Arthur and Arthur
[2008] FMCAfam 1069
•1 October 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| ARTHUR & ARTHUR | [2008] FMCAfam 1069 |
| FAMILY LAW – Property – interim orders regarding payment of capital gains tax –matters to be considered – just and equitable. |
| Family Law Act 1975, ss.75(2), 79 |
| Harris & Harris (1993) FLC 92 378 NHC & RCH (2004) FLC 93-204 |
| Applicant: | MR ARTHUR |
| Respondent: | MS ARTHUR |
| File Number: | MLC 1819 of 2008 |
| Judgment of: | Brown FM |
| Hearing date: | 25 September 2008 |
| Date of Last Submission: | 25 September 2008 |
| Delivered at: | Adelaide |
| Delivered on: | 1 October 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr Richards |
| Solicitors for the Applicant: | Westminster Lawyers |
| Counsel for the Respondent: | Mr Howe |
| Solicitors for the Respondent: | Howe Martin & Associates |
ORDERS
The husband and wife do all things necessary to pay the husband’s 2007 taxation liability of $50,419.60 (being capital gains tax as a consequence of the sale of shares) be paid from the parties’ joint account no. [1] with the Power State Credit Union.
The matter is fixed for final hearing before Federal Magistrate Brown on 18 & 19 June 2009 at 10:00am NOTING 2 days allowed.
The applicant pay the hearing fee or obtain a Remission Certificate in respect thereof within 28 days of the date hereof.
The applicant file and serve all affidavit evidence and updated statement of financial circumstances he proposes to rely on at trial on or before close of Registry filing on 21 May 2009.
The respondent file and serve all affidavit evidence and updated statement of financial circumstances she proposes to rely on at trial on or before close of Registry filing on 4 June 2009.
The interim applications be otherwise dismissed.
IT IS NOTED that publication of this judgment under the pseudonym Arthur & Arthur is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT ADELAIDE |
MLC 1819 of 2008
| MR ARTHUR |
Applicant
And
| MS ARTHUR |
Respondent
REASONS FOR JUDGMENT
Introduction
These are interim proceedings relating to matrimonial property. Principally, they are to do with the payment of capital gains tax arising out of the sale of a number of pieces of real property and a parcel of shares.
Mr Arthur “the husband” and Ms Arthur “the wife” married in April 1991 and finally separated on 16 September 2007. Their marriage produced no children.
The husband is forty-four years of age. He is employed as a senior executive by [E] Corporation, a company which provides information technology.
It is agreed between the parties that his base salary per annum is just under $370,000.00. In addition, from time to time, he receives significant bonuses from his employer.
The wife is forty-two years of age. She has a history of employment in public relations, mainly with [omitted]. She has earned a salary of around $60,000.00 per annum in the past.
The husband’s employment took him to the United States. As a result, the wife resigned her employment in Australia, whilst she lived in Texas with the husband. As a result she was not employed for about three years. It is only fairly recently that she has resumed employment in Adelaide. Her income has always been significantly less than that of the husband.
During the course of the parties’ relationship, they acquired a number of investment properties. Most of those properties are registered in the husband’s sole name. One is in joint names.
In addition, the parties own a house at Property O, which was their former matrimonial home. Currently the wife is living in this property. The property has been renovated. The renovations were funded by the sale of shares held in the husband’s name. This sale attracted capital gains tax. The husband has relocated to Melbourne.
As a result of the parties’ separation, they have agreed that it is necessary to rationalise a number of their investments, particularly their investment properties. They have also agreed that the proceeds of sale, from these properties, should be held in an interest bearing account until either they can agree on how those sums should be divided between them or the court makes an order in this regard.
Given the nature of these investments, upon their realisation, the proceeds of sale attract capital gains tax. In the case of the properties invested in the husband’s sole name, as a matter of law, the capital gains tax will be his sole responsibility.
It is the husband’s position that the court should make orders that both the currently accrued assessments of capital gains tax and any future assessments of capital gains tax should be paid for from the account, in the parties’ joint names, into which the proceeds of sale of these various properties have been deposited.
It is his case that, if the capital gains tax is not paid as it falls due, it will result in the imposition of penalties for late payment and possibly the institution of legal proceedings, including bankruptcy proceedings, against him.
It is his case that it is incontrovertible that the various amounts of capital gains tax will have to be taken into account as a joint matrimonial liability. As such, he argues that it is better that the tax be paid sooner rather than later.
More importantly, he points to the fact that the parties have more than ample assets to ensure that the wife receives her full entitlements, at settlement of the parties’ matrimonial property issues, regardless of whether the capital gains tax is or is not paid.
The capital gains tax already incurred by the husband amounts to a sum of $50,419.60, for the financial year ending 30 June 2007. This assessment was issued on 18 May 2008. This sum relates to the sale of shares.
In terms of capital gains tax incurred in respect of either the financial year ending 30 June 2008 or other future financial years, the husband’s accountants estimate that the amount of capital gains tax to be paid is around $177,000.00. These sums relate to the sale of investment properties. Given the husband’s salary, they are likely to be taxed at the highest marginal rate.
The wife is suspicious as to how the husband has managed his financial affairs in the period following separation. She knows that he has received significant remuneration from his employment and has received a bonus. In addition, he acknowledges that he withdrew significant sums of money from his bank account around about the time of the parties’ separation.
In these circumstances, the wife is at a loss to understand why the husband does not have the financial resources to pay the recently incurred capital gains tax debt ($50,419.60) from his own personal funds without recourse to joint matrimonial property. On this basis she opposes the orders sought.
It is also the wife’s position that there are currently no sufficiently compelling circumstances to warrant the making of the order, which the husband seeks, in respect of capital gains tax not yet formally assessed.
In particular, she points to the fact that the husband has not as yet filed his 2007/2008 tax return and should not be under any pressure to do so, particularly as it seems to be the case that he filed his last tax return fairly recently.
In addition, it is the wife’s case that, although she does not challenge the expertise of the husband’s accountant, there is some level of conjecture about how much the future capital gains tax will actually be. As such, it is her position that there is no proper reason for the court to deal with this issue of prospective tax, which can be left to the final hearing of the parties’ competing applications.
On the other hand, it is the husband’s case that, although he earns a comfortable salary, he is currently stretched financially, particularly because of monies he is advancing which benefit the wife primarily. He has also had to pay outgoings on the investment properties, although this pressure has eased on their sale. In addition, he says he incurred considerable expenses relating to his relocation to Melbourne.
The proceedings
The husband commenced these proceedings, in the Family Court at Melbourne, on 28 February 2008. On a final basis, he seeks orders that would result in the parties’ net property being equally divided between them. The proceedings were subsequently transferred to this court, in Adelaide, in order to allow a financial mediation conference to occur between the parties.
The wife responded to the husband’s application on 23 May 2008. On a final basis, she seeks the transfer to her, free of all mortgages, of the former matrimonial home at Property O. In addition, she seeks payment to her of the sum of $1,000,000.00 or such other sum as the court adjudges to be a just and equitable settlement of the parties’ matrimonial property issues. She also seeks the payment to her of an as yet unquantified amount of spousal maintenance.
Concurrently with her final application, the wife began interim proceedings. In particular, she sought an award of interim spousal maintenance in the sum of $10,000.00 per month.
In addition, she sought orders that would see the proceeds of sale of two of the investment properties situated at Property M and Property D being paid into a jointly held interest bearing account, in respect of which both parties would be restrained from drawing. This is no longer controversial.
The husband responded to this interim application on 14 July 2008. He seeks the dismissal of the wife’s interim spousal maintenance application and the orders to which I have already referred, regarding the payment of capital gains tax.
It is common ground between the parties that the husband is currently paying the mortgage, as it falls due, on Property O. This amounts to a sum of just over $4,000.00 per month. In addition, the husband pays other recurrent outgoings in respect of this property; the wife’s health insurance payments; and a sum of around $1,500.00 in cash to the wife to assist her with her day to day expenses. In total this amounts to a sum of around $7,000.00 per month.
As previously indicated, the wife has recently resumed paid employment, after a break of around three years. In these circumstances, she acknowledges that it would not be reasonable for the court to make an order for interim spousal maintenance and she has abandoned her application in this regard.
The parties were the joint proprietors of Property M. The property has recently been sold with settlement occurring on 8 September 2008. The parties have agreed that the proceeds of sale should be paid into a jointly held interest bearing account.
The husband was also the sole registered proprietor of a property situated at Property G. This property has also been sold, with the proceeds being paid into the same jointly held interest bearing account.
In addition, the husband was the sole proprietor of a property situated at Property D. This property has also been sold and again the proceeds have been paid into the parties’ joint interest bearing account.
Finally, the husband owned a property situated at Property N. This property was sold on 5 February 2008. Again, the proceeds have been paid into the interest bearing account which the parties jointly hold.
Accordingly, the only outstanding issues for the court, at this stage, are whether orders should be made regarding the future payment of capital gains tax in respect of the sale of each of these properties and the capital gains payable on the shares sold by the husband, which has resulted in a liability of $50,419.60.
As previously indicated, given the different dates on which the sale of these properties was settled and the fact that the husband has not as yet filed tax returns for the financial years which are relevant, the amount of the capital gains tax payable, in total in future financial years, is not yet known.
The parties attended a conciliation conference on 10 July 2008. Unfortunately, this conference did not result in the settlement of the parties’ competing claims for property settlement. Accordingly, the parties now agree that their competing applications should be fixed for final hearing. The dates allocated for trial will be in the middle of 2009.
It is against this background that I must determine the issue regarding the payment of capital gains tax. The hearing before me, in respect of this issue, on 25 September 2008 was necessarily brief.
During that hearing, neither party entered the witness box and was cross examined by counsel for the other party. The only evidence before me is in the form of affidavits which each of the parties has sworn and their respective statements of financial circumstances. As a result of the absence of cross examination, I am not in a position to make findings of fact, where there is a dispute between the parties in respect of any material issue.
The evidence
The husband’s position is that the former matrimonial home is worth $970,000.00 and is subject to a mortgage slightly in excess of $400,000.00. In addition, he asserts that the various investment properties have been sold for around $715,000.00. Accordingly, before any consideration is given to capital gains tax, the husband asserts that the parties have assets worth in excess of $1,200,000.00.
In addition, the husband has deposed that he has superannuation entitlements worth around $475,000.00. The wife acknowledges that she has superannuation entitlements worth at least $125,000.00.
There is some controversy between the parties regarding the value of shares owned by the husband in the [E] Corporation. In his statement of financial circumstances[1] the husband asserts that these shares are worth just over $29,000.00. The wife is suspicious that this is not a full disclosure of the husband’s shares and the options which relate to them.
[1] See husband’s statement of financial circumstances filed 28 February 2008
More recently, the husband has provided a summary from [E] Corporation setting out his equity holdings in the company. In the written submissions of his counsel, Mr Richards, the husband acknowledges that the vested share options in [E] Corporation are worth in excess of $200,000.00, which is subject to an estimated capital gains tax of approximately $102,000.00.
In summary, it is the husband’s position that the parties have a net worth, excluding superannuation assets, of at least $1,300,000.00. Accordingly, in such circumstances, he asserts there exist ample funds to pay both the actually assessed capital gains tax and any likely future assessment of capital gains tax, relating from the more recently liquidated investment properties, without any possibility of the wife’s position, at final hearing, be prejudiced.
As previously indicated he seeks an equal division of property. On this basis, he asserts that the payments of capital gains tax which he proposes will not deprive the wife of an opportunity to receive a significant component of the parties’ assets or compromise the court’s capacity to assess properly the relevant factors under section 79(4) and ensure each party receives what he or she is entitled to.
In regards to future assessments of capital gains tax, I have been provided with an estimate prepared by the husband’s accountants, which sets out the firm’s calculation of the capital gains tax likely to be levied at the highest tax margin. The wife characterises this as a provisional assessment but does not query the expertise of the accountants involved.
The wife is critical of the husband for allegedly not making a full and frank disclosure of his financial circumstances. In particular, she does not believe that he has been completely frank regarding a bonus received by him in the early part of 2008.
In addition, she is suspicious in respect of significant sums of money, which were withdrawn from the husband’s savings around about the time of separation. Given the extent of this withdrawal and the amount of the husband’s bonus, the wife is incredulous at the husband’s assertion that he currently lacks sufficient financial resources to pay either the actual or anticipated capital gains tax assessments, particularly given that he also enjoys a significant level of remuneration.
In all these circumstances, the wife is doubtful about the husband’s account of his expenditure incurred as a result of his re-accommodation in Melbourne. As such, she urges the court to take a cautious approach before allowing any further diminution of the parties’ marital assets, particularly at the interim stage, where the evidence available to the court is necessarily cursory and untested.
As her application stands the wife seeks to receive the former matrimonial home and a sum of either $1,000,000.00 or what the court deems just. She does not dispute the husband’s calculations regarding the value of the former matrimonial home and the other investment properties. Although it would seem to be her position that there will be notional “add backs” into the pool of the parties’ assets and there may be other items of property included about which the husband has not as yet been forthcoming.
The husband refutes any suggestion he has not made a full and frank disclosure of all relevant assets. As previously indicated he asserts some liquidity problems at present, which the wife asserts are due to unwarranted extravagance. In short the parties’ respective positions are infused with an atmosphere of suspicion, particularly from the wife’s perspective.
Although there are considerable disputes about the size of the parties’ pool of assets and their financial conduct post separation, what is clear to me is that the parties have considerable liquid assets, which vastly outweigh the current capital gains tax assessment. In addition, the husband has a large recurrent income, which renders him financially secure. In addition the current capital gains tax assessment is clearly a joint matrimonial debt, which arose as a consequence of improvements to the former family home.
The legal principles applicable
These are proceedings to which section 79 of the Family Law Act 1975 applies. The court is authorised to make orders, resulting in the alteration of the property interests of parties to a marriage, if it is satisfied, in all the circumstances, it is just and equitable to do so.
In Harris[2] the Full Court of the Family Court acknowledged that a court, such as this one, was empowered to make what was described as an interim property order in proceedings brought pursuant to section 79. That is make a property order at a stage prior to a full and final hearing of all the relevant evidence.
[2] See Harris & Harris (1993) FLC 92 378
The Full Court did not find it necessary to distinguish between interim orders and partial orders. A partial order being one which it was anticipated would be subsumed into what ultimately became the final orders.
Rather, the Full Court acknowledged that the court could make an order, dealing with aspects of the parties concerneds property prior to the final hearing of their competing applications, if it considered it appropriate to do so.
However, the Full Court directed that the exercise of such a power was limited and should be subject to the following considerations:
·Firstly, the exercise of the power should be limited to cases where the circumstances at the time of the proposed interim order were compelling.[3] Usually the interest of justice were best served if there was only one hearing between the parties concerned in respect of issues relating to the division of their property and any liabilities relating to it.
·Secondly, as any such interim disposition related to the exercise of the court’s power under section 79, the court must be mindful of the provisions of that section, particularly regarding the assessment of relevant contributions and other factors arising under section 75(2) of the Act.
·Thirdly and most importantly, at the interim stage, the court was unlikely to have before it all the necessary evidence to allow it to fully consider all the relevant matters likely to be applicable under the exercise of its discretion pursuant to section 79 of the Act. As such, any exercise of the discretion, at the interim stage must be exercised conservatively so that sufficient assets remained available to correct any error, which may arise from an improper exercise of the discretion at the interim stage.
[3] Examples of such compelling incidences provided by the Full Court included those where it was necessary for the court to act to prevent an asset being lost or eroded.
Conclusions
It is the wife’s case that there are not sufficiently compelling circumstances to justify the exercise of the court’s authority, at the interim stage, in respect of either category of capital gains tax. In particular, she asserts that, given the husband’s undoubted means, particularly his level of remuneration, there is no likelihood of any injustice arising to him if the court declines to make the orders, which he seeks, as he has ample resources from which to pay all likely assessments of capital gains tax.
On the other hand, it is the husband’s position that it cannot be said that the capital gains tax liabilities are anything other than joint matrimonial liabilities, which will have to be paid at some time or other. Further, it is his position that when the quantum of the capital gains tax debts are compared with the amount of the parties’ net worth there exist ample funds to insure against any possibility that the wife will be somehow ‘short changed” by the payment of the debts in question.
In my view, there exist compelling grounds to justify the payment of the capital gains tax liability which has vested. The debt is clearly to be regarded as one which has been jointly incurred, relating as it does to items of property which have been realised as a result of a joint decision of the parties and which has resulted in the improvement of another marital asset.
In particular, if this debt is not paid, it is likely to attract the imposition of an assessment of penalty tax or possibly lead to some form of legal proceedings against the husband, which may be detrimental to both parties. Accordingly, there is some potential for the diminution of the parties’ assets. I think this can be regarded as a compelling circumstance.
Although there is considerable dispute regarding the full extend of their assets, it does not seem probable to me that the payment of a sum of around $50,000.00 will have the potential to skew the pool so that the court will not be able to properly recognise the parties’ respective contributions and any element of prospective need which considerations of equity may require to be taken into account at final hearing.
There is no principle of law that the parties to proceedings such as these are required to keep their financial affairs in a state of “suspended animation” pending final hearing.[4] At this stage I am unable to resolve the controversy between the parties regarding the husband’s alleged lack of liquidity.
[4] See NHC & RCH (2004) FLC 93-204 at 79,312
In such circumstances, I acknowledge I must proceed cautiously and with an ample margin for error. However, just because the husband is well resourced financially does not necessarily mean that such an order should not be made particularly given the joint nature of the debt involved.
In my view, there can be no doubt that there exist ample financial resources of the parties, which will ensure that the court will be able to exercise its proper function, pursuant to section 79, at the final hearing stage, if a sum of $50,000.00 is paid from the proceeds of sale of the investment properties. The hearing will be in approximately nine months time.
This hearing is likely to be before the husband is assessed to pay any further capital gains tax. In this sense I would assess the future and as yet not formally assessed capital gains tax as falling into a different category to the current assessment. In addition, their quantum is likely to be significantly greater and so their potential impact on the parties’ pool of property more intense.
Necessarily, as a result of these factors, these potential debts must be approached more cautiously, at the interim stage, because the margin for error is less and the strength of demand for payment as yet inchoate. I accept the wife’s submission that the husband is not under any compelling pressure to file his tax return for the financial year ending 30 June 2008.
For these reasons, I propose to make an order authorising the payment of $50,419.60 from the parties’ joint account, which currently holds the proceeds of sale of the various investment properties outlined above. The other aspects of the interim proceedings will be dismissed.
For all these reasons, the orders of the court will be as set out at the commencement of these reasons for judgment.
I certify that the preceding sixty-eight (68) paragraphs are a true copy of the reasons for judgment of Brown FM
Associate: P Smith
Date: 1 October 2008
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