C & C
[2005] FamCA 159
•11 March 2005
[2005] FamCA 159
FAMILY LAW ACT 1975
IN THE FULL COURT
OF THE FAMILY COURT OF AUSTRALIA Appeal No SA50 of 2004
AT MELBOURNE
BY VIDEO LINK TO ADELAIDE File No ADF4403 of 2000
BETWEEN:
C
Appellant Husband
- and -
C
Respondent Wife
REASONS FOR JUDGMENT
CORAM: KAY, WARNICK & MAY JJ
DATE OF HEARING: 1 March 2005
DATE OF JUDGMENT: 11 March 2005
APPEARANCES: Mr Randle, of Randle & Taylor, Solicitors, 204 Carrington Street, Adelaide, SA 5000, appeared on behalf of the Appellant Husband.
Mr Berman of Counsel instructed by Diane Myers, Solicitor, 189 Greenhill Road, Parkside, SA 5063 appeared on behalf of the Respondent Wife.
C
SA50 of 2004
Coram: Kay, Warnick & May JJ
Date of Hearing: 1 March 2005
Date of Judgment: 11 March 2005
Catchwords: PROPERTY SETTLEMENT – s75(2) adjustment – disparity of income - Whether the trial Judge erred in making an adjustment in favour of the wife, representing 7.5 per cent of the asset pool because of a disparity in the earning capacity of the parties created by the husband having retained the parties’ business assets – whether the adjustment was just and equitable considering the husband had effectively purchased the wife’s 50 per cent interest in the business – whether the adjustment was “double dipping” – appeal allowed and the adjustment reduced to give recognition to the very great difference in the parties’ income position in the immediate future brought about by the manner in which the assets have been distributed, but also recognition to the ability of the wife to invest part of her capital and help diminish that gap.
This is the husband’s appeal against property orders that were made by Strickland J on 30 July 2004.
The appeal focuses entirely upon the propriety of an adjustment of $82,079 made in favour of the wife, representing 7.5 per cent of the pool of assets available for division between the parties. The adjustment resulted in the wife receiving 57.5 per cent of the pool worth $1.09 million.
The adjustment was said to be made because of the disparity in the earning capacity of the parties, which disparity was created by the husband having retained the parties’ business assets. It was the husband’s contention before us that as he had effectively purchased the wife’s 50 per cent interest in the business at fair market value it would not be just and equitable to make a further allowance to the wife for the fact that the husband was able to generate more income than the wife from the manner in which he invested his share of the parties’ assets, namely by the acquisition of the business. On appeal the husband contended that this was “double dipping”. It was submitted that the wife was equally in a position of being able to invest her equivalent share of the assets to produce an income, and if she chose to invest in a more conservative investment than the husband, he should not effectively be penalised for her investment policy.
Background
At the time the judgment was delivered the husband was aged 55 and the wife 48. When they met the husband was an auto-electrician and the wife a qualified nurse. They commenced cohabitation in 1977 and married in 1979. Their daughter was born in 1980 and their son in 1981. They acquired a home in a suburb of Adelaide after the marriage that they sold in 1986 when they purchased an auto electrical business (‘the business’). The husband managed the business and worked actively in it. The wife worked in the business on a part-time basis while studying and caring for the children and the household. She returned to her profession on a casual basis in 1989.
The parties separated under the one roof in 2000. In 2001 the wife left the former matrimonial home.
Between 1990 and 2001 the parties had accumulated several items of real estate. The wife had invested in some purchases that were negatively geared and thus were showing little return by way of rental income.
Litigation commenced in 2000 with the wife filing an application seeking alteration of property interests. When the matter first came on for trial in 2002 the parties agreed that the business should be sold. Orders were made for the sale to take place but there were subsequent difficulties obtaining a purchaser. Eventually a purchaser was found but the husband then sought and received permission from the trial Judge by way of interlocutory order to purchase the business and its business premises at a price equivalent to that being offered by the third party purchaser. The business was acquired by the husband for $100,000 and the business premises for a further $60,000. The final accounts for the business were to be drawn up as at 31 December 2003.
The trial Judge determined that there was a pool of assets with a net value of $1,094,379. Included in the pool of assets were “the gross sale proceeds of the business premises” at $60,000 and “the gross proceeds of the business” at $100,000.
There had been a dispute about an adjustment that ought be made having regard to the husband’s receipt of all of the profits of the business from the time of separation up until the date of acquisition of the business, namely 31 December 2003. The parties’ accountant determined that the wife’s loan accounts with the business should be credited with her share of the income of the business and as a result they stood in credit to the extent of $114,138.
The husband had urged the trial Judge to make no allowance for the receipt by him of the wife’s share of the income, however his Honour determined that it would be appropriate that from the husband’s ultimate share of the reconstructed asset pool he pay to the wife the monies due to her for her loan account “primarily because the husband has drawn substantial monies from the business for his own benefit”. Precisely what the husband had done with those monies was not the subject matter of any finding in the course of the reasons for judgment nor was any matter drawn to our attention in the course of the appeal. We were limited in the conduct of this appeal by the absence of the evidence that was before the trial Judge. The appellant had chosen to argue the appeal strictly within the confines of the reasons for judgment. It is to be noted, however, that within the reasons for judgment there was reference to the husband having purchased some vacant land in 2002 for $64,000 and that subsequently in the preparation of the list of assets it was said that the husband’s land was “excluded by agreement”. That may go someway to explaining how the husband applied the entirety of the profits of the business during the period in question.
The trial Judge then assessed the contributions both prior to and post-separation as being equal. There is no challenge to that finding in this appeal.
After dealing with the adjustments of the loan account and the liability of the husband to meet the same his Honour turned to considerations under s 75(2) of the Family Law Act and concluded that the only matter that was appropriate to take into account was s 75(2)(b) namely the income, property and financial resources of each of the parties and the physical and mental capacity of each of them for appropriate gainful employment. His Honour said:
“132.The wife’s case is that the disparity in the income and earning capacities of the parties should result in a [sic] an adjustment of 10% in her favour. She makes no submission though in relation to the property and financial resources of the parties, and nor does the husband.
133.At the time of the hearing the wife was employed full-time … and her salary was approximately $52,000.00 per year. In addition, she has two rental properties but the evidence is that both of those properties are negatively geared and thus there is no net income available to the wife from those sources.
134.The husband now has the business as his own, and although I cannot be certain as to the structure that he will put in place, the current position is that he pays himself a wage of $52,000.00 per year and he then has access to the net income after payment of that expense and all others. In the year 2001 that net income was $98,010.00, in 2002 it was $86,017.00, in 2003 it was $47,219.00, and for the half year to the 31st December 2003 it was $46,286.00 (see Exhibit W6). Thus, it can be seen that the husband will have the ability to provide himself with income and benefits greater than the wife is able to, and this must be taken into account.
…
137.The wife says that there should be an adjustment in her favour as a result of the disparity in their income and earning capacity.
138.In my view this disparity is a relevant one and it clearly justifies an adjustment, but not to the extent of 10%. It must be remembered that this is neither ‘an exercise in social engineering’ (CLAUSON and CLAUSON (supra at p. 81,912)) nor an attempt to ‘equalise the financial strengths of the parties’ (MALLET v MALLETT (1984) FLC 91-507, at p. 79,127). I consider that a 7.5% adjustment is appropriate.”
Submissions on Appeal
As already indicated this appeal turns entirely upon the appropriateness of the course adopted by the trial Judge. Mr Randall submitted that there had been an inconsistency in approach by the trial Judge. The husband had urged the trial Judge to give him credit for the earnings of the business post-separation by way of contribution. In rejecting that submission the trial Judge had held:
“…The business was a joint exercise between the parties and the only difference post-separation is that the wife did not physically work in the same. The husband employed [someone] to do the work that the wife had previously done, and this of course became an expense of the business before any profit was struck. The husband then received a wage that he determined was appropriate leaving a net profit at the end of the day. It is entirely proper that that profit should be shared equally between the parties.”
Counsel for the husband argued before us that if it could be seen that the profit was generated not by the husband’s efforts but by the business itself then the wife, having received her share of the business by way of capital adjustment ought not be seen to be entitled to receive a further adjustment because the retention by the husband of the business left him in a stronger position to generate income:
“Notionally a line should have been drawn across the page at the date of the judgment. From there on it was up to each party what he or she did with the appropriate share of net property awarded to him/her.
If the wife chooses to invest in residential property…with its greater security and perhaps upside for capital growth but smaller return it is unfair that the husband should in effect subsidise that decision. If the husband earns at a higher rate from his assets tied up in the business it is because those assets are at greater risk. This [is] a fundamental of the correlation between risk and return and the assessment of the risk is represented by the capitalisation rate used for the assets in this case the business. Valuation of the assets is a function of that capitalisation rate…”
We were then referred to the decisions of Borriello (1989) FLC 92-049; (1989) 13 Fam LR 415, Georgeson (1995) FLC 92-618, and Lenehan (1987) FLC 91-814; (1987) 11 Fam LR 615. We do not find those cases helpful in dealing with the problem raised by this case. They are all authorities that deal with questions as to the method of valuation of an asset where there is conflicting evidence about that issue. None of them deal with the problem of whether the Court can distribute an asset that could have been valued by reference to its future maintainable earnings and then make a further adjustment by reason of the income that asset provides.
In Mc Farlane v Mc Farlane (unreported Appeal No NA24 of 2004 delivered 25 October 2004) the Full Court disallowed an adjustment made for s 75(2) factors that included the difference in the parties’ earning capacities brought about by the wife’s retention of a business that was producing for her wages of $44,000 plus profits of another $38,000
Kay J, with whom Bryant CJ and Holden JJ agreed said:
“The profit making capacity of the business was already factored into the valuation, and I perceive there is an element of double dipping, paying attention to the income it earnt. If the wife sold the business, she lost her greater earning capacity. Accordingly, whilst its value was appropriately included in the pool of divisible assets, the fact that she will be required to buy out the husband's half share immediately compensates him for that difference, while increasing her outgoings by borrowings necessary to finance the purchase. Once that factor is recognised, there is really very little difference between the parties' positions.”
The figures in Mc Farlane were significantly different to those in this case. The total pool of assets was $470,000. The business had been valued at $128,650 by capitalising its future maintainable earnings. The contributions to the pool were considered to be equal. The wife’s retention of the business required her to effectively pay the husband a sum equal to half its value. In this case there was no finding that the value of the business directly reflected its earning capacity. The value reached was by the husband matching what some other purchaser was willing to pay for it rather than by reference to its earnings.
The point is not without difficulty. The key finding of the trial Judge was that the husband and the wife each had the same capacity to draw a wage of equivalent value through their personal effort, however, the husband retained a business which was generating not insubstantial profits of around $100,000 per annum. There was no valuation on the basis other than that a purchaser had been obtained for it and its premises in the sum of $160,000. There was no application of normal valuation principles concerning a capitalisation rate being applied to its maintainable profits.
Section 79(4)(e) directs the Court to take into account the matters referred to in sub-s 75(2) in so far as they are relevant. There are no restrictions on the manner in which the Court may have regard to such matters other than the restriction in s 79(2) that the Court shall not make an order unless it is satisfied in all the circumstances that it is just and equitable to do so.
In Waters v Jurek (1995) FLC 92-635; (1995) 20 Fam LR 190 the parties separated after a marriage of 22 years. Both parties were specialist psychiatrists and had made significant financial contributions to the parties’ assets. There was a significant disparity between their respective incomes and at the time of the trial the husband’s income was approximately $171,000 per annum and the wife’s $74,000. The trial judge made a finding that the contributions by the parties during the marriage had been equal, then ordered that the former matrimonial home be sold and the proceeds be divided equally between the parties. The trial judge also made an order that the husband pay to the wife the sum of $50,000 having regard to the greater income earning capacity of the husband.
The Full Court (Fogarty, Baker and Hase JJ) rejected the husband’s appeal against the orders made at trial. Fogarty J said:
“The connection between the s. 75(2) factors and a just and equitable property order is more difficult since the criteria are expressed very broadly and are fundamentally prospective in their operation. The provision does not invite a process of social engineering (Clauson and Clauson (1995) FLC ¶ 92-595 at 81,912 ). In Mallet, supra, at FLC p 79,127; CLR 638 Wilson J said that:¾
‘The objective of the section is not to equalize the financial strengths of the parties. It is to empower the court, following a dissolution of a marriage, to effect a redistribution of the property of the parties if it be just and equitable to do so ...’
The Court can only apply one or more of the paragraphs of that provision where it is satisfied that that step is relevant to arriving at a just and equitable result. Once that primary issue is determined the weight which a particular judge gives to one or more of the factors so identified has long been recognized as subjective and capable of review on appeal only when the Appeal Court is satisfied that the conclusion falls outside a reasonable range or, as Brennan J said in Norbis v Norbis (1986) FLC ¶ 91-712 at p 75,178; (1986) 161 CLR 513 at 540 outside the ‘generous ambit within which reasonable disagreement is possible’ .
…
In the present case the adjustment under s. 75(2) was made in reliance upon the disparity in the parties' incomes and income earning capacities. Both were practising psychiatrists. The husband's taxable income was approximately $171,000 and the wife's approximately $74,000 but Ellis J considered that she had a capacity to earn a greater sum in the future. The question agitated in this appeal is, given those circumstances ¾ was it reasonably open to the trial Judge to conclude that that was a factor relevant to a just and equitable property distribution between the parties?
Disparity in income and income earning capacities is a common basis for making an adjustment under s. 79, quite independently of its maintenance implications. The rationale for that usually lies in the circumstance that the difference in income earning capacities is significant and/or has arisen either directly or indirectly as a consequence of the marriage and the roles which the parties played during the marriage.
…. ultimately the question is whether it was reasonably open to the trial Judge to treat this aspect as relevant to the adjustment of the parties' present property.”
Baker J delivered a separate judgment saying:
“The question for me however, is, does the Court have a corresponding right to make an adjustment pursuant to the provisions of s 75(2)(b) if there is a disparity in the income which each of the parties is earning, or are respectively capable of earning?
In my view, consistent with the decision of the Full Court in Collins and Collins [1990) FLC 92-149 ] the answer must clearly be yes. Shortly stated, if a trial Judge comes to a conclusion that where there is an imbalance in the income and or respective earning capacity of each of the parties, adjustment can be made in favour of one of the parties. This must be so if for no other reason than that any order which the Court makes under the provisions of s 79 must, in all the circumstances, be just and equitable.”
If we were to simply apply that analysis to this case then we would dismiss the appeal. There is no general principle within the Act that supports the proposition being put by the husband, namely that if he buys the wife out of the business the judge is prohibited from taking into account the relative income positions of the parties brought about because of the husband’s retention of the business. Moreover, the husband's earning capacity is grounded not just on the capital investment in the business but upon his qualifications and experience.
While the trial Judge focused upon the income differential of the parties in determining an appropriate adjustment, his Honour seemingly overlooked the fact that for the husband to maintain the income differential represented by the business’s profits he has to keep invested $160,000 from his half share of the assets invested in the business whilst the wife has available to her an equivalent sum to invest as she sees fit. It can be assumed that those monies will securely return her a sum which will diminish the gap between the parties’ income and earning capacity either by way of income or capital growth. To the extent that the trial Judge has overlooked that factor in this case we feel it appropriate that we interfere in the outcome.
Re-exercise of discretion and consequential matters
In view of the narrowness of the appeal as argued and the absence of transcript from the appeal book, we are rather constrained in the re-exercise of discretion. However, both parties have asked us to re-exercise as best we can in the circumstances. We will accede to that request notwithstanding that in all the circumstances re-exercise of discretion is likely to result in a fairly small adjustment.
We conclude that whilst recognising the very great difference in the parties’ income position in the immediate future brought about by the manner in which the assets have been distributed, the wife does have the benefit of being able to invest part of her capital and help diminish that gap. In the circumstances where each of the parties is otherwise entitled to the retention of assets to the value of approximately $550,000 a further adjustment in favour of the wife of $50,000 would be appropriate to maintain the essential correctness of the trial judgment yet give recognition to the matter we have identified.
Accordingly we would propose that the appeal be allowed and that the sum ordered by Order 1 of the orders of Justice Strickland of 30 July 2004 be reduced by the sum of $32,079. It would be appropriate that there be cost certificates for each of the parties.
Orders
1. The appeal be allowed.
2. Order 1 of the orders made by the Honourable Justice Strickland on 30 July 2004 be varied by substituting the sum of $324,048 for the sum of $356,127 therein appearing.
3. The Court grants to the appellant a costs certificate pursuant to the provisions of s.9 of the Federal Proceedings (Costs) Act 1981 being a certificate that, in the opinion of the Court, it would be appropriate for the Attorney-General to authorise a payment under that Act to the appellant in respect of the costs incurred by the appellant in relation to the appeal.
4. The Court grants to the respondent a costs certificate pursuant to the provisions of s.6 of the Federal Proceedings (Costs) Act 1981 being a certificate that, in the opinion of the Court, it would be appropriate for the Attorney-General to authorise a payment under that Act to the respondent in respect of the costs incurred by the respondent in relation to the appeal.
I certify that the 28 preceding
paragraphs
are a true copy of the reasons
for judgment delivered by this
Honourable Full Court.
Elizabeth Hore
Associate
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