Dougal and Dougal (No. 2)

[2008] FamCA 1116

FAMILY COURT OF AUSTRALIA

DOUGAL & DOUGAL (NO. 2) [2008] FamCA 1116

FAMILY LAW – ORDERS - ENFORCEMENT of property orders – release of capital gains tax earmarked funds pending assessments over a period of more than a year – Question of diligence of the parties in sorting out the issue

Family Law Act 1975 (Cth)

APPLICANT: MR DOUGAL

RESPONDENT: MS DOUGAL

FILE NUMBER: MLF 2460 of 2005

DATE DELIVERED: 17 DECEMBER 2008

PLACE DELIVERED: Melbourne

PLACE HEARD: Melbourne

JUDGMENT OF: THE HONOURABLE JUSTICE CRONIN

HEARING DATE: 15 DECEMBER 2008

REPRESENTATION

COUNSEL FOR THE APPLICANT: MR EDMUNDS

SOLICITOR FOR THE APPLICANT: PETER FALCONER & ASSOCIATES

COUNSEL FOR THE RESPONDENT: MR WILSON

SOLICITOR FOR THE RESPONDENT: LOU CASTELLANO

Orders

1. That of the funds held by Bowman and Knox being the funds referred to in paragraph 5(a) of the orders made on 17 January 2008, the amounts of $134,025 and $85,343 be placed in an interest bearing account on behalf of the parties for the 2008 and 2009 financial year capital gains tax liabilities of the husband as a consequence of the disposal of his unit holding in the M Unit Trust.

2. That save for those said sums, the balance of the said monies be distributed to the parties in accordance with paragraph 5 and 6 of the orders of 17 January 2008.

3. That each party instruct Bowman and Knox to pay to the Australian Taxation Office from the funds referred to in paragraph 1 of these orders, the relevant Australian Taxation Office assessments in the names of the husband for the financial years 2008 and 2009 in relation to capital gains tax due by him arising out of the disposal of his unit holdings in the M Unit Trust.

4. That in the event that there are funds in excess of the amount required for payment to the Australian Taxation Office including any accrued interest, they shall be distributed between the parties according to the provisions of paragraph 6 of the orders made on 17 January 2008.

5. That the husband notify the solicitor for the wife at any time after the lodging of the taxation returns for the financial years 2008 and 2009 should he file any amended taxation return for those years or do any act or thing that may give rise to an amended assessment such as would reduce his liability for the capital gains tax for those years referred to in paragraph (1) of these orders.

6. That upon the written request of the wife, the husband sign any necessary authority to authorise the wife to obtain from the Australian Taxation Office copies of his taxation returns and assessments arising out of those returns in respect of the financial years ended 30 June 2008 and 30 June 2009.

7. That in the event that the husband ultimately obtains an assessment which is less than the requirement to pay the sums set out in paragraph (1) of these orders, any excess sum retained or refunded shall be distributed between the parties according to the provisions of paragraph 6 of the orders made on 17 January 2008.

8. That should any party seek any order for costs arising out of these proceedings, such application be filed with my Associate electronically and served upon the other party (with a certification that such service has been effected) by no later than 4.00pm on 9 January 2008.

9. That in the event that any party seeks costs as so provided, any response to that application shall be filed and served in the same way as so provided by no later than 4.00pm on 16 January 2009.

IT IS CERTIFIED:

1. That pursuant to Order 19.50 of the Family Law Rules 2004 it was reasonable to engage counsel to attend.

2. That save as set out above, the application of the husband filed 18 November 2008 and the response of the wife thereto filed on 11 December 2008 be dismissed.

IT IS NOTED that publication of this judgment under the pseudonym Dougal & Dougal is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth)

FAMILY COURT OF AUSTRALIA AT MELBOURNE

FILE NUMBER: MLF 2460  of 2005

MR DOUGAL

Applicant

And

MS DOUGAL

Respondent

REASONS FOR JUDGMENT

1. On 17 January 2008, I delivered reasons for judgment and made orders in a property dispute between Mr and Mrs Dougal.

2. These proceedings now arise out of those orders.  It is common ground that a large sum of cash held in trust arising from the sale of properties ordered in January 2008 is yet to be divided pursuant to the orders that I made.

3. There are three interconnected issues for determination. 

4. The first issue relates to whether funds held in trust should be released to the husband notwithstanding they are earmarked for the payment of capital gains tax pending an assessment of the formal liability to the Australian Taxation Office on the basis that when those assessments do issue, the husband as the taxpayer, will be solely responsible for them.

5. The second issue is just what is the net capital amount for division between the parties regardless of the capital gains tax liability. 

6. The third issue relates to whether the husband has complied with the orders that I made in January 2008 anyway.

7. For the purposes of these interim proceedings, the relevant orders that I made on 17 January 2008 may be summarised as follows.  The orders were:

   (a)the husband was to charge in favour of the wife, his interest in a company in which he has a minor shareholding, a sum of $100,000 plus interest and he was then to provide to each of the other directors, a copy of the orders of the court and request of them that they note the charge and confirm they would comply with the orders generally;

   (b)injunctions restraining the husband from accessing his entitlement to the company’s assets without first paying out the wife;

   (c)a division of a determined pool of assets as to 60 per cent to the wife and 40 per cent to the husband; and

   (d)that the husband sell various assets to convert them into cash.

8. On 10 November 2008 by arrangement between the parties, the matter was listed before me and I made orders that if any party desired to seek formal orders, they had to file an appropriate application supported by affidavit material.  Before making those orders, I heard argument from counsel on behalf of both parties about an interim position and ordered that the parties each have $100,000 by way of a partial distribution of the funds held in trust.  I am now told that those two payments have been made.

9. The matter was returnable on 21 November 2008 but the parties agreed to alter that date and the interim hearing was fixed for 15 December 2008.

10. On 18 November 2008, the husband filed an application in a case seeking orders in summary terms as follows:

    (a)that to implement the distribution of funds between the parties, a sum of $134,025 for a 2008 capital gains tax liability and $85,343 for a 2009 capital gains tax liability be deducted from the funds held in trust;

    (b)that after the setting aside of the capital gains tax funds, $195,378 be paid to the wife and $119,252 be paid to the husband and any accrued interest be distributed to the wife as to 60 per cent and the husband 40 per cent; and

    (c)the wife pay the husband’s costs.

11. The husband relied upon an affidavit filed on 31 October 2008 (preceding the first hearing to which I have mentioned), an affidavit by Ms K filed 19 November 2008 (Ms K being an accountant) and a further affidavit sworn by himself filed on 12 December 2008.  I shall return to those in some detail.

12. On 11 December 2008, the wife filed a response to the husband’s application.  She sought orders in summary form as follows:

    (a)that the money held in trust be distributed save for $134,025 for the 2008 capital gains tax liability and $85,343 for the 2009 capital gains tax liability;

    (b)that the capital gains tax funds be held in trust in an interest bearing account and paid by the solicitors holding the trust funds upon production of assessments issued by the Australian Taxation Office;

    (c)that no money be paid to the husband until he had complied with the January orders in full;

    (d)that if there was an excess of funds after the capital gains tax liability was determined, any balance in the trust be distributed according to the percentages determined under the January orders;

    (e)that the husband notify the wife of anything in the future that might give rise to an amended taxation assessment which would reduce the capital gains tax liabilities referred to;

    (f)that the husband provide the wife with a written authority to obtain details of his taxation assessment and returns; and

    (g)that the husband pay the wife’s costs.

13. The wife relied upon an affidavit filed on 11 December 2008.

14. Each party was represented by counsel and each put submissions in respect of the applications.

15. It is important to note that notwithstanding the capital gains tax liability was included as a joint liability of the parties for the purposes of the determination of the net pool of assets for division, the legal liability to pay the tax falls upon the husband alone.

16. A second important issue is that the most significant amount of cash coming into the trust account for division between the parties was from the sale of a warehouse which was the sole asset of the M Unit Trust.  The husband was at all times, not a major unit holder in the sense of having control of the trust.

17. The husband’s evidence for these proceedings was that the warehouse had been sold and that the sum of $1,810,947.52 was placed in trust in a solicitor’s hands for distribution to the unit holders.

18. The husband set out copies of numerous letters written between solicitors relating to the sale of the warehouse, the calculations of the capital gains tax liability and the winding up of the M Unit Trust.  The correspondence began in June 2008 and continued through until September.  It was and still is, clear, there is no dispute any longer about what the capital gains tax liability, is based upon the information provided to the respective accountants.

19. The husband complained that notwithstanding the numerous letters, the parties could not reach agreement about the distribution of funds.

20. Accordingly, the husband pursued orders for the disposal of the funds. 

21. The husband relied upon an affidavit by Ms K who described herself as a chartered accountant.  Ms K swore her affidavit on 17 November 2008 and attached to it letters dated 29 July 2008 and 18 September 2008.  There is some significance in this evidence.

22. On 29 July 2008, Ms K said inter alia:

    Given that the trust is to be wound up in the 2009 year there will be a further taxable amount on winding up the trust.  This further amount relates to untaxed distributions and is represented by accumulated depreciation $1,436,602 and other capital profits reserve of $374,311 giving a total gain on winding up of $1,810,913 of which your 1/3^rd share would be $603,638 to which you can apply the general 50% CGT discount leaving approximately $301,818 of assessable capital gain.

23. The 29 July 2008 letter was addressed to the husband.

24. Ms K said that “based on the numbers” presented to her in an email, the assessed capital gains tax was $135,025 for 2008 and $112,818 for 2009.

25. On 18 September 2008, a further letter was sent by Ms K to the husband.  This letter was largely the same as the letter of 29 July except that there was a revision of the 2009 estimate because Ms K had been advised that “the other capital profits reserve of $374,311 is non-taxable and not to be included in the calculation”.  That particular calculation reduced the 2009 estimate from $112,818 referred to in the July letter to $85,345.

26. Counsel for the husband produced an aide memoir to show that working on a one-third net sale proceeds of the warehouse of $734,000 and deducting the two capital gains liabilities referred to in Ms K’s September letter, and taking off the two sums of $100,000 that I ordered to be released in November 2008, one could calculate precisely the amounts to be made available to each of the husband and the wife.

27. It would be seen from the aide memoir that there is ample money to cover the capital gains tax estimates and in the husband’s view, there is no reason why the money ought not be distributed.  To a very large degree, the wife agrees in relation to the question of monies due to the parties.  Her disagreement lies in the fact that she does not want the husband to have access to the capital gains tax earmarked money pending formal assessments.  I was told by Mr Edmunds of counsel for the husband that the 2008 taxation return can be lodged in March 2009 but obviously there is no need yet to file a 2009 return as we are only half way through the financial year.

28. On the issues raised by the husband, the wife said she agreed with Ms K’s calculations as amended but her concern related to the distribution of those funds for the husband to use on the basis that he would ultimately be responsible for the payment of the tax when assessed.  She pointed to the fact that in November 2007, single expert Mr W anticipating for the trial that there would be a tax liability referred to the husband being able to achieve a “retirement exemption” having regard to his age.  The inference to be drawn was that if the husband opted for that retirement exemption, the capital gains tax liability may be lower than that assessed by Ms K.  The wife’s position was that if the orders enabled the husband now to have access to those funds and the assessment of tax was other than as assessed by Ms K, she would be left without redress notwithstanding she had paid the bulk of the capital gains tax liability.

29. Mr Wilson on behalf of the wife went further and said:

    (a)the calculations were based on an assumption of the winding up of the M Unit Trust which gave rise to the tax.  If the trust was not so wound up, it would not arise.  He said there was no necessity for the trust to be so wound up.  He noted that in the husband’s annexure GD5 to this first affidavit, he exhibited correspondence in which the solicitors holding the trust funds noted that one of the other unit holders had been told that if the trust was “vested” and thus wound up, the tax consequences would be much more severe.  The husband was urged to get some tax advice;

    (b)The two letters annexed to the affidavit of Ms K indicated that errors could be made giving rise to different potential tax assessments.

30. Mr Wilson argued that there was no material before me setting out why the husband needed the tax money now.  With that I agree.  Notwithstanding that the taxation assessment will be in the name of the husband alone, it is the potential for the husband to end up with a different assessment that was concerning the wife.  Mr Wilson said that if the money was earmarked in accordance with the orders as I had set out in January, the problem could be put beyond doubt not only with the payment of the relevant sum but also the making of an order requiring the husband to notify the wife of any changes. 

31. Finally, Mr Wilson noted that the orders of January made clear that the tax was to be paid upon the issue of the assessment and the orders could not be construed to mean that they were simply to be paid by the husband at any particular time.  Mr Edmunds for the husband pointed to the fact that it had always been the husband’s case that the unit trust would be wound up.  That was not an issue challenged by the wife at trial. 

32. The jurisdiction to make any orders in this case is dependent upon the power in the Family Law Act 1975 (Cth) (“the Act”) to enforce its existing orders. I do not have the power to alter orders made under s 79 except in specific circumstances unless of course there are orders of a machinery nature to give effect to the final orders that were clearly intended. In this case, neither party disputed the jurisdiction to make orders.

33. Notwithstanding the matters were dealt with “on the papers”, I am obliged to make findings based on the evidence, untested as it is.

34. Whilst there is a modest difference between the capital sum suggested in the husband’s aide memoir and that mentioned in correspondence as to what the net proceeds of the sale of the warehouse will be, that alone would not preclude me from ordering a dispersal of the funds because a formulaic approach could be adopted.  In reality, the funds are what they are.  Furthermore, both parties agree that the capital gains tax estimates are correct based upon the assumptions underlying the calculations.  However, I am not able to say on the evidence that the husband will in fact be a party to the winding up of the trust.  There are matters there beyond his control notwithstanding a clear understanding at the trial that that was what was to occur.  The letter from the solicitors holding the trust funds seems to indicate that there was certainly some uncertainty or ambivalence about it.  If the trust was not wound up, a different capital gains tax position might arise.  There is nothing wrong with that either except that if I was to adopt the husband’s position, the wife may not be made aware of any recalculation and she could therefore be at a risk of unfairly contributing to the tax that would not necessarily be paid.  The same logic applies in respect of the aged retirement exemption referred to by Mr W.  Whilst the husband says it is not an issue as he does not intend to retire, for me to ignore that possibility must put the wife at similar risk again to that which I have just mentioned.  Finally, in respect of the preciseness of the calculations, there is evidence of agreement as to the relevant sums but even there, the matter of the inconsistency in Ms K’s letters of July and September indicates that in the future, the results may change again. 

35. All of these matters affect not so much the question of what the capital gains tax is but rather whether there ought to be a disposal of the funds leaving the husband to pay the ultimate capital gains tax rather than have the sum earmarked with injunctions to protect the wife. 

36. On balance, it seems proper not to release the earmarked funds to the husband but rather to make orders in terms of paragraphs 5 and 6 of the application of the wife.

37. The next issue relates to an argument by the wife that the husband has not complied with paragraphs 1, 2 and 3 of the orders that I made on 17 January 2008.  I have already referred to the general details of those orders.

38. The solicitors for the wife wrote to the solicitors for the husband on 9 December 2008 seeking clarification as to the compliance with the orders and the wife then asserted that the husband had failed to sign and return the document of charge.  That assumption arose from an inspection of the wife’s former solicitor’s file. However, the husband by his affidavit filed 12 December 2008 gave evidence that he had executed a charge prepared by his counsel and he annexed a copy of it to his affidavit.  He also produced correspondence showing that he had forwarded letters to each of the directors of the company and more importantly, V Pty Ltd, the company, had written back on 15 February 2008 to his solicitor saying:

    We would be grateful if you would kindly advise the wife’s solicitors the court orders will be complied with generally.

39. I am not entirely clear why the sentence to which I have referred has a qualification about it but I accept that that was as much as the orders obliged the husband to do.  Accordingly, I find that the husband has complied with paragraphs 1, 2 and 3 of the orders of 17 January 2008 and there is therefore no basis to withhold funds that he might otherwise be entitled to save for the estimated and earmarked tax monies.

40. In the circumstances, it seems that the funds should be disbursed using calculations similar to that set out in the aide memoir of the husband’s counsel provided to me on 15 December 2008 but substituting therefore the precise details of the net sale proceeds of the M Unit Trust property.  Thereafter, the calculations otherwise appear to be agreed.  It would need to be understood however that the funds for the estimated capital gains tax liabilities for the years 2008 and 2009 as agreed at this stage between the parties should be held by the solicitors currently holding the trust funds pending production by the husband of the assessments.

1. To protect the wife and ensure that the outcome to which the orders of January 2008 refer is carried into effect, orders should be made requiring the husband to not only produce the assessments but also provide any indication hereafter that might alter in some way his personal liability to the Australian Tax Office in respect of such assessments.

2. There was not sufficient time for either party to have the matter determined on 15 December 2008 as a result of which I reserved the judgment.  I propose to order that in the event that either party seeks to apply for costs in these proceedings, they do so by a particular date.  Having said that, each party should be conscious of the fact that neither has been entirely successful.  Whilst the husband did not get access to the funds allocated or earmarked for the capital gains tax as he requested, the wife had in my view apparently not been diligent in pursuing the clarification of the issue for much of 2008.  Whilst I have not closed my mind to the issue of any costs application, the parties might be a little more circumspect in the circumstances. 

I certify that the preceding Forty Two (42) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Cronin

Associate: 

Date:  22 December 2008