Edgar & Edgar
[2021] FamCA 433
FAMILY COURT OF AUSTRALIA
Edgar & Edgar [2021] FamCA 433
File number(s): MLC 12058 of 2016 Judgment of: BAUMANN J Date of judgment: 8 July 2021 Catchwords: FAMILY LAW – PROPERTY – Should the husband’s evidence be accepted – significant disputes over what constitutes the pool of interests – dispute as to valuation of family home – whether the Court orders a sale or is persuaded to accept one of the expert valuer’s opinions – “add backs” relating to funds paid to adult children of parties post separation and whether without the consent of the wife – whether wife’s inheritance should constitute a separate pool – dispute as to whether funds in a Trust should be excluded from the pool or not – likely prospective capital gains tax liabilities on sale of major asset – how certain is the estimates of prospective tax – should the prospective capital gains tax be included in the pool as a liability or taken into considered under s 79(4)(2) – how should other tax liabilities arising from Division 7A be treated – should the commercial involvement of the wife’s father in a range of businesses undertaken by the parties be treated as a “contribution” by the wife – weighing up all contributions in two pools amounting to $77.5 million to arrive at an adjustment as to 53% to the wife and 47% to the husband – consideration of matters pursuant to s 79(4)(e), particularly the husband’s superior earning capacity; the wife’s separate inheritance and the treatment of the prospective capital gains tax liabilities – adjustment made in husband’s favour of 1% for s 75(2) factors – whether the family home should be sold – whether the wife should retain a 50% share of the parties’ interest in the business and adjoining properties – should the self-managed superannuation fund splitting order favour the husband or the wife to facilitate one of them retaining a particular piece of real property valued at $6.9 million – how to resolve a dispute about the future management of a Trust – how and by what means should the parties’ art collection valued at $8,433,000 and jewellery valued at $1,247,700 be distributed – how and by what means should the prospective Division 7A tax liabilities estimated at $4,354,445 be shared between the parties – further submissions to be received before final orders that achieve justice and equity and finality can be pronounced Legislation: Family Law Act 1975 (Cth), ss, 75, 79, s 81
Income Tax Assessment Act 1936 (Cth), Div 7A
Cases cited: Best & Best (1993) FLC 92-418)
Campbell & Kuskey (1998) FLC 92-795
Clauson & Clauson (1995) FLC 92-595
Elliston & Dennell (2019) FLC 93-903
G & G [2001] FamCA 1453
Gosper & Gosper (1987) FLC 91-818
Hickey & Hickey (2003) FLC 93-143
Holland & Holland [2017] FamCAFC 166
Kessey & Kessey (1994) FLC 92-495
Kowaliw & Kowaliw (1981) FLC 91-092
Monfort & Bade [2018] FamCAFC 163
Rodgers & Rodgers (2016) FLC 93-703
Rodgers & Rodgers (No. 2) (2016) FLC 93-712
Rosati & Rosati (1998) FLC 92-804
Stanford & Stanford [2012] COMPANY 6 52
Steinbrenner & Steinbrenner (2008) FamCAFC 193
Taffner & Taffmer (2021) FLC 94-022
Townsend & Townsend (1994) 18 Fam LR 505
Trevi & Trevi (2018) FLC 93-858
Varnham & Moses (2021) FLC 94-007
W & W (1980) FLC 90-872
Number of paragraphs: 216 Date of last submission/s: 4 September 2019 Dates of hearing: 1, 2 & 3 April 2019; 29, 30 & 31 July 2019 and 1 & 2 August 2019 Place: Melbourne Counsel for the Applicant: Mr G Richardson SC and Mr D Sweeney Counsel for the Respondent: Mr L Glick QC and Mr T Puckey
Mr T Murphy QC (1 April 2019; 1 August 2019)ORDERS
MLC 12058 of 2016 BETWEEN: MS EDGAR
Applicant
AND: MR EDGAR
Respondent
ORDER MADE BY:
BAUMANN J
DATE OF ORDER:
8 JULY 2021
THE COURT ORDERS:
1.That these proceedings be adjourned for Case Management Hearing at 1.00pm on 23 July 2021 in the Family Court of Australia at Brisbane.
2.That both parties and their legal representatives have leave to appear by telephone on 23 July 2021 by using the Microsoft Teams telephone conferencing system as follows:
(a)They shall each telephone ... by 12.55pm on 23 July 2021;
(b)They shall each then enter the pass code ...; and
(c)Hold the line until the Court is ready to connect and proceed with the matter.
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 17.02A(b) of the Family Law Rules 2004 (Cth)), or to record a variation to the order pursuant to 17.02 Family Law Rules 2004 (Cth).
IT IS NOTED that publication of this judgment by this Court under the pseudonym Edgar & Edgar has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
BAUMANN J:
INTRODUCTION
An assumption is often made that in very long relationships, parties are more able to resolve disputes and move on with their lives after a breakdown of that relationship, because they have better things to do than litigate.
As these Reasons demonstrate, that assumption did not apply to these property proceedings where, despite a 50 year relationship; highly competent firms of solicitors and Senior Counsel giving advice; an attempt at mediation and expending, I estimate, well over $3 million in legal and valuation costs, a trial spanning eight days of evidence and lengthy written submissions was required.
The reasons which follow attempt to ensure all issues in dispute have been canvassed, analysed and determined, however it is regrettably not possible to pronounce final orders at this time as further submissions are necessary for the reasons set out. To assist the parties, the following index of key discrete areas of discussion and determination by the Court is set out:
CREDIT ……………………………………………………………………paragraphs 4 – 12
COMPETING ORDERS ………………………………………….……..paragraphs 13 – 29
PRINCIPLES …………………………………………………………….paragraphs 30 - 34
BRIEF HISTORICAL CONTEXT ………………………………….….paragraphs 35 - 54
HOW THE CURRENT INTERESTS OF THE PARTIES
CREATE THE POOL OF ASSETS AVAILABLE
FOR ALTERATION …………………………………………………..…paragraphs 55 - 58
VALUATION OF SUBURB D ……………………………………………paragraphs 59 - 73
THE WIFE’S INHERITANCE FROM HER MOTHER’S ESTATE…paragraphs 74 - 86
SHOULD FUNDS RECEIVED BY MR M ($251,341)
AND MR Z ($581,809)
BE ADDED BACK? ……………………………………………...………paragraphs 87 - 98
HOW TO TREAT THE FUNDS
IN THE EDGAR INVESTMENT TRUST NO 1 …………………….paragraphs 99 - 106
TAXATION ISSUES …………………………………………….……paragraphs 107 - 116
PRINCIPLES TO BE APPLIED …………………………………….paragraphs 117 - 118
CONCLUSION ON HOW TO TREAT
THE PROSPECTIVE TAX LIABILITIES ……………………….….paragraphs 119 - 121
POOLS ………………………………………………………………....paragraphs 122 - 123
CONTRIBUTIONS …………………………………………………....paragraphs 124 - 129
WIFE’S INHERITANCE OR BENEFITS FROM HER FATHER paragraphs 130 - 141
WIFE’S INHERITANCE FROM HER MOTHER ……………………..….paragraph 142
MR B’S INVOLVEMENT FROM
1979 TO 1991 IN THE BUSINESS BUSINESSES …………….…….paragraphs 143 - 147
DISCUSSION ………………………………………………………….paragraphs 148 - 155
CONCLUSION ON CONTRIBUTIONS …………………………….paragraphs 156 - 159
CONSIDERATION OF S 79(4)(E)
THROUGH THE FACTORS IN S 75(2) ………………………….….paragraphs 160 - 171
ORDERS THAT ACHIEVE JUSTICE AND EQUITY ……………..paragraphs 172 - 208
OTHER TAXATION ISSUES ………………………………………...paragraphs 209 - 212
FINALLY………………………………………………………………paragraphs 213 - 216
CREDIT
Senior Counsel for the wife contends that an adverse credit finding should be made against the husband who, it is submitted, was sometimes untruthful, misleading by omission and one-sided and manipulative. Counsel pointed to examples, including the evidence surrounding the personal guarantees and securities offered by the wife’s late father, Mr B.
As I note later in these Reasons, I do find that the husband had minimised the benefits derived from the financial assistance and support made by Mr B, but I find his evidence in that respect, more as a reflection of the prism through which he sees his own conduct and contributions to create the pool of assets now available.
Furthermore, I find he was not always over the “detail” and in the entrepreneurial manner in which he built the businesses, he relied heavily upon advisors on matters such as taxation implications and structures for example.
As the reasons which follow demonstrate, there are events where a conflict of evidence or recollections must be determined as between the husband and wife, and in respect of those events, I give reasons why I prefer the evidence of one party over the other.
The husband’s submissions in response are that issues of credit are unlikely to assist, as it is essentially an assessment of how best to practically effect a just and equitable adjustment of property interests, after a marriage spanning almost 50 years.
I do not entirely accept this submission, as a number of discrete issues arise in this matter and some (for example, the Edgar Investment Trust) do require an analysis of the evidence of each party.
However, I do not find that the husband is an “unbelievable” witness as submitted. I accept that he was not, at the end of the relationship, honest and frank with the wife about his intentions to leave the relationship and buy the Suburb C unit. I accept this caused the wife some hurt and perhaps embarrassment. After a relationship of this length, the wife felt she deserved better.
However I do not make the general adverse credit finding about the husband urged upon me by the wife’s submission.
For completeness, although no specific submission was made by the husband that the wife’s evidence should be treated with caution, I make no general adverse credit finding about the wife either.
COMPETING ORDERS
Although the parties each complied with the Orders to file a case outline in which they were required to identify the final orders they sought, by the conclusion of submissions some variations to the orders, - some significant – others not so, emerged.
I will, when discussing the form of orders at the end of these Reasons, explain that neither form of order achieves the justice and equity requirements of the law, however my hope is that by dealing with a number of discrete issues in dispute, these parties with their bevy of lawyers, accountants and financial advisors, will be able to agree on the form of order which properly takes account of my findings.
However, the parties had a starting position and it helps to understand where they ultimately differed, by setting out those positions.
Wife’s starting position
The wife’s case outlined filed on 25 March 2019 (and it appeared to be the consistent position during the case to that time and since separation) in broad terms, sought a 60% share of the nett asset pool, inclusive of superannuation. She sought to retain:
(a)the Suburb D property; the Suburb E property; the F Town Unit, the G Street property held by the Edgar Superannuation Fund; and the Suburb H property;
(b)personally her motor vehicle 1; her jewellery collection; an equitable division of the artwork including some specific pieces; the contents of the Suburb D property and some specific items in F Town;
(c)the bank accounts;
(d)the interest in the Edgar Family Trust;
(e)her future inheritance from her late mother, Ms B; and
(f)“such further transfer of property or cash payment necessary to effect the said percentage division”.
However, by final submissions, the wife’s position had changed in a significant way. At the commencement of the trial, the wife sought leave to amend and seeks orders, which in effect, would see her retain a 25% interest in the major asset - Business 1 – being half of the 50% interest held by the parties. This was a “shock” to the husband, particularly noting, even in the wife’s first case outline, she laid out at paragraph 2(b) of the specific orders sought, and indicated that the husband would retain to her exclusion, the 50% interest in Business 1 and surrounding properties.
The change in position required a ruling as to the wife being able to so argue, and for oral reasons delivered at the time, she was permitted to do so.
Husband’s starting position
The husband’s case outline filed 27 March 2019 sought the orders detailed in the amended Response filed 1 October 2018, and in broad terms, sought a 50% (or equal) share of the nett asset pool inclusive of superannuation (see Appendix Two, with the additional orders sought as set out in his written submissions filed 21 August 2021).
He sought to retain:
(a)the Suburb D home, or in the alternative, that it be sold by private treaty;
(b)the interest in a range of entities collectively called “Edgar Group 1” which importantly includes the interest in Business 1, adjoining properties and the Suburb C unit;
(c)specific items of artwork, contents and jewellery (including jewellery the wife contends that the husband bought for her during the relationship; and
(d)a splitting order in his favour, in respect of the Edgar Superannuation Fund such that he would be in a position to retain the G Street property as an in specie “roll over” of his increased member benefit.
The form of order made it less clear as to what the husband’s position was, in respect of the F Town unit, the Suburb E property and the Suburb H property.
Final competing orders sought
The wife, consistent with her new case, sought the orders set out in Appendix One to these Reasons, which were marked as Exhibit 23. Although the form of order is similar to Exhibit 2, tendered on 1 April 2019, it incorporated a range of injunctions (Order 19) directed to impose restraints upon the husband executing various powers relating to Business 1 in particular, and other procedural amendments.
The husband maintained broadly his position, as set out in the amended Response, but sought further orders, prescribed in the written submissions of the husband, that:
(a)the parties be and are hereby restrained by themselves, their servants and/or agents from dealing with, transferring, encumbering or dissipating the asset of Edgar Investment Trust No 1 other than for the benefit of Mr X;
(b)taking a transfer of Suburb H from the wife rather than selling it, as the wife now proposes; and
(c)deal with income tax payable by the parties and their entities for the year ending 30 June 2019 and 30 June 2020 adopting a particular process.
I must say, I am left in the position of wondering whether there is a degree of “tit for tat” going on with these parties. They have been in a relationship for a long time and probably know which buttons to push, because it is obvious that:
(a)the wife, until the last moment, accepted (or let the husband believe) he would retain the interest in Business 1 subject to the wife receiving property and cash equating to 60% of the pool; and
(b)both want the Suburb D home, and if the husband does not retain it, he wants it sold; and
(c)even though the wife agreed to sell the Suburb H property, now that she has made her intention clear, the husband wishes to retain it; and
(d)neither party wants the other party to retain, as an in specie roll over of a benefit in the self-managed superannuation fund, the G Street property; and
(e)they are unable to sensibly resolve the distribution of valuables, forms of artworks, furniture and jewellery.
At this juncture of the Reasons, I feel compelled to express my regret to these parties for the delay in publishing these Reasons. While it is a matter with many complexities, that is not a satisfactory excuse for the delay.
However, the Court appreciates that since the final submissions filed 4 September 2019, Australia in general and Melbourne in particular, has been engulfed by the consequences of the COVID-19 pandemic. These parties hold significant property interests and the valuations relied upon by the parties are now over two years old. I have no evidence as to the operations of Business 1 or the performance of the parties’ other investments.
Such uncertainties arising whilst a judgment is reserved are not unique to this case. I can well understand when the parties have incurred such significant expense (even for these rather wealthy people), that a desire to reopen is less than inviting.
The Court, itself, contemplated doing so, but decided not to do so.
However, as the Reasons demonstrate when read holistically, whilst I have made findings on the number of complex issues caused by this litigation, I am not able to make final orders without further submissions from the parties as identified.
PRINCIPLES
Neither Senior Counsel felt it necessary in their submissions to identify the well illuminated statutory pathway that guides the exercise of my discretion under s 79 of the Family Law Act 1975 (Cth) (“the Act”), but suffice it to record the following principles from Hickey & Hickey[1]. In property settlement case, the Court must adopt a well-known four-step process, essentially:
(a)to identify the pool of assets and liabilities generally, and usually at the time of hearing;
(b)to assess the relative contributions of both the financial, non-financial, direct and indirect nature as specified by s 79(4);
(c)to consider the factors as are relevant contained in s 75(2) of the Act; and
(d)finally, consider the ultimate analysis to determine whether the order the Court proposes to make is just and equitable to both parties.
[1] (2003) FLC 93-143.
Both Counsel acknowledge this is a case where it is just and equitable within the meaning of s 79(2) of the Act to make an adjustment to the parties existing legal and equitable interests (Stanford & Stanford[2]). I agree.
[2] (2012) 247 CLR 108.
Of course, Counsel did alert me to a number of binding authorities relating to various issues, and as necessary, they are referred to in these Reasons.
I provide at least a general historical context for the findings which follow next.
Statements of fact hereafter should be construed as findings of fact.
BRIEF HISTORICAL CONTEXT
The husband was born in 1947 and the wife was born in 1949 and they are now both in their early 70’s. Cohabitation commenced with their marriage in 1969.
The couple were blessed with three sons:
(a)Mr X, born in 1973, who is now 48 years of age and lives in Country J;
(b)Mr Y, born in 1976, who is now 45 years of age and lives in the United States of America; and
(c)Mr Z, born in 1978, who is now 43 years of age and lives in Australia.
The husband is a medical professional and after some early years of practice, in 1979, the entity, Company 1(“COMPANY 1”) was incorporated by the parties as the vehicle to pursue large scale business acquisitions and management, beginning with Business 2. This was followed in 1982 with the acquisition with a business partner, Mr K, a medical professional, of Business 1. Business 1 had previously operated as a business but is now a health service. Although, as necessary to understand the history, I record some (not all) of the details of the various corporate entities, it is sufficient to note at this point that the ownership of the business is vested in the Business 1 Trust, of which Company 2 Pty Ltd is the Trustee, whilst the freehold is owned by Trust 1 of which Company 3 Pty Ltd is the Trustee. The husband and Mr K are the Directors of the two Trustee companies, with the units and Trustee shareholding held separately and equally between those two family entities. Business 1 has an agreed value of $33,500,000 reached by the parties with the benefit of separate forensic valuers and some likely compromises.
These core business interests are vested for the family benefit, in Company 4 Pty Ltd as Trustee for the Edgar Investment (“EIT”), and has been the primary foundation for the parties’ wealth creation, but was not the only source.
At paragraph 33 of the husband’s trial affidavit, he details further business acquisitions between 1983 and 1986, not seriously challenged by the wife, save but for the husband’s assertion at paragraph 33.5 that suggested:
All of the above purchases were funded by a loan from Bank 1, with Mr B and I each providing personal guarantees to secure our share of the funding.
(My underlining)
Under cross-examination, the husband conceded he had not provided a personal guarantee.
In November 1991, as a result of a commercial arrangement with Company 5 Ltd (“COMPANY 5 LTD”) (which the husband deposes to at paragraph 48 and 49 of his affidavit), Mr B left COMPANY 1 and his properties, that had been used as security since approximately 1979 to support holdings by COMPANY 1, were released from any contingent liability. From 1991, Mr B was no longer involved in any businesses or investments with the husband and the wife.
In August 1996, COMPANY 1 went to the market with a public listing of 32 million shares. At this time, COMPANY 1 had swelled to holding/owning 13 businesses. After repaying liabilities to COMPANY 5 LTD (the husband estimates a total of approximately $13.9 million) though a share transfer, he claims the family holding in the newly ASX listed entity, reduced from 26.2% to approximately 20%.
In 1999 a restructure of the family entities was undertaken, I find, on advice and broadly for tax reasons, and this is dealt with further below.
In 2001, Company 6 (a Company 15 company) made a successful takeover bid for the shares in COMPANY 1 with the offer allowing shareholders to elect to take either $1.15 per COMPANY 1 share, or to convert 4.2 COMPANY 1 shares for 1 Company 15 share. The husband says he elected to take approximately 7.6 million Company 15 shares in exchange for the holding in COMPANY 1. Between May 2001 and May 2003, the shares were sold and the nett proceeds were used by the parties through various entities, to acquire other assets. It is not necessary to trace all those acquisitions – many of which seem to have resulted in capital gains. Rather, I regard it as important to provide some further brief context to how some of the interests which now exist were created or acquired.
In 2006, the wife’s father Mr B passed away, however, before his death, during the years ended 30 June 2001 until 30 June 2008, the wife received distributions from the corporate interests of her father that were paid, pursuant to a Deed of Agreement entered into on 2 September 1999. The wife says the funds received in 2001 to 2008 amounted to $5,815,806.
The wife, in June 2000 established the Ms Edgar Trust to receive funds from the B Group and her future inheritance as a personal “nest egg” (see paragraph 108). The wife says that these benefits have been kept entirely separate “from our matrimonial finances, save for that the total sum of $1,755,113 of the funds contributed to the Edgar Superannuation Fund and used for the purchase of the G Street property”[3].
[3] See paragraph 109.
Later in these Reasons, I deal with other transactions involving the parties’ children.
The parties separated on 13 December 2016, and although I am not required to make findings about the circumstances surrounding separation (detailed from the wife’s perspective at paragraphs 9 to 16) it is clear, and the husband admits, he had formed the view that the marriage was over even before the parties spent an overseas holiday together from May 2016 to August 2016.
The clear intention of the husband to separate manifested in his decision in April 2016 to use approximately $2,000,000 of funds available to the parties, without the knowledge or consent of the wife, as a deposit to purchase for $8.5 million an apartment at L Street, Melbourne, through Trust 3 of which Company 16 is the Trustee. This unit now has an agreed value less than the purchase price. I am satisfied the husband used his solicitor to construct the transaction in a way whereby the wife would not know immediately of his decision to separate, and when she found out, as he would have known was likely, it further reduced the level of trust between the parties.
The wife’s mother Ms B died in 2017 and the wife’s vested inheritance to date, has been placed into the Edgar Family Trust of which Company 7 Pty Ltd is the Trustee. A dispute as to how to treat this post separation inheritance and how much the wife’s interest is, are controversies to be determined by the Court.
Also, post separation, funds under the parties control through an advisor in Country N, described in the material as the “[Investment] Portfolio” have moved into a trust called the Edgar Investment Trust No 1. How the transaction that took place should be interpreted and how the funds in the trust should be treated as between the husband and wife, are also matters in issue, dealt with discretely in these Reasons.
The wife commenced proceedings in this Court by Application filed on 9 December 2016, within a month of the husband informing the wife the marriage was over.
There is no necessity to record the case management pathway taken from that date to the first day of hearing before me on 1 April 2019, save to record that the final hearing lasted eight days over two separate tranches and the written submissions, after the completion of the evidence on 2 August 2019 (when Mr Richardson of Senior Counsel delivered oral submissions on behalf of the wife), were completed by 4 September 2019 when judgment became reserved.
In the above historical context, I have not delved into the many complex commercial transactions which the husband described in some detail in his affidavit, most of which were not seriously challenged. It would be reasonable to regard the husband as a medical businessperson – which entailed many “deals,” often associated with large borrowings and some business risks. The enterprises survived the 1987 stock market crash and subsequent challenges. The involvement for part of this journey of the wife’s father, Mr B, is analysed, save that this involvement ceased in 1991 – whilst the wife was involved and supportive from the beginning and through the various “ups and downs.” The wife relies upon the memorandum prepared by the firm Accounting firm 1 dated 28 April 1989[4] as an accurate record of the history to that date. The husband did not seriously challenge the accuracy of that memorandum. I accept its accuracy.
[4] Annexure 6 to her affidavit.
HOW THE CURRENT INTERESTS OF THE PARTIES CREATE THE POOL OF ASSETS AVAILABLE FOR ALTERATION
Although the agreed gross value of the 50% interest in Business 1 and the adjourning properties; and the current value of various real estate interests, shares and other items were agreed (mostly with the aid of independent experts or compromise), a range of issues remain for determination by the Court relating to the divisible pool, which I identify (in no particular order of priority) as follows:
(a)The value of the only personally owned real estate (held in joint names) being the former matrimonial home at O Street, Suburb D;
(b)How the inheritance the wife has (or will) receive from the Estate of her late mother Ms B, should be estimated and whether, as the wife contends, it should be in a separate pool;
(c)Whether funds paid to Mr X ($251,341) and Mr Z ($581,809) should be “added back,” or not;
(d)Whether the funds now vested in the Edgar Investment Trust No 1 should form part of the pool (as the wife contends) or excluded (as the husband contends);
(e)Whether any taxable capital gain would arise from a sale of the parties interests (held by “TRUST 2”) in Business 1 and if so, should it be taken into account and at what level of contingent liability; and
(f)How taxation and other liabilities said to arise from past corporate activities and perhaps including liabilities resulting from alleged operation of Div 7A of the Income Tax Assessment Act 1936 (Cth), are to be assessed and/or treated.
The parties, sensibly in my view, agreed to exclude from the balance sheet, all credit card liabilities and loans to children (not otherwise the subject of controversy) being unpaid present entitlements of the children.
As a consequence of the compromised agreement as to the value of the 50% interest in Business 1, there is no necessity to look further than the “without prejudice” joint statement of experts (Exhibit 1) and note that between the date of the conference (12 October 2018) and the first day of trial, the parties reached a compromised agreed value between the estimates at the time of the conference ($70,000,000 to $63,700,000). The adversarial experts were not required for cross-examination as a result of the agreement.
I now deal sequentially and discretely with the identified pool issues, drawing on the evidence and submissions. In so doing, I do not repeat all the evidence and all the submissions, and the fact that I do not do so, should not be construed as ignoring them or not engaging with the case asserted by either party. Rather, I deal with the competing positions and, as required by law, make findings supporting the conclusions the Court has reached.
VALUATION OF O STREET, SUBURB D
Although the valuers retained by the parties, Mr Q of Valuation Firm 1 (for the wife) and Mr S of Valuation Firm 2 (for the husband), conferred by telephone on 9 October 2018, both valuers still maintained their respective valuations were appropriate, when cross-examined on 3 April 2019, being:
(a)Mr Q at $17,400,000 (as set out in his valuation dated 22 February 2019 and annexed to his affidavit filed 22 March 2019); and
(b)Mr S at $19,065,000 (as set out in his valuation dated 11 September 2018 and annexed to his affidavit filed 4 October 2018).
Both were the subject of cross-examination and, as set out in Exhibit 8 (the experts’ joint statement), “the major matters of disagreement, being ‘points of difference’ between the valuers, relate primarily to the assessment of comparability and interpretation of the sales evidence and the attributes of the property”, where both valuers utilised the direct comparison methodology based on a rate per square metre inclusive of improvements.
I again note that neither party, during the period this Judgment has been reserved, has sought to re-open so as to seek to adduce further evidence of any change in value of the property.
Mr Q’s evidence
The valuation by Mr Q identified nine properties described as “prestige residences, similarly situated on a significant parcel of land within Suburb D” before concluding that:
The subject property comprises a larger land holding when compared to the comparable sales and the improvements are considered to add value. However it would not surprise if a future buyer demolished the house. The key driver to Suburb D property values is the land component and I note the slope of the subject property of circa 4 to 5 metres from front to rear…I consider a direct rate of $6,850 per square metre site area improved to be appropriate in my assessment of market value, sitting below the analysed range due to the subject having the largest land holding, when compared to the evidence, and given the dated nature of improvements.”
Furthermore, Mr Q considered and transparently analysed a check method, described as a “Summation Approach”, where he made the following assessment:
Site value $16,137,890 Main residence $925,500 Sundry improvements $360,000 $17,423,390
Under cross-examination, Mr Q said:
(a)he consulted local real estate agents and regarded the O Street address as more desirable than the other side of Suburb D Road;
(b)it is hard to predict if the hypothetical buyer will demolish or not but said the lot is a “substantial size” and a buyer could always pay more if they want it;
(c)he held concerns about the slope of the block and felt the home was not sitting on the block “efficiently”;
(d)he agrees there is room for legitimate variation within a range of 10%; and
(e)he did not deviate from his assessment at $17,400,000 after being challenged on his assessment of the comparable properties at Suburb D.
Mr S’s evidence
The valuation by Mr S identified 13 properties as suitable for consideration under the comparable sales methodology and analysed the sales evidence on a rate per square metre inclusive of improvements and had obviously disregarded sales where it is evident that the improvements did add significant value. He concluded his valuation based on a calculation of $7,500 per square metre site area, noting that:
(a)the subject premises certainly provides greater appeal than many of the sales that have occurred and is adjoined by significant substantial residential estates thus “comprising a highly regarded location”;
(b)the number ... is a “particularly beneficial street number, being ...”;
(c)the residence’s setting provides a “very effective layout including the favoured layout of residence, garden pool and tennis court”; and
(d)in reaching the assessment of $7,500 per square metre, Mr S considered the fact “that the residence is superior to many of the comparable sales evidence”.
Under cross-examination, Mr S said:
(a)the husband sent him a newspaper article[5] and identified real estate agents active in the Suburb D area;
(b)he knew of the importance of “...” to buyers and an agent Mr T told him that was a “positive”. He regarded the “T intersection” as bad feng shui – but when asked about his knowledge of, he confirmed he “Googled it”;
(c)he does not regard the “shape” as a big issue. He did not regard the proximity (50 to 60 metres up the road) of the school as a relevant or significant issue;
(d)although the professional guidelines recommend a check valuation by the summation approach, he felt confident just to do one analysis;
(e)he agreed he had made no apparent analysis of adjusting between building/land value in respect of the properties at assessment of the comparable properties at Suburb D and in respect of P Street, Suburb D he was not able to opine whether the property was “inferior” or “superior” to the subject property. The same can be said of the property at U Street, Suburb D;
(f)Although he felt the property at V Street, Suburb D was “similar in many ways to the subject property” he made no real analysis of the sale evidence for the property, or an adjustment between building and land;
(g)He conceded the valuation by Mr Q is “clear and transparent”.
[5] See Exhibit 10.
In re-examination, Mr S rejected any inferences that he had been influenced by the involvement of the husband and did speak to five different agents including the husband’s suggested Mr T (who he knew anyway and would have spoken to). He said the possible impact of the school was not raised during the joint conference.
CONCLUSION OF VALUATION
Whilst I accept valuation is not an exact science and that there are always examples of a purchaser keen to acquire a property who is prepared to “outbid” others, this does not mean that accepted methodologies for assessing market value should not be adopted.
Overall, I am satisfied that the reasoning and assessment by Mr Q is both apparent and transparent – as it should be. I felt his adoption of the various “comparable sales”, and the analysis that led to his figure of $6,850 per square metre was persuasive. Mr S, on the other hand, gave me much less confidence that he had undertaken the required analysis to reach his conclusion of $7,500 per square metre, and his general statement for his written report that he had “considered the fact that the residence is superior to many of the comparable sales evidence”, when no attempt on any of the 13 identified sales was made to indicate if they were “superior” or inferior”, was simply unhelpful.
In final written submissions, Counsel for the husband pointed to the concession made by Mr Q that a 10% variation could be reasonable. All this means, for example, is that Mr Q’s estimate could have been up to $7,745 per square metre (10% greater) and Mr S’s estimate could have been down to $6,750 per square metre (10% less).
I accept the submission of Counsel for the wife that the discretion to order a sale, when the Court is faced with two “equally cogent” examples of valuation evidence, does not arise in this case.
I accept Mr Q’s evidence in preference to Mr S’s evidence.
In the pool I intend to incorporate a value for the jointly owned home at O Street, Suburb D of $17,400,000.
THE WIFE’S INHERITANCE FROM HER MOTHER’S ESTATE
The wife’s mother Ms B died in 2017. The wife and her siblings Ms W and Mr AA were appointed Executors and Trustees under the Will. After making a specific bequest to Ms W, the balance of the Estate is to be divided equally between the three siblings.
In her affidavit filed 17 September 2018, the wife[6] indicated that as probate of the Will had not been granted at that time, she was unable to “know the quantum of the inheritance” although a summary of some Estate interests was set out[7].
[6] At paragraph 135.
[7] At paragraph 135.
Although a dispute arises as to the finite quantification of the wife’s interest as beneficiary, it is not contended (as it seemed the husband may have misunderstood) that the wife’s interest (some of which has already vested) should be “excluded’ from or ‘immune” from consideration in the s 79 application before me. To do so, even though the death of the Testatrix occurred post separation, would be contrary to authority (see Holland & Holland[8]).
[8] [2017] FamCAFC 166 at [25].
Rather the wife submits that when constituting the schedule of interests at stage one of the analysis, the wife’s inheritance should constitute a separate pool. For reasons that follow, I agree.
However, the husband contends that the Court cannot be satisfied that the wife’s interest is less than $4,483,667[9]. The husband says this figure is based on the wife’s evidence[10].
[9] Item 5 in the balance sheet.
[10] At paragraph 135.
However, since September 2018, the wife’s interest has been clarified further by Exhibit 21 – tendered without objection, and clearly a business record, being a letter dated 20 June 2019 by the solicitors acting for all Executors. At the time of that letter the solicitors informed the Executors that:
(a)the Suburb D home of the deceased had not been sold. I accept that the home had been independently valued at $8,300,000 such that the wife’s 1/3 share was estimated at $2,766,000. This estimate is adopted;
(b)company financials and Estate tax returns were being completed but there was no estimate of tax liabilities (or for that matter refunds) offered;
(c)the letter suggested an interim distribution to each residuary beneficiary of $1,000,000. The letter attached an “Interim Distribution Statement” for review and comment by the Executors that revealed the balance of funds available at that time to be $4,678,297.54, with the solicitors proposing to retain initially for “costs and contingencies” a sum of $1,673,297.54 and to make a distribution of $1,000,000 to each beneficiary.
The wife’s further evidence confirmed that although probate had been now granted on 29 October 2018, there is a dispute about the deceased’s jewellery. There is uncertainty about the additional costs of administration, tax etc. Doing the best I can on the evidence and based on Exhibit 21, I calculated the wife’s interest in her mother’s Estate to be $4,292,765, as follows:
One third share in TT Street, Suburb D
$2,766,666
One third share of residuary ($4,678,297 less $100,000 for “costs and contingencies”) equals $4,578,297)
$1,526,099
$4,292,765
I prefer to adopt, albeit somewhat arbitrary, a figure of $100,000 for costs and contingencies rather than less transparently adopt a lower inheritance value and deal with the uncertain component under s 75(2)(o) through s 79(4)(e). I also accept, as it seems did the parties, that until the Suburb D home of the deceased is sold (and expenses of sale etc are known) the “best evidence” of the value is that adopted by the parties. Whether the jewellery has any significant monetary value is unknown. I am satisfied it probably holds sentimental value. How long a dispute over the jewellery will take to resolve and at what costs is also uncertain.
For completeness, I do not regard the Deed of Agreement[11] of any material relevance to the determination of the wife’s interest in her mother’s estate. Apart from the fact that the Deed was made in September 1999 (some 18 years before the death of Ms B), it is clear from the terms of the Deed that its intent was to reach agreements as to the right and interests of various children (from two different marriages) and the wife’s mother Ms B in significant corporate and financial interests, at a time when the wife’s father Mr B was no longer personally and legally competent to act on his own behalf and where Ms B had made an application in the Family Court of Australia for a property settlement. The Estate of Ms B was likely shaped by the terms of the Deed (and a result of any subsequent Family Court orders) but that is all.
[11] Exhibit 11 to the wife’s affidavit of 17 September 2018.
It is a matter of discretion for a trial Judge whether interests held by the parties should constitute one pool or a number of separate pools. To do so does not, of course, invite departure from a holistic consideration of contributions, however it is often asserted that interests with different characteristics, such as superannuation, should be considered in a separation pool (see for example Elliston & Dennell[12]; Monfort & Bade[13]). In this case, sensibly, both parties agree that the interests in the Edgar Superannuation Fund should be included in the pool with other interests.
[12] (2019) FLC 93-903.
[13] [2018] FamCAFC 163.
Mr Richardson SC contends that where the wife’s interest in her mother’s Estate arose post separation; has not yet entirely vested and has not in any way been intermingled with other “family assets”, it is proper to constitute a separate pool. To do so has no effect on the ultimate findings as to contributions (although the wife submits the husband made no contribution to her inheritance from her mother) or on taking the interest into account for the purposes of s 75(2)(b).
It cannot be the case that constituting the pool of interests can lead to a less “just and equitable” outcome. It is, in my view, nothing more than an attempt in appropriate cases to add a further level of transparency to the exercise of a broad discretion.
The wife’s interest, as quantified above, will constitute a separate pool.
SHOULD FUNDS RECEIVED BY MR M ($251,341) AND MR Z ($581,809) BE ADDED BACK?
In many respects, considering a pool of assets exceeding, on any estimate $70 million, it is unfortunate that the Court is required to make a determination on this issue (and also the characterisation of the interest in the Edgar Investment Trust No 1 that follows below).
This is fundamentally because I am satisfied that these wealthy parents have, during the lifetime of their children to the date of the acrimonious separation in November 2016, consistently and generously supported financially and emotionally Mr X (now aged 48 years); Mr Y (now aged 45 years) and Mr Z (now aged 43 years).
I did however detect a difference in attitude between the parties in their sworn testimony, which may have existed during the marital relationship, but is evident now. The husband takes the position that the generosity that existed during the relationship should be maintained and, that he can unilaterally elect to do so. The wife asserts that with the benefit of the support received by her sons during the past years (including to start-up businesses; educational pursuits and, I infer, travel and rental support), it is time that they pursued their dreams and ambitions themselves. Furthermore, the wife strenuously objected to the husband, she says, making either unilateral decisions about use of funds or even worse, ignoring her clear statements against what she regards as joint funds being distributed to the children post separation.
I get a sense that this issue may be having an affect on the children’s relationships with their mother, however the principles I am required to consider are not shaped by keeping the family happy, but to look at the evidence and determine on the facts as found, how justice and equity between the parties can be achieved.
In circumstances where principle directs me to consider the interests of the parties existing at the time of the hearing, over time the jurisprudence has developed to identify how assets or funds that no longer are generally controlled by the parties, should be taken into account so as to do justice and equity.
It is clear that “adding back” funds is the exception to the earlier stated principle (see Trevi & Trevi[14]). Premature distributions in a Townsend & Townsend[15] sense or quantified waste through reckless, wanton or negligent behaviour of a party (Kowaliw & Kowaliw[16]), have found favour in some cases as appropriate to notionally “add back”. In other cases, perhaps arguably less transparent, consideration to some dissipation of a valuable interest is given within the almost “catch-all’ provision under s 75(2)(o). Before exercising this range of discretions, it is necessary to give careful attention to the facts. As earlier alluded to, this is not a matter of “fairness” to the children, but rather an analysis within the context of family law jurisprudence.
[14] (2018) FLC 93-858 at [47].
[15] (1994) 18 Fam LR 505.
[16] (1981) FLC 91-092.
I make these findings:
Mr Z
(a)Mr Z was living in the family home at the time of separation in November 2016 and moved out on 4 December 2017. Although I accept the husband’s evidence that before separation the parties were happy for him to live at the home, rather than live independently, I infer that the situation in the home post separation became tense and that Mr Z did ask his parents to assist him to buy a home. I do not regard it as materially relevant whether or not the parties assisted, as an intact couple, Mr X and Mr Y to buy a home. What is relevant is that on 22 September 2017, the husband, via his lawyers, asked the wife “to join with me to purchase a home for Mr Z” at R Street, Suburb BB, and that the parties pay the deposit jointly and secure a mortgage to fund the balance of the purchase price. The husband conveyed information about expected rental income and mortgage repayments. The husband’s solicitor’s letter[17] informed the wife that the husband had signed a contract on 22 September 2017, with a three day “cooling off” period;
(b)The wife deposes to informing the husband, via solicitors on 26 September 2017, that she did not agree to jointly contributing to the purchase of “a property for Mr Z at this time”. The wife says, and I accept, that Mr Z was aware of his mother’s position about her not contributing to a house for him. His email to his mother of 8 July 2017 makes that clear;
(c)The husband concedes in his affidavit filed 1 October 2018[18] that the wife “did not agree to join with me to purchase Suburb BB for Mr Z”; and
(d)The husband decided to assist Mr Z knowing the wife did not agree to do so “at that time” by taking out a mortgage with a bank for $1,436,000 and applying just over $475,000 from the Company 16 offset account to pay the deposit and some expenses;
Lest it be thought that the funds in the Company 16 offset account represents some form of “excluded” asset – that is not the parties’ position. In fact, at Item 36 of the draft balance sheet[19] the parties include the offset account at a figure of $1,420,121;
(e)Through discovery, the total sum contributed by the husband from that source was $581,809. If the funds had not been withdrawn, they would, I infer, still be in the offset account; and
(f)I find, in the circumstances of this transaction, the use of the funds is akin to a unilateral distribution, without consent of the wife, and reduces the available pool for division. As a result, the funds should be “added back” to the pool available for division.
[17] Exhibit 18.
[18] Paragraph 223.5.
[19] Exhibit 32.
Mr X
(a)It is accepted post separation, and after funds were vested in the Edgar Investment Trust No 1, that payment from those trust funds were made to Mr X in the sum of USD $193,000 which for the purpose of the draft balance sheet at Item 12, has been agreed as a figure of AUD $251,341;
(b)The wife deposes to receiving a copy of an email to the husband from Mr X dated 7 August 2017[20] in which Mr X asserts that the wife “mentioned to me several times since the separation that the support I receive from my father should be considered as coming from her as well. Whenever I mentioned that you gave me money, Mum has responded that the money comes from both of you jointly”. The wife says she does not recall “such conversations with Mr X”, but did spend time with Mr X when she visited Country J in December 2016 and October 2017. She deposes to not recalling any discussions with Mr X in relation to ongoing financial support during those visits, but did approve payment to Mr X from joint funds around June 2017 for a new motorcycle and tickets to the Country J festival in London. Also it is agreed the parties jointly agreed to use joint funds to assist Mr X to facilitate a divorce settlement with his wife well after this parents’ separation. It is not clear what the source of the “joint funds’ were at the time;
[20] Paragraph 10.
(c)The transfer of funds from a Country N investment to the Edgar Investment Trust No 1 occurred after June 2016, although it is common ground that the wife was not appointed as a Director of Company 9 Pty Ltd as Trustee of the Edgar Investment Trust No 1 until 23 September 2016. The funds paid to Mr X that are in dispute were made as follows (all in US dollars) as a result of requests made by Mr X to the husband solely, namely:
August 2017 - $43,000 September 2017 - $53,000 December 2017 - $40,000 March 2018 - $20,000 April 2018 - $12,000 May 2018 - $25,000 $193,000
(d)The wife says, and I accept, she only became aware of the payments to Mr X when she received the financial accounts for the Trust for the year ended 30 June 2018. Although arguably in a different context relating to the proposition by the husband to “gift” Mr X $2,000,000 to be used “to buy Mr X’s property in Country J”[21], the wife’s solicitors gave written notice to the husband (via his solicitors) on both 6 December 2016 and 24 April 2017 that she did not agree to any “gifting, transferring or otherwise disposing of capital or income” to Mr X. The husband communicated to the sons by email of 1 May 2017, the letter of 24 April 2017, to demonstrate “her attitude towards buying a house for Mr X”;
[21] See paragraph 42 of the wife’s affidavit filed 17 September 2018.
(e)Before any of the payments set out at (c) above had been made, and in the context of the history set out now, the wife filed an Application on 30 June 2017 seeking, inter alia, that the husband be restrained from dealing with the funds held by the Edgar Investment Trust No 1. The Application was listed urgently and came before MacMillan J on 5 July 2017 and a transcript of the hearing that day is before this Court[22]. Although the Application was adjourned until after a scheduled (and ultimately unsuccessful) mediation, the wife’s Counsel Mr Richardson SC says the wife relied upon statements made to the Court on that occasion by the husband’s Senior Counsel Mr Glick QC;
[22] Exhibit 13.
(f)I have read the full transcript, the tenor of which reveals that the adjournment sought by the husband was granted on certain articulated “understandings”.
In respect of remarks made by Mr Glick QC to the Court, I record some pertinent statements as follows (noting the acknowledgement that the husband and the wife controlled jointly the Trustee) for Edgar Investment Trust No 1:
(i)At line 5, page 7, “we can’t do anything without the wife’s position”; and
(ii)At line 25, page 10, “the wife is a co-director. There’s no suggestion we can do this unilaterally”;
After Mr XX, then appearing for the wife, made it clear that the wife sought the “injunction…with urgency in relation to the investment trust and the two and a half million dollars”, and with further exchanges between the Bench, the proceedings were adjourned at 3.05pm for further discussions between Counsel (and resumed at 3.57pm).
After the resumption of the hearing, the transcript[23], in the context of reading “into the transcript some areas of agreement we have, your Honour”, records Mr XX saying:
…and we accept Mr Glick’s position that he put to your Honour before that nothing can happen in relation to that as the husband and wife are joint directors and shareholders of the trustee company and that no funds will leave that company.”
It is clear that after 5 July 2017, monies did “leave that company” and I am satisfied the husband did so without the wife’s consent or approval as a Director of the trustee company which legally controlled the funds.
(g)The husband submits at paragraphs 16.1 and 16.2 of the written submissions that the wife “otherwise complains about further benefits paid by the Edgar Investment Trust No 1 to Mr X for his day to day support post separation”. I do not think that statement is entirely accurate. As the wife herself admits, she did agree to a payment to Mr X for his motorcycle and trip to London. What is clear is that the wife did not agree to the husband making unilateral decisions about using the funds for Mr X and she was entitled, based on the statements made on 5 July 2017, to assume that would not occur. I do not accept the submission that there was some “uncertainty about what was intended” by the statements made on 5 July 2017. In any event, the earlier statements by the wife on 6 December 2016 and 24 April 2017 and her Application filed 30 June 2017, are not uncertain.
[23] At line 15, page 19.
In summary, I find the husband decided to provide support to Mr X from the Trust knowing his wife at least had an expectation she would be consulted as a co-director of the Trust before doing so. That he appears to have conveyed to the three sons the comparison between his intentions and the “attitude” of their mother, is disappointing and hardly reflective of the many years of support and pattern established before separation of financial support.
It is contended by the husband[24] that:
Given the size of the pool and income available to the parties and given the husband has continued to apply a significant part of the income he derives from the [business] to the support of the wife, assistance to Mr X in these amounts is not an unreasonable use of funds post separation and as a matter of discretion ought not be ‘added back’.
[24] At paragraph 16.3 of the submissions.
I disagree because:
(a)the funds were not paid from his income but from a jointly controlled fund established by the parties; and
(b)Mr X had no legal right to those funds, whereas the wife of nearly 50 years did; and
(c)Whatever earlier understandings or assumptions between these generous parents existed up until separation, that came to an end with the breakdown of the relationship and separation, and the wife made it clear she did not approve of payments being made BEFORE the husband did so.
The sum of $251,341 will be “added back” notionally, representing the value of the unilateral withdrawals made by the husband and given to Mr X.
I now begin to discuss the movement and treatment of funds for what has been described as the “Investment Portfolio” to the Edgar Investment Trust No 1.
HOW TO TREAT THE FUNDS IN THE EDGAR INVESTMENT TRUST NO 1
Since at least 2015 the parties held an overseas investment in Country N described in the material as the “Investment Portfolio”. The husband says in 2015 Country J underwent significant tax law changes which caused the husband and wife to discuss tax law amendments with a Country J legal consultant Mr UU – a former resident of Australia – whilst in Country J and they also spoke with their accountant Mr VV, about Australian tax laws. These discussions took place in Country J before separation.
I accept that at a meeting held on 20 June 2016 with Mr UU and Mr VV (at the family home) a further discussion took place. There are no notes of the meeting and no direct evidence capable of being tested from either Mr UU or Mr VV. What is clear from the testimony of the husband and wife is that they retain different recollections about what was discussed at the meeting.
I accept the wife’s evidence that it is likely that at the meeting advice was received about bringing the Country N investments “on-shore”. Whether this was entirely motivated by a Government tax amnesty to encourage resident Australia taxpayers to bring assets “on-shore” (as Mr Glick QC alluded to before MacMillan J) or not, is far from clear. I do accept that at the time of these discussion, the wife says in the context of the parties being an intact couple, the husband and wife had been discussing with Mr X assisting him to buy a home in Country J.
The wife’s support for finding a suitable home for Mr X is clear from the emails put to the wife in cross-examination[25]. However, whilst I am satisfied that discussions took place, I find that:
[25] Exhibit 12.
(a)prior to final separation on 13 November 2016, the wife did accept the tax advice offered for moving the funds into an Australian taxed trust;
(b)that at 27 June 2016 the letter from Accounting firm 1 accountants to Mr CC of DD Firm (“[MR EDGAR-17]”) instructing the legal firm to prepare a “gifting document to the” Edgar Investment Trust, effective at 20 June 2016 “such that Ms Edgar and Mr Edgar effectively dispense with their assets comprising the [Country N] equities in favour of the Trust”, reflected an agreed position between the husband and wife at that time;
(c)the Edgar Investment Trust No 1 was established in 2007, with Mr X and the husband and wife joint guardians and appointers; Mr X is the specified beneficiary and the husband is the sole shareholder of Company 9 Pty Ltd, the corporate Trustee. On 29 September 2016 a Deed of Gift was executed by the parties, the wife having almost contemporaneously become a co-director with the husband of the Trustee
(d)although it was necessary to move the funds for tax purposes, the gift to the trust (thereby removing any suggestion of a loan being owed to the parties by the Trust), had likely future tax benefits. For example, distribution by the Australian discretionary Trust of foreign income to Mr X would result in no Australia taxation. As Mr X is a Country J tax resident and an Australian non-resident for taxation purposes, the Australian Trust would report to the Country J taxation authorities such that it would pay Country J tax at the rate of 25%;
(e)the wife believes and submits[26] that the “gift” to the Trust was “made in circumstances of deception on behalf of the husband and his accountant” – the deception being the husband was preparing to bring the marriage to an end (and further behaviour set out at paragraph 29). I agree with the submission of Counsel for the wife that the husband could have called Mr VV, but so could have the wife. Neither chose to do so;
(f)I have reached the view that the parties did agree to transfer funds from the Investment Portfolio to the Trust, established in part to benefit Mr X as a specific beneficiary – but still only a discretionary beneficiary; and
(g)at the time of the transfer, discussions about using the funds to assist Mr X to buy a home in Country J had taken place. The husband says the parties told Mr X in 2016 that that they would contribute US $2 million towards the purchase price[27]. The wife disputes this, saying the intention was to provide a future income stream for Mr X to assist him to borrow funds in Country J[28];
(h)the purchase of a home was never concluded, in part due to Mr X’s marriage to Ms AA ending, which halted the process of searching for a house. As a result, whether Mr X was to receive capital, just income or both is not material. The Trust permits all such distributions; and
(i)when the parties’ marriage came to an end, and it seems the relationship between Mr X and his mother became estranged, the mother’s intention to use some of the funds to support Mr X changed.
[26] See response submissions at paragraph 29.
[27] Paragraph 110.3.
[28] Paragraph 76.
30.After service of the payment split notice in accordance with the SIS Regulations, the Wife promptly do all such acts and things and sign all such documents as may be necessary, including but not limited to exercising the Wife’s request in accordance with the SIS Regulations, for the rollover or transfer of her remaining entitlements in the Super Fund to a complying superannuation fund of the Wife’s choosing in accordance with the SIS Regulations.
31.Each of the Husband and the Wife promptly do all such acts and things and sign all such documents, including but not limited to the signing of trustee minutes, rollover requests and related documents, that may be necessary to rollover or transfer the entitlement of the Wife in the Super Fund (such entitlement to comprise the assets of the Fund excluding G Street) to another complying superannuation fund of the Wife's choosing, at the Wife’s expense.
32.Upon the rollover or transfer of the transferable benefits to the complying superannuation fund chosen by the Wife in accordance with these orders:
32.1.the Wife do all such acts and things and sign all such documents as are necessary to resign as a director and secretary of the Super Trustee and to transfer to the Husband or his nominee, at the expense of the Husband, any shares held by her in the Super Trustee and to relinquish any interest of whatsoever nature she has in the Super Trustee and the Super Fund; and
32.2.the Husband be solely liable for and indemnify the Wife and keep her effectively indemnified against all liability of the Super Fund, including but not limited to taxation and all other liability of, or howsoever arising in relation to, the Super Trustee and the Super Fund.
Other matters
33.Pending the performance of all transactions required by the provisions of these orders:
33.1.the parties hold their respective interests in the property specified in those orders upon trust for each other in such proportions as accord with their entitlements under the orders;
33.2.neither party encumber property specified in those orders without the consent in writing of the other art save to the extent necessary to comply with the orders.
34.Save as otherwise provided in these orders and save for the purposes of enforcement of these and any subsequent orders:
34.1.each party be solely entitled to the exclusion of the other to all other property (including choses-in-action) in the possession of such party at the date of these orders;
34.2.each party be solely liable for and indemnify the other against any liability encumbering any item of property to which that party is entitled pursuant to these orders;
34.3.monies standing to the credit of the parties in any joint bank account (if any) be divided equally between the parties;
34.4.each party forego any claims they may have to any superannuation or work-related benefits or entitlements belonging to or earned by the other;
34.5.life insurance policies remain the sole property of the named owner; and
34.6.any joint tenancy is hereby expressly severed.
35.The Wife pay the Husband’s costs of an incidental to these proceedings.
36.Such other or further orders as this Honourable Court deems appropriate.
APPENDIX THREE
1.We have met to identify the issues that are agreed and not agreed between us, if practicable reach agreement on any outstanding issue, identify the reason for disagreement on any issue and identify what action (if any) may be taken to resolve any outstanding issues, identify the reason for disagreement on any issue and identify what action (if any) may be taken to resolve any outstanding issues. We have summarised our response in the following table. In the table, “Units” refers to the units in the Business 1 Trust and the Trust 1 and Underlying Assets refers to the assets in those unit trust.
Issue
Mr EE
Mr FF
Did the Units become post-CGT as a result of the transfer in 1999 of the Units from Edgar Family Trust (EFT) to Edgar Investment Trust (EIT)?
Yes. While there was a “cloning” exemption at the time of the transfer, this required the beneficiaries and terms of relevant trusts to be the same. This exemption did not apply as EFT and EIT have different beneficiaries and terms.
Uncertain.
Whilst the Commissioner has formed a strict view on the “cloning” exemption and may likely form a view that the exemption did not apply, there is little judicial guidance on this matter.
Did the Underlying Assets become post-CGT as a result of the transfer in 1999 of the Units from EFT to EIT?
Yes. Under Division 149 of the Income Tax Assessment Act 1997, assets acquired by entities (as opposed to individuals) pre-CGT are deemed to acquired post-CGT if it cannot be shown that the same individuals have held ultimate ownership of the assets since CGT was introduced on 19 September 1985. It is difficult for the individuals who are behind family discretionary trusts such as EFT and EIT to satisfy this test as they become entitled to the assets of the trust only when the trustee’s discretion is exercised in their favour. The Commissioner of Taxation has issued a ruling that allows a family discretionary trust to satisfy the requisite level of continuity of ownership by showing that the trust continues to be administered for the benefit of the same family. This ruling does not directly apply in this case as the Underlying Assets are owned by unit trusts rather than a family discretionary trust. We consider that it is possible that the Commissioner of Taxation may be prepared to extend the ruling to the transfer made in this case given that EFT and EIT were administered for the benefit of the same family at the time of the transfer. However, we consider the more likely outcome to be that the Commissioner would decline to extend the ruling in this way given that the units had been transferred between separate discretionary trusts with different beneficiaries and terms and that he would consider that the Underlying Assets became post-CGT assets.
No.
In IT 2340, the Commissioner allowed ultimate ownership to be traced to a particular family rather than an individual for the purposes of the predecessor of section 149-15 in a situation where assets were held directly by a discretionary trust.
Contrary to the view expressed in paragraphs 27 and 28 of the ACCOUNTING FIRM 2 supplementary report, I consider that it would be reasonable to extend IT 2340 to situations where assets are held indirectly by a discretionary trust given that section 149-15 applies both to direct and indirect interests in assets
On the assumption that the Units and the Underlying Assets became post-CGT as a result of the transfer of Units in 1999 and adopting the Mr AL valuation, do the ACCOUNTING FIRM 2 calculations correctly estimate the income tax that would be payable if the Underlying Assets were sold and the proceeds distributed to Dr and Ms Edgar equally?
Yes
Yes, however we consider it unrealistic to assume that the Underlying Assets would be sold in such a manner
On the assumption that the Units became post-CGT assets as a result of the transfer of Units in 1999 but the Underlying Assets remained pre-CGT, and adopting the Mr AL valuation, do the ACCOUNTING FIRM 2 calculations correctly estimate the income tax that would be payable if the Underlying Assets were sold and the proceeds distributed to Dr and Ms Edgar equally?
Yes. However we consider it unrealistic to assume that the accounting profit would be distributed to unitholders, given that is what gives rise to 81.76% of the tax payable as calculated by ACCOUNTING FIRM 2.
It is acknowledged that it is uncertain whether the ATO would seek to apply Part IVA to the distributions by BFT to Mr X and Mr Y Edgar as discussed in the ACCOUNTING FIRM 2 report. However, on the assumption that the ATO does decide to apply Part IVA, does the ACCOUNTING FIRM 2 report correctly estimate the tax that would become payable?
Yes
No. We agree there is considerable uncertainty as to whether the ATO would seek to apply Part IVA.
Further, if the ATO were to seek to apply Part IVA, it is too premature to conclude that Mr X and Mr Y would be the targeted taxpayers.
Given the ATO review has been ongoing for many years without the ATO requesting an extension to the amendment period of any taxpayer, it is speculative that they would seek to issue assessments in relation to the 2003-2005 tax years, which total $1,428,243.
They are also unlikely to issue an assessment in relation to the 2014 tax year totalling $216,356 given ACCOUNTING FIRM 2 have indicated the ATO is time barred from 21 May 2019.
ACCOUNTING FIRM 2 has been instructed to calculate income tax payable on the assumption that Edgar Family Home Trust, Edgar Investment Trust No 1 and Edgar Family Trust are vested and their assets distributed 50/50 to Mr and Ms Edgar.
Are there other more tax effective ways to achieve a division of assets?
Yes.
Either party can assume control of one or more trusts with no tax implications; and assets can be transferred from the trusts to either party with no CGT implications utilising compulsory marriage breakdown rollover in Subdivision 126-A of the ITAA 1997 (subject to Division 7A strategies).
ACCOUNTING FIRM 2 has been instructed to calculate income tax payable on the assumption that Company 10 Pty Ltd, Company 11 Pty Ltd, Company 12 Pty Ltd and Company 13 Pty Ltd are wound up in their current structures.
Yes, utilising tax concessions such as the marriage breakdown rollover in Subdivision 126-A of the ITAA 1997, interposition of investment companies or simply by having one party assume control of shareholder trusts.
Are there more tax effective strategies to achieve a division of the shares and assets in these companies?
APPENDIX FOUR
POOL ONE No. Item Value WIFE 1. AL Street, Suburb H + Shed $1,412,500 2. ANZ #02 $128 3. Credit card #01 $14,694 4. Motor vehicle 1 $140,000 5. 4,800 ANZ shares $124,704 $1,692,026 HUSBAND 6. ANZ #71 $166,245 7. 1,043 GG shares $2,383 8. Motor vehicle 2 $20,000 9. Add back – R Street, Suburb BB $581,809 10. Furniture and chattels – L Street $13,300 11. Add back – gifts to Mr X since 5 July 2017 $251,341 $1,035,078 JOINT 12. O Street, Suburb D $17,400,000 13. Art $8,433,000 14. Jewellery $1,247,700 15. Furniture and chattels – Suburb D $124,600 $27,205,300 COMPANY 15 PTY LTD ATF EDGAR FAMILY HOME TRUST 16. Share portfolio and ANZ V2 account $801,175 17. ANZ #17 $3,280,106 $4,081,281 COMPANY 19 PTY LTD ATF EDGAR FAMILY HOME TRUST 18. AK Street units, F Town $2,750,000 19. Shares and cash $60,789 20. Furniture and chattels, F Town $25,590 $2,836,379 MEDICAL ANCILLARY SERVICES PTY LTD ATF EDGAR FAMILY TRUST 21. Shares – AH shares and AM shares and V2 account $27,679 22. CBA overdraft #11 ($8,622) $19,057 COMPANY 4 PTY LTD ATF EDGAR INVESTMENT TRUST 23. 50% Business 1 $33,500,000 24. 50% AG Street $916,250 25. 50% AH Street $760,000 26. 50% AE Street $200,000 27. 50% AF Street $207,500 28. 50% overdraft ($790,437) 29. 50% bank debt ($14,642,641) $20,150,672 COMPANY 16 ATF TRUST 3 30. L street units, Melbourne $7,225,000 31. ANZ loans ($6,615,000) 32. ANZ offset account #31 $1,420,121 $2,030,121 COMPANY 18 ATF EDGAR INVESTMENT TRUST NO 1 33. AI Street, Suburb E $8,600,000 EDGAR SUPERANNUATION FUND 34. Shares ANZ V2 account $633,818 35. CBA accounts #24; #73 $37,022 36. G Street, Melbourne $6,900,000 $7,570,840 EDGAR INVESTMENT TRUST NO 1 37. Investment Portfolio $2,991,192 TOTAL ASSETS $78,211,946 LIABILITIES/TAX 38. Tax liabilities resulting from Division 7A loans $4,354,445 39. Unpaid income tax liabilities FYE18 – Company 11 Pty Ltd $597,746 TOTAL LIABILITES (NOT OTHERWISE IDENTIFIED) $4,952,191 ASSETS $73,259,755 POOL TWO 1. Inheritance from Ms B $4,292,765 TOTAL POOL TWO ASSETS $4,292,765 NOTIONAL COMBINED NETT POOLS $77,552,520
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