’s evidence in this proceeding, I take the view that merit exists in Mr Kearney’s submissions that the husband did not answer questions in accordance with Kuhl v Zurich Financial Services concepts.
But that does not mean his evidence is to be rejected in its entirety. It simply means that on issues on which the husband’s evidence differed to that of the wife’s, I should prefer the wife’s evidence unless her evidence was improbable or unless the husband’s evidence was independently corroborated. I am not willing to conclude that he is a dishonest witness. By the same token, when he asserted that he suffered from stress and had a medical condition, no medical evidence was adduced to support that assertion.
In my view the husband was not diligent in the discharge of his duty of disclosure. That has had the consequence of denying the wife, and for that matter me, a full and detailed understanding of various matters to which that documentary disclosure pertained. As has already been observed, deficiencies in disclosure permit the Court to adopt a robust approach towards the s 79 application.
Other balance sheet items
Mr Kearney submitted that two items of the balance sheet (4 and 5) were said to be contentious yet the basis of any dispute in relation to them was not stated. Items 4 and 5 revealed two loans from each of the husband and the wife to D Pty Ltd in the undisputed sum of $277,288. Mr Lloyd did not separately address on those items. Each appeared in the financial statements of D Pty Ltd in Mr AE’s report dated 4 March 2022. Mr AE treated each loan advanced by the husband and by the wife to D Pty Ltd as an asset in the hands of lenders and as a liability in the hands of the borrower, D Pty Ltd. That accorded with mainstream accountancy orthodoxy. To my mind, as no basis for challenging the treatment of those items was revealed, the correct approach is for those items to be dealt with in a manner done by Mr AE.
Item 6 on the balance sheet was the sum of $19,567,471. The footnote to the balance sheet explaining the calculation of the figure of $19,567,471 was in the following terms –
1.The husband and the wife are each the directors and hold 1 of the 2 shares on issue. Per valuation of [JJ Group] ([Mr AE]) dated 4 March 2022, adjusted per items 3a and 3b.
2.Calculated by adjusting [JJ Group] valuation report 05.03.2022: to reflect the increase of $1,886,465 from the balance at bank of $13,429,823 as at 30.06.21 recorded in Financial Statement per item 3a and stock values of $628,277 per item 3b.
3.[AF Company] dated 11.02.2022, page 47 summary by entity.
4.Of which [Aitken Pty Ltd] is the trustee, the husband and the wife each being the directors of that entity and each holding 1,000 of the 2,000 shares on issue. The husband and the wife are the sole unit holders of the Trust.
5.Calculated by adjusting [JJ Group] valuation report of 5 March 2022: $18,458,000, being Alternative C, adjusted per item 6a, being the increase of $121,971 from the balance at bank of $47,364 as at 30 June 2021 recorded in the Financial Statement, and item 6c, being 50% of the value of [Suburb AN] property ($497,500) and 6g, being wife’s contention as to value of the parties’ interest in [1 YY Street] after value of [Mr X’s] […] acres is deducted.
6.[AF Company valuation] dated 11.02.2022, page 47 summary by entity.
In essence, item 6 addressed the value of the units in The Aitken Unit Trust. In items 6(a) to 6(l) of the balance sheet, the component parts said to aggregate the overall figure of $19,567,471 were recorded. No individual sums were entered against any of the items in 6(a) to 6(l). Mr Kearney SC and Mr Ford itemised each subcategory of item 6 with careful explanations of the versions of each item that should be found by me. Conversely, Mr Lloyd SC contended that Mr AE was not called and he was not cross-examined for the simple reason that in the absence of “the husband being there” (Mr Lloyd’s words)[42] the business would lose its value. In developing his contention on behalf of the husband, Mr Lloyd SC argued D Pty Ltd needs to be sold at an arm’s length sale because the husband has reached the end of his ability and willingness to carry on with D Pty Ltd.[43] Mr Lloyd argued that the husband is the key to the business.[44] Mr Lloyd argued that Mr AE did not take into account the worth of the husband to the business.[45]
[42] T-348, L-2.
[43] T-350.
[44] T-360, L-26.
[45] T-361, L-24.
Mr Lloyd SC pressed forcefully for an order the effect of which was for the sale of the whole of the assets and undertakings of D Pty Ltd. He submitted that the husband was integral to the ongoing operations of D Pty Ltd, that the husband was “burnt out” and that the husband should not be forced to remain in the demanding environment that is D Pty Ltd especially in view of his health, he recently having been afflicted with a medical condition.
A sale of D Pty Ltd has superficial attraction in that the market would determine the price. That said, the price may well be ascertained by reference to the items being sold and the terms under which those items are being sold, in each instance the husband being particularly vague. I entertain no realistic expectation that he will cooperate in determining, for example, the items of plant and equipment and stock that might form part of any such sale. Equally, I have very real doubts that he will engage with the wife in agreeing on the terms pursuant to which any such sale is to be determined, namely, whether some third person should be appointed as a trustee for sale, with its attendant costs and its capacity for the prolongation of this litigation.
The wife has consistently opposed any sale of D Pty Ltd’s business, its assets and undertaking to a third person. She once proposed her own purchase of D Pty Ltd. Having regard to the integral nature of the husband’s role in the operations of D Pty Ltd, if the wife purchased the husband’s shares in D Pty Ltd, the wife would need to employ persons of equal calibre to the husband to assist in the day-to-day running of D Pty Ltd. It would be highly undesirable to tie the husband to ongoing employment at D Pty Ltd once the wife acquired the entire ownership of D Pty Ltd. In any event, the husband’s health may well be such that he is physically or emotionally unwilling or unable to remain working in D Pty Ltd subsequent to the sale of his interest in D Pty Ltd.
The wife did not dispute the importance of the husband’s role in D Pty Ltd’s future.
Further, it must be acknowledged that D Pty Ltd may very well be less successful hereafter without the involvement of the husband in D Pty Ltd’s day-to-day operations. Making all the more uncertain D Pty Ltd’s future profitability is the husband’s own state of indecision about his own future. He simply does not know what he proposes to do after this litigation is put to an end.
The options set out below presented themselves. They were –
(a)make orders for the sale of D Pty Ltd to a third party;
(b)make orders for the sale of the husband’s interest in D Pty Ltd to the wife or vice versa; or
(c)defer making an order for the sale of D Pty Ltd in reliance upon s 79(5).
Any sale of D Pty Ltd to a third party on terms that do not require the husband to serve out a handover period is likely to generate a lesser sale price to the parties.
Any sale of the husband’s interests in D Pty Ltd to the wife in which the husband is required to continue serving D Pty Ltd is problematic at an inter-personal level and any sale of the husband’s interests in D Pty Ltd to the wife in which the husband is not involved is likely to derive an asset of lesser value to the wife than it now is.
Any deferral of any sale exacerbates the present uncertainty and prolongs the disputation between the parties.
None of the options recorded above is particularly favourable to either party. On the other hand, if the husband were to purchase the wife’s shareholding in D Pty Ltd then the husband could either operate D Pty Ltd himself for such period as he is willing or able or he could sell the entire shareholding, formulating the terms that best suit him.
Mr X
Returning to item 6 on the balance sheet, the wife contended that one issue falling for determination was the basis on which The Aitken Unit Trust held the property at 1 YY Street, Suburb BB on trust for the parties’ son Mr X.
The factual setting of this component of the case was complicated and required a degree of recital. In its component parts, that narration was as follows –
(a)in 2017 the trustee of The Aitken Unit Trust purchased 34 acres of land making up the property described as 1 YY Street, Suburb BB for $2,100,000;
(b)in 2018 the trustee of The Aitken Unit Trust purchased 78 acres of land making up the property described as YY Street, Suburb BB for $3,471,615;
(c)four acres of YY Street, Suburb BB were located directly adjacent to the 34 acres that made up 1 YY Street, Suburb BB;
(d)on 14 May 2019 the titles to 2 and 1 YY Street, Suburb BB were consolidated and together they thereafter became known as 1 YY Street, Suburb BB;
(e)when the 34 acres originally called 1 YY Street, Suburb BB was acquired, the wife and husband agreed that those 34 acres were being acquired by the trustee of The Aitken Unit Trust for the benefit of Mr X;
(f)according to the wife, the parties agreed that the acquisition of the 34 acres would be structured in such a manner that Mr X would become indebted to the husband and the wife (I infer jointly) in the sum of $2,203,635;
(g)also according to the wife, the husband and the wife intended that four of the over 70 acres of the land previously known in its unconsolidated form as 2 YY Street, Suburb BB would be acquired by Mr X so that, in aggregate, he would hold over 30 acres of which Mr AE valued 4 acres at $325,000; and
(h)to date Mr X has paid $830,000 in reduction of his indebtedness.
The husband did not challenge those contentions by the wife.
Based on that narration of the events surrounding the acquisition of those acres by or for Mr X, the wife advanced a collection of contentions. They were as follows –
(a)Mr X is beneficially entitled to those acres of the land currently known in its consolidated form as 1 YY Street, Suburb BB;
(b)the balance of the acreage of 1 YY Street, Suburb BB has been valued at $4,535,000; and
(c)Mr X remain indebted to the husband and the wife in the sum of $1,698,635 being $2,203,635 plus $325,000 less $830,000 as paid to date.
The wife took issue with the husband’s contention that the parties are indebted to Mr X in the sum of $1,200,000. In her written submissions, counsel for the wife argued that –
(a)the evidentiary foundation for the proposition that the parties are indebted to Mr X for $1,200,000 is not stated in the husband’s affidavit material nor was any evidence to that effect adduced in his cross-examination; and
(b)when the husband closed his case he contended for the first time that the value of part of 1 YY Street, Suburb BB needed to be brought to account was $4,353,000.
Several things must be said in respect of the contention that Mr X is to be acknowledged as having an equitable interest to part of the property known as 1 YY Street, Suburb BB. First, no documents were adduced in evidence to substantiate the terms of any equitable interest or the legal basis for its recognition. That said, the husband acknowledged that Mr X had some form of interest in the real property now known in its consolidated form as 1 YY Street, Suburb BB.
Second, the nature of the equitable interest possessed by Mr X was not articulated. In debate with Mr Kearney SC I explored whether the interest was said to take some form of a constructive trust or an implied trust. The circumstances did not appear to constitute a resulting trust. The debate was arid because the details of the arrangements in relation to the acquisition of the acres were so scant and, in accordance with the observations of Lord Stowell's in The Juliana,[46] equity looks at every connected circumstances to ascertain the true justice of the situation. Mr X did not give evidence in this case so his version of the circumstances were not known. Further, the imposition of a constructive trust is waning in its acceptability since the High Court’s decision in Giumelli v Giumelli[47] and John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd.[48] In my view, the evidence to support the existence of an equitable interest in favour of Mr X in relation to the acres of 1 YY Street, Suburb BB was extremely scant. That said, this was not a case in which an equitable interest in favour of a person (Mr X) was reluctantly or begrudgingly imposed on the putative constructive trustees (the husband and the wife). Instead on the facts of this case they were enthusiastic about conferring some benefit on Mr X. Further, it must not be overlooked that Mr X has paid his parents a significant amount ($830,000) in reduction of his indebtedness to them.
[46] [1822] 165 ER 1560.
[47] (1999) 196 CLR 101.
[48] (2010) 241 CLR 1.
When the wife spoke of Mr X’s indebtedness to the wife and the husband, it struck me that the true analysis of the relation between Mr X and his parents may have been one of lender and borrower under a loan agreement simpliciter for the acquisition on two occasions of real property. That analysis seemed to break down by reason of there being no written documentation relating to Mr X’s acquisition of an interest in land or by reason of there being a fundamental absence of essential terms with the consequences that any such alleged loan agreement may be void for uncertainty.[49] Neither counsel advanced any contentions about that so in the absence of submissions on point it would be quite wrong for me to pronounce on point, which I refrain from doing.
[49] Upper Hunter Country District Council v Australia Chilling & Freezing Co Ltd (1968) 118 CLR 429.
Mr X did not give evidence, as has already been observed. Yet the parties accepted that he has paid his parents $830,000. Of course, the mere fact of his paying that amount, without more, may not thereby confer upon him an equitable interest in real estate.[50] But having regard to the fact that neither party disputed the conferral upon him of some benefit, which the husband expressed to arise from a “moral obligation”, I am willing to proceed on the basis that over 30 acres of the land known as 1 YY Street, Suburb BB in the state of New South Wales should be earmarked as intended for Mr X and not amenable to alteration in this litigation. Further, such a position seems to accord with the husband’s most recent contentions pursuant to which he now includes the value of 1 YY Street, Suburb BB as being $4,353,000 whereas he earlier included the value of 1 YY Street, Suburb BB at $7,400,000 on the basis that the entirety of all acreage was brought to account, that is to say, there being no acknowledgment of Mr X’s entitlement. The husband seems to now acknowledge Mr X’s interest.
[50] John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1.
According to the wife, that analysis has an impact on items 6(k), 25 and 43 in relation to sums said to be referrable to Mr X and the proper ascertainment of the land to be altered as between the husband and wife at 1 YY Street, Suburb BB.
Items 7 and 8 on the balance sheet
In item 7 the sum of $812,017 was recorded on the balance sheet as being an amount said to be a loan payable by the husband to the trustee of The Aitken Unit Trust. In item 8 the sum of $811,104 was recorded on the balance sheet as being an amount said to be a loan payable by the wife to the trustee of The Aitken Unit Trust. While the wording there expressed is infelicitous, the intendment of those entries seems to be that the husband advanced to the trustee of The Aitken Unit Trust (whether in one or more tranches) a sum aggregating $812,017 for which the trustee of The Aitken Unit Trust bears a liability to repay that amount. Correspondingly, the intendment of the entries referrable to the wife seem to mean that the wife advanced sums aggregating $811,104 to the trustee of The Aitken Unit Trust for which the trustee bears a liability to repay that amount.
The wife’s counsel submitted in their written address that Mr AE had recognised in his report that the unit trust was indebted to the wife in the amount of $811,104 and that the unit trust was indebted to the husband for the amount of $812,017. Counsel for the wife argued that no challenge had been made in the evidence about either of those sums and that if the adjustment is not acknowledged in the balance sheet in the manner urged by Mr AE, then an adjustment must be made to the overall value of D Pty Ltd.
It seems to me that the position there expressed on behalf of the wife is correct. No challenge was made to those entries in Mr Lloyd’s cross-examination of the wife. Mr AE was not called so he was not cross-examined on those entries. No contrary position was put. In short, to my way of thinking the entries against items 7 and 8 should be treated as they appear in Mr AE’s evidence.
Item 9 – shares in U Pty Ltd
The parties agreed that the value of D Pty Ltd’s shares in U Pty Ltd was $2,061,599. That amount appeared as item 9 on the parties’ agreed balance sheet. Counsel for the wife submitted that as at 14 March 2022, cash-at-bank stood at $229,544 with the consequences that the value attributed to D Pty Ltd’s shareholding needed to be increased to reflect that enhanced sum. No issue was taken to that position so to my mind, the figure must be enhanced which I shall request counsel to do. Items 9(c), 9(d) and 9(e) on the balance sheet are affected by that arithmetic.
Item 10 – money owed by Ms AD
Item 10 on the joint balance sheet related to the sum of $144,000 said to be owing to the parties by the husband’s sister, Ms AD. In their written submissions, counsel for the wife contended that in July 2013 (nine years ago) the sum of $134,522.80 was transferred by the husband and wife (jointly, I infer) to Ms AD. It was said that the advance took the form of a loan. No challenge was advanced to the phenomenon of the advance carrying with it an obligation of repaying it. In contending that a loan may be found to exist even if the arrangement is not recorded in writing, counsel for the wife relied on the decision in Strand & Strand (No 2)[51] which in turn drew on observations of the Court of Appeal of the Supreme Court of Queensland in Berghan v Berghan.[52] In the latter decision, in ex tempore reasons Sofronoff P, Philippides JA and Boddice J addressed the absence of contemporaneous documentation evidencing payments. The Court also addressed the trial judge’s reason that the parties did not intend to enter into legal relations even though repayments had been made against admitted loans. To my mind both authorities cited (Strand & Strand (No 2) and Berghan v Berghan) were fact specific and are not to be taken to enunciate any doctrinal point of principle about the circumstances when a particular form of agreement, here, a loan agreement is to be taken to have come into existence. A more reliable analysis in answering that question is whether the parties to a domestic arrangement intended to create legal relations.[53] Once that is answered in the affirmative, the next task is for the court to set about construing the terms of the agreement.[54]
[51] [2018] FamCAFC 247 (at [24]).
[52] (2017) 57 Fam LR 104.
[53] Ashton v Pratt (2015) 88 NSWLR 281.
[54] An excellent distillation of applicable principle is given by Gillard J in Howtrac Rentals Pty Ltd v Thiess Contractors (NZ) Ltd [2000] VSC 415 (at [155]) et seq).
Here, the wife gave evidence at paragraph 269 of her trial affidavit that the money advanced to the husband’s sister would eventually be repaid to the sister in a worst case scenario at the time of passing of the husband’s parents and that it would be included in the distribution of their estate.
The husband in this proceeding faintly hinted at the advance to his sister being statute barred.[55] The wife submitted that on her unchallenged evidence, the time for repayment had not yet arisen and thus no limitation period had been enlivened, citing Ogilvie v Adams.[56]
[55] Limitation Act (1969) (NSW) s 14(1).
[56] [1981] VR 1041, 1049, Fullagar J.
No challenge was made about the loan to the husband’s sister. The husband’s counsel did not cross-examine the wife on the loan whether as to the sum owning or as to its terms. In those circumstances I am unable to meaningfully assess whether any merit exits in the husband’s contentions about a limitations period. It seems to me, therefore, that the entry in item 10 should stand.
Items 11 to 16 – cash-at-bank
In written submissions prepared by counsel for the wife it was submitted that all entries, other than the entry in respect of item 38, that is to say her director’s loan, should be accepted. No submission was put against that proposition. Accordingly, I make orders in relation to cash-at-bank as appears in balance sheet items 10 to 16.
Item 26 – the husband’s leave entitlements
Item 26 is for the amount of $23,763 as it appears on D Pty Ltd’s records as a liability. No contrary submission was put. It seems to be correctly recorded on that basis.
Item 27 – motor vehicle
The sum of $100,000 recorded against item 27 was said to relate to the husband’s disposal of a motor vehicle. The wife characterised that disposal as a unilateral sale at an under value. In the report of the expert Mr AL dated February 2021 the middle scenario of $100,000 was selected by the wife. The husband stated in cross-examination that he had produced no documentation in relation to the sale of the Motor Vehicle 2 for which he said he derived the amount of $25,000.[57] The wife’s counsel described the husband’s action in unilaterally selling the motor vehicle at an under value as wasteful.[58] Using the information that is in fact available about amounts for the motor vehicle, the husband was unable to substantiate the sum of $25,000 he said he derived from the sale. The expert, Mr AL, ascribed the amount of $100,000 for the motor vehicle. There being no reliable evidence about the motor vehicle beyond that of Mr AL, I accept his attribution of $100,000.
[57] T-252.
[58] Paragrph 5.11 of the wife’s written final submissions.
Item 28 – livestock value
The husband’s evidence in relation to stock was indecipherable. He denied that he had failed to comply with orders in relation to stocktakes[59] and he denied he failed to provide a depreciation schedule.[60] Yet Mr AE was unable to attribute a detailed value to stock. The husband asserted that he was unable to address stock issues because he was not permitted to be on site.[61] Yet he stated that he could not say whether the SS Company report captured all stock owned by D Pty Ltd.[62] He also admitted he did not provide particulars of all livestock in accordance with an earlier order.[63]
[59] T-188.
[60] T189.
[61] T223.
[62] T-224.
[63] T-255.
The balance sheet in its current form contains the entry in relation to stock “not known”. Counsel for the wife submitted that I will be unable to accord any value to stock. However, he argued that s 75(2)(o) should be invoked. To my mind, where (as with this aspect of the proceeding) the husband’s disclosure has been particularly poor, I should adopt the time honoured learning in the authorities in relation to dereliction of duty for disclosure and in respect of which I should adopt a robust approach. While I must not guess at values nor must I draw inferences in circumstances where a choice between competing guesses is involved, there is merit in the suggestion that s 75(2)(o) provides a statutory enabling power for me to have regard to “any fact or circumstances which, in the opinion of the court, the justice of the case requires to be taken into account”.
The husband offered no submission in opposition to that proposed by the wife.
Items 31 to 34 – legal fees
Four items on the balance sheet bearing upon legal fees were included, those being divided into sums expended and sums in trust. According to the balance sheet the wife recorded she had expended $1,121,884 in legal fees and that as at the date of trial her solicitors held the sum of $303,769 in trust. According to the balance sheet the husband stated that he had expended the sum of $763,219 in legal fees and that his solicitor had no sum in trust. On any view, the expenditure on legal fees was vast. The balance sheet was an agreed document. So it was curious that the wife submitted in her written final address at paragraph 5.13 that the husband had provided no evidence about his own expenditure on legal costs and disbursements. One wonders how the entries in items 33 and 34, referrable to “H”, came to be included on the balance sheet if the husband provided no evidence of the information to which those entries related.
The wife submitted that in the usual course of events, according to Trevi & Trevi,[64] the amounts paid by each party are brought to account except where such a course is not possible, the appropriate course is to include neither. No submission was advanced by the husband on point.
[64] [2018] FamCAFC 173.
The effect of the wife’s contentions on this issue, namely, that neither party’s legal expenses should be brought to account is that she has used joint funds to pay her legal fees but by reason of the husband providing no disclosure in respect of his legal expenditure, neither party’s legal expenses are to be recognised in this property adjustment application notwithstanding that the wife applied over $1,100,000 of joint funds to pay personal legal costs. On her behalf it was contended that to the extent that such a course may operate to the disadvantage of the husband, it was entirely of his own making, inferentially, by reason of defective disclosure.
Consistent with the robust approach that authority binding upon me sanctions for defective disclosure it seems to me that the wife contentions on point are correct. The husband’s approach to disclosure has been very poor. A robust approach is thereby authorised and is applicable. I propose to bring neither to account.
Item 35 - $47,225
This item related to funds of the business used by the wife since 10 April 2017. The total was $47,225. The wife submitted that no challenge was made by the husband in respect of that amount. That accords with my reading of the transcript of the cross-examination of the wife. Equally, when the husband gave evidence he did not assert that the amount or dates making up the amount of $47,225 was wrong. In those circumstances it seems appropriate to recognise that the sum of $47,225 was obtained from D Pty Ltd subsequent to separation, a matter the husband did not put in issue.
Item 36 and 37 – Machine 1 and Machine 2
The sum of $28,000 is attributed in the balance sheet for the purchase of Machine 1 and the sum of $30,000 is attributed in the balance sheet for the purchase of Machine 2. In his report Mr AM of AF Company dated 11 February 2022 stated the amount of $28,000 is ascribed to Machine 1 and the amount of $30,000 is ascribed to Machine 2. No challenge was offered by the husband as to the sums selected or the correctness of incorporating those items in the overall ascertainment of the property to which the s 79 application is directed. In any view, it is appropriate to include those items in the balance sheet as the amounts that appear at item 36 and 37.
Item 38 – the wife’s director’s loan
The relevant amount is $1,000,000.
Something of a backstory is associated with this entry.
As with many family companies, in this family, attention to the formalities required by the Corporations Act in relation to creating minutes of meetings at which loans to directors are approved were bypassed. Little even in the way of journal entries supported the existence or the amount referrable to this item notwithstanding the magnitude of the amount. And, while company loans to directors are everyday occurrences in Australian commerce, in the family law jurisdiction the niceties of company law to support the legitimacy of such loans is frequently overlooked. Minutes of board meetings are rarities at which a motion for the making of the advance is approved by the board. Journal entries in the books and records of the company’s accounts are equally scarce. Nevertheless, loans to directors from the company and loans by directors to the company continue to represent an undeniable source of financial lifeblood in the corporate arena, especially in family controlled companies. Questions of whether the lender and borrower are separate legal entities, the commercial terms of the arrangements or even the providence of the transactions as viewed through the prism of the director-fiduciary are seldom posed, still less answered.
In this instance, D Pty Ltd advanced the wife $1,000,000. Whether that was in one or more tranches was not readily answered. The manner in which those funds was applied is equally not readily answered. Whether the terms of the advance or advances were commercially advantageous to D Pty Ltd is a matter that will escape the scrutiny of the judicial microscope in this case. It seemed that it was common ground that, with the acquiescence of the husband, the sum of $1,000,000 was applied in such manner that those funds no longer exist and therefore only a liability for the repayment of those features in this component of the case.
On behalf of the wife, her counsel contended that several issues arose from the $1,000,000 director’s loan to the wife. Those issues included –
(a)whether the sum of $1,000,000 was properly characterised as her property;
(b)to the extent that the $1,000,000 or part thereof may have been expended on legal expenses, then the wife argued that her earlier contentions about the proper treatment of her legal expenses applied mutatis mutandis in this context;
(c)a line of authority that includes SMB & MFB[65] and La Costa & La Costa[66] has made observations about the propriety of including funds exhausted on legal fees as part of a party’s property;
(d)if expended legal fees are in fact included, then it is also necessary to make a corresponding adjustment to the value of the parties’ interests in D Pty Ltd; and
(e)further, to the extent that the wife incurs a tax liability in respect of the loan that fact needs to be recognised in the balance sheet.
[65] [2006] Fam CA 46.
[66] (2007) 38 Fam LR 412.
So far as the last matter was concerned Mr XX gave extensive evidence on point, as the earlier passages of these reasons record.
It is necessary to deconstruct this component of the case.
The $1,000,000 in issue in this item on the balance sheet has been the subject of examination by various experts in the case. So far as Division 7A issues were concerned, Mr XX provided expert evidence. Mr AE also examined the issue.
Counsel for the wife submitted that the amount of $1,000,000 was expended by the wife on “regular and reasonable expenses”.[67] Counsel for the wife cautioned against adding back the $1,000,000 sum, referring to principles governing add-backs in cases such as Chorn & Hopkins,[68] SMB & MFB,[69] and La Costa & La Costa.[70]Counsel for the wife submitted that “to the extent that such funds have been expended on the wife’s legal expenses, the above submissions are repeated”. That was an oblique contention because it failed to identify how much of the $1,000,000 was actually applied to what, whether in legal fees or otherwise. The submissions went on to state that the tax impost falling upon the wife referrable to the loan needed to be taken up in the balance sheet consequent upon a decision being made on tax issues.
[67] Paragraph 5.15.1 of the wife’s written final address.
[68] (2004) 32 Fam LR 518.
[69] [2006] Fam CA 46.
[70] (2007) 38 Fam LR 412.
The husband’s answers in cross-examination about the manner in which the wife applied the $1,000,000 director’s loan was little more than he had no issue with the wife receiving that sum.[71] The husband said he did not know of the tax implication of the $1,000,000 loan.[72] In his final address, Mr Lloyd SC submitted as follows on point –
We know and there’s no doubt that [Ms Aitken] was permitted to borrow from [D Pty Ltd] $1 million, and what has become of it is, really, basically her matter, her concern, really. But we understand a fair amount of it went into costs and so on, but that’s by the by.
If that loan is not repaid in this current financial year, it too will probably attract the division 7A issues, so that’s why we say now what you can do definitively without any problems is to cause a dividend to be paid to her and her alone. My client doesn’t need the money at the moment. She should then from that distribution received by her – the dividend received by her repay the company the $1 million that she has borrowed. Then the accounting is in order.
[71] T-210.
[72] Ibid.
It seems that the husband recognised that the wife was permitted to borrow $1,000,000 and it was a matter for the wife as to what became of that amount, or, I infer, how she applied that sum. If D Pty Ltd paid a dividend to her, Mr Lloyd SC submitted that the wife could apply that dividend to repay the $1,000,000 loan to D Pty Ltd with the consequence that accounting issues were thereby regularised.
There is a great deal of merit in the submissions of Mr Lloyd SC on this issue. If the loan is repaid from a dividend that is struck, then D Pty Ltd’s accounts will need to recognise the fact that the loan to the wife has been repaid with the consequence that D Pty Ltd’s asset position is commensurately enhanced. That regime is to be contrasted with the transfer of property regime to which I know turn.
D Pty Ltd – The Aitken Unit Trust loan
Mr XX provided evidence that in respect of loans by D Pty Ltd to the trustee of The Aitken Unit Trust, the estimated tax liability is $21,952,876 made up of the debt of $17,816,617 and interest of $4,091,259. In their written final address counsel for the wife submitted that on their understanding, the matter is to be addressed by the transfer of property from the trustee of The Aitken Unit Trust to D Pty Ltd.
The precise basis for that understanding was not given. In his final address Mr Lloyd SC did not make such a submission.
Having regard to my current disposition to produce these reasons for the parties’ consideration with an invitation to them to formulate orders based on these reasons, the question whether the wife states an agreed position on the transfer of property from the trustee to The Aitken Unit Trust to D Pty Ltd can wait.
Tax on $1,000,000 received by the wife
In paragraph 5.17 of their written submissions, counsel for the wife pointed out that pursuant to orders made on 17 September 2021 the wife received the sum of $1,000,000. As Mr XX stated, unless that amount is made the subject of a compliant Division 7A loan agreement that satisfies s 109N of the Income Tax Assessment Act then $1,000,000 will be repayable by June 2023 at the latest. Mr XX also stated that if no such agreement is entered into, the wife will be assessed on the basis of the loan being deemed a dividend on which the sum of $470,000 is payable. Counsel for the wife conceded that the wife’s lability arising from the $1,000,000 depends on whether she enters into the compliant Division 7A loan. The wife has indicated that the form and timing of the orders will be important on this issue.
Item 44 – Aitken Family Superannuation Fund
Item 44 (a) to (d) are in mirror form on the balance sheet. Counsel for the wife contended that two entries require updating, so that item 44 (a) reads $1,142,332 (as it now does) and so that item 44 (d) reads $2,020 (as it now does).
Further, the wife contended that item 44(f) required updating to record the current amount of the debt owed by D Pty Ltd, namely $11,115 (which it now does).
Overall asset position – $79,925,966
The wife contended that the parties’ overall asset position was in the sum of $79,925,966. That was based on the parties’ joint balance sheet as adjusted in the manner set out above.
The husband’s principle contentions
Once the husband physically provided the wife with the diamond ring she sought,[73] the husband’s contentions in this s 79 application mostly concerned –
(a)his application to sell his interest in D Pty Ltd; and
(b)his application to retain certain parcels of land.
[73] T-212.
As the foregoing reasons demonstrate, enormous tax consequences are involved in certain alterations of interests. In addition, the husband has all but given up as Mr Lloyd SC pointed out in his final address, citing the husband’s medical treatment.[74] The fact remains that the husband himself deposed to struggling with stress[75] and being unable (or unwilling) to make decisions any more.[76] He said he does not know what he wants anymore.[77]
[74] T-349.
[75] T-151.
[76] T-150.
[77] Ibid.
Mr Kearney SC argued that one option open to me was to defer the making of orders in pursuance of s 79(5) of the Family Law Act.
Let me say at this juncture that I do not favour such a course. The parties need certainty in their circumstances. Even though market conditions in July 2022 are not as favourable as, say in July 2021, there should be a conclusion to this litigation. Plus, the tax position is unlikely to improve without a determination being made about it. Further, both the husband and the wife acknowledge that Mr X has a legitimate entitlement to be concerned about and which both of his parents acknowledged, namely his 38 acres of land in Suburb BB. Even though Mr X did not give evidence, there is common ground that he takes 38 acres. Accordingly, the land now known as 1 YY Street, Suburb BB must be dealt with, save as to 38 acres that fall outside of any orders to be made by me under s 79 of the Family Law Act.
Then there is the hotly contested issue of the sale of the husband’s shares in D Pty Ltd or, for that matter, orders for the sale of both the husband’s and wife’s shares in D Pty Ltd.
In the passages below I have addressed those issues.
Selling D Pty Ltd
The husband wishes to terminate his association with D Pty Ltd. The wife has previously said she does not wish to sell, at least, not to a third party. The husband has not engaged in any consideration of the terms of any such sale, especially the actual items that might form part of any such sale. Further, the husband has said that he has not turned his mind to whether an incoming purchaser may require the husband to serve out a handover period. That may turn out to be important having regard to the fact that the husband maintains he is integral to the success of D Pty Ltd.
The Suburb C property
Since 2018 when the parties finally separated the wife has resided in the property known as B Street, Suburb C. Since the date of the parties’ separation, the husband has resided at the property known as AA Street, Suburb BB. He wishes to retain that property. The husband seeks and the wife does not oppose the husband taking the benefit of every other parcel of real estate owned by the parties.
In those circumstances, it is appropriate to make an order that reflects –
(a)the wife having the sole legal and beneficial ownership on the parcel of land known as B Street, Suburb C in the state of New South Wales and to that end, that the husband forthwith effect such a transfer of his interest in that property;
(b)the husband having the sole legal and beneficial ownership in the parcel of land known as AA Street, Suburb BB in the state of New South Wales and to that end, that the wife forthwith effect such a transfer of her interest in that property; and
(c)the wife thereafter, and by not later than 90 days from these reasons, transfer to the husband her legal and beneficial interest in all other parcels of real property as is owned by the parties.
I direct that the parties bring in a minute within 14 days that gives effect to that order.
Loan Accounts
The parties’ position on restoring loan accounts fluctuated. According to the wife, since December 2021 she has proposed specific properties being transferred to meet the liability of the unit trust to D Pty Ltd.[78] She contended that Mr XX had provided advice about the legitimacy of that approach. Counsel for the wife submitted that the husband subsequently, and belatedly, proposed a different regime of property transfers. Counsel for the wife argued that the husband’s last minute proposal was not the subject of consideration by Mr XX and so its tax effectiveness could not be assessed.
[78] Paragraph 8.3 of the wife’s written final address.
There is force in that contention.
Counsel for the wife sought orders to the effect that the ATO is notified of the orders proposed.
I direct that the minute that I have required the parties to formulate incorporates precise stipulations of the property transfers together with submissions explaining –
(a)how tax liabilities are thereby satisfied; and
(b)the reasons why those specific transfers assist in achieving a just and equitable outcome in this s 79 application, especially in dollar terms and in percentage of asset value terms.
Declaring a dividend
Mr AE’s evidence was not challenged. He did not enter the witness box. In his report dated 4 March 2022 Mr AE expressed the opinion that a quantity of cash in D Pty Ltd was available for immediate distribution as between shareholders. The husband proposes the declaration of a dividend but one only to the wife in respect of one half of the cash held. Counsel for the wife submitted that[79] –
(a)no basis existed why that distribution ought not be made, that is to say, half to the wife only;
(b)no reason existed why such a dividend could not be declared; and
(c)no impediment existed in paying such a dividend forthwith.
[79] Paragraph 8.8 of the wife’s final address.
It must be remembered that the husband proposed the arrangement for a dividend to be paid as to half of the cash to the wife forthwith.
In the minute that the parties will prepare to reflect these reason, I also require the minute to incorporate this proposed dividend declaration and for the accompanying submission to specifically address –
(a)the amount and date by which that dividend is to be paid;
(b)the amount of tax that will be separately paid on that payment; and
(c)the reasons why the payment of that dividend assists in achieving a just and equitable outcome, especially in dollar terms and in percentage terms.
Recognising Mr X
As has already been recorded above, Mr X has not participated in this case yet, for reasons also recorded above, he is to be taken as having an equitable interest in 38 acres of the 1 YY Street, Suburb BB property. The husband acknowledged a moral obligation to preserve the equitable interest possessed by Mr X in those 38 acres of the land comprising 1 YY Street, Suburb BB. The wife sought orders from the husband protecting her by way of indemnity in the event that thereafter, Mr X made a claim against the wife in relation to the acres of land. The husband was willing to accommodate that request. The wife apprehended that the husband has now adopted a different position. She wishes to hold the husband to his previously adopted position, namely, to indemnify the wife as to any liability of the parties to Mr X. Proceeding on the basis that all parcels of real property are transferred to the husband, except for the Suburb C property which is to be transferred to the wife, the husband will need to somehow accommodate Mr X’s equitable interest in acres of the Suburb BB property. If Mr X pursues such a claim and he included the wife in any such claim once the husband is the sole registered proprietor of the legal estate in the YY Street land, the wife will have no interest other than an in personam interest against which Mr X might bring a claim. In those circumstances, it seems to me to be just and equitable for the husband to indemnify the wife against any claim Mr X may hereafter make. An indemnity in those terms is largely consistent with the husband’s concession that he owes Mr X a moral obligation in relation to the acres.
Selling the shares in D Pty Ltd
The husband’s position in relation to the sale of D Pty Ltd has been recorded above. He wants it sold yet he has no well-formed or even partially formed plans on the terms of any such sale. It seems he is exhausted and he no longer has the assistance of his son Mr X to run the business conducted by D Pty Ltd.
The wife has been opposed to any sale of D Pty Ltd to the public. In circumstances where the full and complete itemisation of the assets to be sold have not been specified by the husband, any joint sale (that is to say of the husband’s shares and the wife’s shares) is borderline meaningless.
The wife has proposed my making orders requiring the husband to take the wife’s share in D Pty Ltd. I infer that to be her position, anyway. I say that because her counsels’ use of the passive tense is wholly misleading. They said this[80] –
It is the primary position of the wife that the Court sought order the transfer to the shares in [D Pty Ltd], and thereby the underlying interests including in the business to the husband.
[80] Paragraph 8.11 of their written submissions.
No reference is set out in that sentence about the price the husband will pay for any such transfer.
It must be acknowledged that D Pty Ltd conducts its operation from certain real estate. That must be factored into the share price that is payable by the husband.
It is readily apparent that the husband and wife have no wish to continue their joint commercial endeavours for D Pty Ltd and that their commercial interests in D Pty Ltd must be severed.
In final addresses I canvassed with Mr Kearney SC whether it would be better in all the circumstances to appoint a provisional liquidator to deal with D Pty Ltd having regard to the deadlock in which the husband and wife find themselves. Mr Kearney SC forcefully strained against that proposal. It found no favour with Mr Lloyd SC, either. In view of such trenchant opposition, I shall not pursue it further even though in commercial courts across the Commonwealth of Australia such a solution was immediately open and possible even of the court’s own motion in view of the shareholders’ deadlock.
The wife pointed out that if the husband purchases her share in D Pty Ltd, then he will be free to do as he wishes with his complete shareholding, including selling the whole of D Pty Ltd’s assets and undertaking on such terms as he chooses, whether involving the husband in any handover period or otherwise. To my mind, that proposal is just and equitable.
Timing will be important. In order to arrive at the overall value of D Pty Ltd’s shares, its liability to the ATO must first be discharged, in all respects.
According to the agreed balance sheet that accompanied the wife’s final address, the revised value of the shares in D Pty Ltd was stated as $45,514,742. Of course, a number of items must be brought to account in accordance with these reasons. That said, once adjustments are made to derive the proper figure for item 3 on the balance sheet, then the amount to be paid by the husband for the wife’s shares will be known. The husband must then pay the wife the value of her shares in D Pty Ltd. If the husband then chooses to sell the whole of his shareholding he is perfectly at liberty to do so.
As with other items, I require the parties to formulate a precise proposal that gives effect to these reasons, setting out in particular how in percentage terms, in aggregate the purchase by the husband of the wife’s share in D Pty Ltd effects an equal alteration of the property interests.
The wife advanced a collection of reasons why she said an order for the husband to purchase the wife’s share in D Pty Ltd was warranted in the circumstances. She argued[81] –
(a)the court cannot be satisfied the husband had properly, diligently and fully identified all of D Pty Ltd’s interests;
(b)the court cannot be satisfied the husband will ever do so;
(c)the court cannot be satisfied that the husband, if permitted to have control of any sale of D Pty Ltd to a third party, will secure a sale on a proper basis for a proper market value;
(d)the court cannot be satisfied that, if permitted to control any sale of D Pty Ltd’s assets and undertaking to a third person, that the husband would conclude any such sale in a manner that promoted the attainment of an amount representing proper entitlements to the wife;
(e)the court cannot be satisfied that if permitted to control any sale of D Pty Ltd’s assets and an undertaking, the husband would ensure that real property associated with the business would be sold with the business; and
(f)the court cannot be satisfied that the husband has any developed formulation of the most advantageous terms on which any sale of the assets and undertaking of D Pty Ltd might be affected.
[81] Paragraph 8.11 of the wife final address.
I agree. The husband’s proposal about the sale of D Pty Ltd were bewilderingly underdeveloped.
The husband must buy out the wife’s shareholding in D Pty Ltd.
Directions
The parties must confer and agree on a minute that gives effect to these reasons. I shall defer the pronouncement of final orders until the parties have had the opportunity of considering these reasons, formulating the minute previously mentioned, preparing submissions on the issues identified above and making such verbal submissions as they wish to make on the final form of orders. To that end I adjourn the further hearing of this proceeding to 10:00am on 29 July 2022 or earlier by agreement.
I certify that the preceding one hundred and sixty-four (164) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Wilson. Associate:
Dated: 15 July 2022
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