Gare & Farlow
[2023] FedCFamC1A 98
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 1) APPELLATE JURISDICTION
Gare & Farlow [2023] FedCFamC1A 98
Appeal from: Gare & Farlow [2023] FedCFamC2F 109 Appeal number: NAA 61 of 2023 File number: MLC 10265 of 2019 Judgment of: AUSTIN J Date of judgment: 23 June 2023 Catchwords: FAMILY LAW – APPEAL – PROPERTY – Appeal from property settlement orders – Where the appellant wife complained the primary judge over-valued her business and so the cash sum she was required to pay the husband was greater than it should have been – Whether the primary judge erred by admitting the evidence of the husband’s expert witness about the value of the business – Where the evidence of the husband’s expert was admissible under the Evidence Act 1995 (Cth) as an exception to the opinion rule – Where the primary judge concluded a sum of money paid by the wife to her father six months prior to separation should be added back to the asset pool – Where the wife’s complaint that the primary judge ought to have considered the add-back a contribution by her to the parties’ asset pool is rejected – Appeal dismissed – Where the appeal was wholly unsuccessful – Appellant ordered to pay the respondent’s party/party costs of and incidental to the appeal in a fixed amount. Legislation: Evidence Act 1995 (Cth) Pt 3.3, ss 76, 79
Family Law Act 1975 (Cth) Pt VIII, ss 75, 79
Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth) Pt 7.1, r 12.17
Cases cited: Carr v Baker (1936) 36 SR (NSW) 301
Preston & Preston (2022) FLC 94-108; [2022] FedCFamC1A 157
Samper & Samper (2021) FLC 94-041; [2021] FamCAFC 140
Seltsam Pty Ltd v McGuiness & Anor (2000) 49 NSWLR 262; [2000] NSWCA 29
The Commonwealth v Milledge (1953) 90 CLR 157; [1953] ALR 199
Number of paragraphs: 78 Date of hearing: 8 June 2023 Place: Melbourne Counsel for the Appellant: Dr Smith Solicitor for the Appellant: Garland Hawthorn Brahe Lawyers Counsel for the Respondent: Mr Wilson Solicitor for the Respondent: Cohrssen Partners Lawyers ORDERS
NAA 61 of 2023
MLC 10265 of 2019FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
DIVISION 1 APPELLATE JURISDICTIONBETWEEN: MS GARE
Appellant
AND: MR FARLOW
Respondent
order made by:
AUSTIN J
DATE OF ORDER:
23 june 2023
THE COURT ORDERS THAT:
1.The appeal is dismissed.
2.The appellant shall pay the respondent’s party/party costs of and incidental to the appeal, fixed in the sum of $18,000.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 10.14(b) Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 10.13 Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth).
IT IS NOTED that publication of this judgment by this Court under a pseudonym Gare & Farlow has been approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
AUSTIN J:
A judge of the Federal Circuit and Family Court of Australia (Division 2) made orders between the parties in respect of their children and their property to resolve two causes of action brought respectively under Pt VII and Pt VIII of the Family Law Act 1975 (Cth) “(the Act”).
The wife appealed from only the property settlement orders (Orders 1-12 inclusive), which embodied the decision for the parties’ net assets to be divided in shares of 66 per cent to the wife and 34 per cent to the husband, but that they each retain their own relatively equivalent superannuation entitlements.
To effect the decision, the orders provided for the husband to receive one unencumbered real property (“[Town E]”), certain items of personal property, and a cash sum of $410,542 paid by the wife. In turn, she received an encumbered real property (“[Suburb C]”), an incorporated business (“the business”), and items of personal property.
The central tenet of the appeal is that the primary judge erred by over-valuing the business and, as a consequence, the cash sum the wife was required to pay the husband was greater than it should have been.
For the reasons which follow, the appeal is dismissed.
Background
The parties commenced cohabitation in 2009 and married shortly afterwards.
They separated in February 2019, but continued to live in the same house with the children until January 2020, when the husband vacated it.
The wife commenced the proceedings in September 2019.
The trial spanned four days in February 2022, after which judgment was reserved and delivered a year later in February 2023.
At the time of trial, the parties were aged in their mid-forties. Both were in reasonable health and were found to have comparable income-earning potential (at [339]). They have two adolescent children, who live predominantly with the wife.
Even though the value of the business was an issue of considerable friction, regrettably, no orders were ever made compelling the parties to appoint a single expert under Pt 7.1 of the Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth) (“the Rules”) (or the predecessor rules) to express an opinion about the value of the business. Instead, they were permitted to engage adversarial experts and the dispute over the value of the business devolved to trial by combat between the two experts, who expressed remarkably different opinions.
The appeal
The amended grounds of appeal are contained within the Amended Notice of Appeal, filed on 29 May 2023 contemporaneously with the wife’s Summary of Argument.
The principal issue in the appeal, to which several grounds of appeal are directed, is the value attributed by the primary judge to the business, which finding was predicated upon acceptance of the adversarial expert opinion evidence adduced by the husband. Other grounds complain of findings made about contributions and the application of s 75(2) of the Act.
Grounds 4 and 5 were abandoned as the appeal hearing began.
Ground 1
This ground pleads the primary judge erred by admitting the evidence of the husband’s expert witness about the value of the business, as it was allegedly inadmissible pursuant to application of s 76 and s 79 of the Evidence Act 1995 (Cth) (“the Evidence Act”).
The opinion rule imposed by s 76 of the Evidence Act renders opinion evidence inadmissible, though s 79 of the Evidence Act allows for the exception of expert opinion evidence in an area of specialised knowledge if based on relevant training, study or experience.
At trial, each party objected to the admissibility of the other’s expert evidence, but all of the expert evidence was admitted and thereafter evaluated by the primary judge in light of the cross-examination of each expert witness.
On the anterior question of the admissibility of the husband’s expert opinion evidence, the wife submitted to the primary judge that it was inadmissible for two reasons: first, the husband’s expert lacked the requisite skill, training or experience to give the expert opinion evidence; and secondly, the lateness of some of the opinion evidence given by the husband’s expert, as his last report was not served until the last business day before the trial started (at [121]).
The primary judge’s rejection of the latter objection is not engaged by this ground of appeal, which only pertains to the alleged inadmissibility of the husband’s expert evidence by reference to provisions of the Evidence Act. Only the first ground of objection is relevant in the appeal.
The primary judge conducted a voir dire on the discrete issue of the husband’s expert’s qualifications and experience in the field of business valuation, permitting the wife’s counsel to cross-examine him on that issue (at [126]).
The husband’s expert gave evidence of experience valuing businesses for some 12 to 15 years beforehand and of his completion of a business broking course in 2016, a component of which was education about valuing businesses. The expert also gave evidence of doing “continuous development” courses every year thereafter. The expert said he did 75 to 100 business valuations each year and had been called to give oral evidence in court some 20 to 30 times before. He has previously given expert valuation evidence in other federal and State superior courts of record.
Having heard the evidence in the voir dire, the primary judge overruled the wife’s objection and admitted the opinion evidence of the husband’s expert witness, as was expressed in his reports (at [127]), giving ex tempore reasons for the ruling. The husband’s expert was later cross-examined in the trial by the wife’s counsel about the reliability of his opinions and the oral evidence he then gave supplemented the opinion evidence given in his reports.
In pressing this ground of appeal, the wife repeats the arguments advanced at trial for why the husband’s expert’s opinion evidence was inadmissible under Pt 3.3 of the Evidence Act.
The wife’s counsel submitted this to the primary judge in respect of the husband’s expert witness:
[COUNSEL FOR THE WIFE]: Your Honour, I say that it’s quite clear that [the husband’s expert] has no training upon which his Honour could rely that meant that pursuant to section 79 of the Evidence Act he had the requisite specialised knowledge. …
…
[COUNSEL FOR THE WIFE]: … So [the husband’s expert] doesn’t have the training, [the husband’s expert] doesn’t have the study and he doesn’t have the experience.
…
[COUNSEL FOR THE WIFE]: … But, in my submission, your Honour can’t be satisfied that the first limb required pursuant to section 79 is met.
(Transcript 14 February 2022, p.25 lines 24–26; p.25 lines 34–35; p.25 lines 43–44)
Such submissions were made – then and now – without any proper evidentiary basis.
The evidence given by the husband’s expert in the voir dire verified his training and experience as the foundation for his specialised knowledge, thereby making his expert opinion evidence admissible under the Evidence Act as an exception to the opinion rule.
The wife’s belief in the inferior expertise of the husband’s expert, by contrast with her own expert, did not mean the husband’s expert lacked the necessary qualifications to give admissible expert opinion evidence. At the conclusion of the trial, it remained open to the wife to attack the weight afforded to such opinion evidence when compared to the opinion evidence given by her own expert, but the husband’s expert’s opinion evidence was certainly admissible.
Grounds 2 and 3
These two grounds are pleaded as follows:
2.The learned trial judge failed to apply, or properly apply, relevant binding authority, and/or failed to consider relevant evidence and/or failed to provide adequate reasons to support his adoption of the evidence of [the husband’s expert].
3.The learned trial judge made material errors of fact and law in adopting the opinion evidence of [the husband’s expert] and in doing so his discretion miscarried.
(Emphasis added)
As pleaded, the grounds are an indiscriminate blend of alleged legal, factual and discretionary errors which are difficult to unscramble. Nonetheless, it is clear they attack the primary judge’s finding about the value of the business by reliance upon the opinion evidence given by the husband’s expert.
It is best to start the analysis by summarising the foundational evidence.
The husband’s expert produced four reports concerning the valuation of the business – one in November 2019 (at [55]), a second in May 2020 (at [60]), the third in December 2021 (at [76]), and the last in February 2022 (at [79]). As requested, his valuation opinions were given on alternate bases: the second and third reports using the “value to owner” methodology, ultimately quantified at $429,500, but the first and fourth reports using the “net asset backing” valuation methodology, ultimately quantified at $224,820.
The husband’s expert preferred the “value to owner” methodology. In evidence-in-chief and cross-examination, he said that method entailed applying a chosen multiplier to the business revenue paid as the proprietor’s annual wage, which multiplier in this case was 2.75. His opinion evidence about the value of the business being $429,500 was cross-referenced and consistent with comparable sales evidence of businesses operating in the same industry.
The wife’s expert produced three reports – the first in November 2019 (at [54]), the second in September 2020 (at [129]), and the third in January 2022 (at [75] and [130]). His preferred methodology was “an assessment of the [business] earnings before interest and taxation (i.e. EBIT) that could reasonably be expected to flow to a hypothetical purchaser as profit” (at [54]), which was a variation on the “value to owner” methodology used by the husband’s expert, but eschewed by him (at [129]). His alternate methodology was the “net asset backing” of the corporation (at [128]–[129]).
The wife’s expert’s valuations fluctuated modestly between $56,948 and $73,057 in his written reports, irrespective of the methodology used, though he conceded a much higher value of $189,000 in cross-examination, corrected that to $95,000 during re-examination, but then eventually admitted under more cross-examination that, despite the business generating more than $120,000 in annual income for the wife, he believed the business was worth nothing. Such vacillation by the wife’s expert did seem confounding when compared to the husband’s expert.
The wife’s expert’s cross-examination ended this way:
[COUNSEL FOR THE HUSBAND]: … And a [business] which is earning for the owner, say, $120,000 a year plus, is far more attractive than a [business] that’s earning $50,000 for the owner of that business. Is that correct?
[THE WIFE’S EXPERT]: Yes.
[COUNSEL FOR THE HUSBAND]: Yes. But what you say is that despite those adjustments, a purchaser would come in, go to you, you would produce the EBITDA figures in relation to this business that has been running for 22 years at a considerable profit to the owner, and you will say, “This business is worth nothing.” Is that what your evidence is?
[THE WIFE’S EXPERT]: Yes.
(Transcript 16 February 2022, p.178 lines 8–15)
(Emphasis added)
The essential point of difference between the two experts in respect of the “value to owner” methodology was the treatment of the business proprietor’s annual wage paid from the business. The husband’s expert added back to the business revenue the entirety of the wage paid to the business proprietor, whereas the wife’s expert would only add back the proportion of the proprietor’s wage which exceeded a reasonable wage for the time expended by the proprietor working in the business.
The wife’s expert admitted in cross-examination that there was a distinction to be drawn between owner-operated and managed businesses, with the former type, like the business under consideration, often valued as the husband’s expert had done. He could not have credibly denied it because five of the 11 comparable sales relied upon by the husband’s expert were valued in the same way. The wife’s expert also conceded that, when valuing the business, he would apply a multiplier of 2.5 to the added-back portion of the business proprietor’s annual wage from the business, which was not much different from the multiplier of 2.75 used by the husband’s expert.
As the primary judge correctly recognised (at [188]), the experts’ opinion evidence was given in the context of indisputable facts. Nearly 20 years before, the wife paid her sister $75,000 to acquire the other 50 per cent shareholding in the corporation which owned the business, suggesting the wife believed the business was then worth $150,000. No one had any reason to believe the business was worth less at the time of trial because it was no less profitable. The business operates from commercial premises owned by the wife’s father, albeit without the security of a formal lease. Nevertheless, not long before trial, the wife used $105,000 of business revenue to renovate the premises, suggesting she believes the business has security of tenure in the premises (at [295]).
In the reasons for judgment, the primary judge discussed the evidence led by both parties (at [131]–[162]), the submissions made by each in respect of such expert evidence (at [163]–[174]), and set out the findings made (at [175]–[189] and [299]).
Most relevantly, the primary judge said this:
180.The “value to owner” approach to valuation is intended to capture the reality of the situation by bringing to account any special or additional economic benefit which is conferred upon the business owner by his or her control of the shareholding. It is intended to include within the value any commercial, financial or other advantage which accrues to the owner which might not necessarily be available to any hypothetical third party purchaser. Such benefits might include the right to receive profits or dividends, the flexibility and autonomy of self-employment, control and ownership of business assets, the use of a company car, use of the company for contribution to household expenses and bills, the use of a loan account, the ability to tax plan and so on. There may be other benefits such as security of tenancy due to a special relationship with a landlord or the ability to expend funds in a way which benefits other family members. A valuation which assumes a negligible or only net asset value because the business is “unsaleable” is artificial because it ignores the reality of benefits which accrue to the owner.
181. In a fair market value valuation, risk is considered from the hypothetical willing but not anxious buyer. It reflects the value of each asset and liability on a going concern basis and the profitability, market position and attractiveness of the business. The value to owner approach on the other hand considers risk from the perspective of the existing owner and assumes that the party wishing to hold on to the asset will do so in good faith and seek to maximise the value that could be obtained in a hypothetical sale. Value to owner might reasonably assume a notional sale of the business to the existing owner at its highest realistic value.
182.An instructive working definition of value to owner was posited by Vella as:
“what a reasonable, prudent businessperson, in the position of the holder [husband or wife], willing but not anxious to exchange the asset for cash, and reasonably informed of the relevant facts, would see as the cash equivalent of the relevant asset to him/her”
183.This definition begs what I consider to be highly relevant inquiries. If a business is said to be worth nothing or only its net asset value, why would a proprietor want to hold it and have no intention of selling it? What realistically would the proprietor have to be paid to relinquish the business and the benefits derived from it?
184.It was submitted on behalf of the wife that the value to owner approach to valuation is normally used to value a minority shareholding, usually in a family business, which is not realisable because there is no available market. It is true that the approach is often used in such cases, although it has also been adopted in respect of partnership interests in medical practices, legal practices and similar businesses.
185.The criterion which engages the value to owner approach is not whether a party is a minority shareholder. Rather the critical criteria are the absence of a market for the party’s interest in a business (for whatever reason) and evidence of circumstances which satisfy the Court that even in the absence of a market the party is likely to retain the interest because he or she derives real value and benefits from it, of the type described in Harrison.
…
187.Here the expert evidence is that the business is unsaleable in its current state because of the absence of a lease. If there was a lease in place or if the landlord was prepared to offer one to a willing purchaser, there is no question that there is a market for [businesses] and no question that the wife’s business could be sold as a going concern at a fair market value. However, notwithstanding the unsaleability of the business and the minimal value attributed to it by [the mother’s expert], the wife clearly wants to keep it, has no intention of walking away from it and her father/landlord has no intention of pulling the rug from under her. Justice and equity demands that the Court look to the reality of the situation and value the owner’s interest accordingly.
188.Having regard to the evidence, including the expert opinions, I am satisfied that in the circumstances of this case the “value to owner” approach to valuation is appropriate for the following reasons:
(1)there is no market for the wife’s interest in the business. In the absence of a written commercial lease, the business is not saleable as a going concern to a third-party purchaser and cannot be valued on that basis;
(2)the evidence demonstrates that the business is successful and profitable and has been so for the entire time it has been owned by the wife. The business has in the past and continues to deliver significant financial and other benefits to the wife in terms of steady and reliable profits, a salary, flexibility of self-employment and autonomy, access to and control of business funds, the ability to tax-plan among other things;
(3)a unique benefit to the owner of the ongoing business is the security of its tenancy on favourable terms notwithstanding the absence of a written lease. While the wife’s father says that he could re-purpose the premises and derive a greater commercial return from it, he has not done so and I consider there to be no likelihood of him doing so while the wife operates the business. Moreover, the wife has been prepared to invest considerable funds from the business into renovations and improvements to her father’s property, suggesting that she has no concerns about the security of her tenancy;
(4)I infer that the business has significant value to the owner having regard to what the wife was prepared to pay to buy out her partner [the wife’s business partner] in 2002. This was a payment made in circumstances where the business had no written lease. The Court can infer that the enterprise value of the business to the wife at that time was considered to be in the order of $150,000;
(5)the evidence clearly establishes that the wife wishes to retain the business, intends to operate it on an indefinite basis and that she has no intention to sell the business, let alone close it. The evidence of the wife’s father corroborates that his daughter has no intention of selling the business and that he would only re-purpose the building if she were to close it;
(6)a further significant benefit to the wife is the very real likelihood that her landlord father would act in his daughter’s best interests should she ever decide to sell the business. There is evidence that there is a market for [businesses] and if a standard industry lease were in place, the wife could expect to realise in excess of $400,000.
189.Despite the wife’s attack on his credentials and [the wife’s expert] strident criticism of his methodology, I accept the evidence of [the husband’s expert] that for the purpose of determining the asset pool the [business] should be valued at $429,500 on a value to owner basis. On the question of valuation I found his evidence to be the most cohesive, consistent and persuasive.
(Footnotes omitted) (Emphasis added)
No factual error is demonstrated by the wife now pointing to other evidence, the probative value of which she would prefer to emphasise but which the primary judge discounted.
When pressed to identify the factual errors alleged, the wife identified only one – in effect, a finding that the wife’s father, who owns the premises from which the business operates, would grant a commercial lease for the benefit of the business if she later decided to sell it as a going concern (at [119] and [188(6)]). The finding he would do so necessarily entailed the rejection of his evidence on that issue, as he said he would not grant a lease.
The wife asserted it was never put to her father in cross-examination that he would be prepared to grant an “industry standard” lease for the business if asked, which failure she contended precluded the contrary finding made by the primary judge. The corollary of the wife’s submissions, though never expressly stated, was the primary judge had no option but to accept the evidence given by the wife’s father because he was not contradicted. But that is not so. The primary judge was not compelled to accept the evidence given by any witness.
The specific factual issue could only be resolved with a binary answer: if asked, either the wife’s father would grant a lease to the business or he would not. As was open, the primary judge did not accept the wife’s father’s denial, so the opposite inexorably followed.
On that issue, the primary judge said this:
109.The gravamen of the husband’s case is that the Court should conclude, on the evidence, that in the event that the wife wished to sell her interest in the [business], her father (as landlord) would provide a purchaser a suitable commercial lease for the continuation of the business at that site in order to maximise the financial return to his daughter by allowing her to realise the goodwill of a successful 20+ year investment.
…
114.When cross-examined [the wife’s father] was asked whether he would provide a written lease to the [business] if his daughter approached him and said that she wanted to sell it for the best possible price. He said somewhat emphatically that he would not because he would rather repurpose the building into a medical centre or something like that because it is in a prime position, it has a car park and that he could maximise his money that way. In any event, he did not think that his daughter wanted to sell the business because it provided her with a job and if she did sell it there would be significant capital gains tax consequences.
…
118.In giving his evidence [the wife’s father] presented as a direct, forthright and somewhat abrupt witness. I have little doubt that [the wife’s father] is a successful commercially-minded man and that in business he is unlikely to let emotion cloud his decision making. Nonetheless, on this issue and others, my overall impression of [the wife’s father] was that of a determined protective father who is aligned to his daughter’s interests in the current litigation.
119.In relation to the issue of whether he would offer a written lease to his daughter if she wished to sell the business, I felt that his answers in cross-examination, although confidently expressed, were tailored to a narrative that would minimise the value of the business in the asset pool. In giving his answers my impression was that [the wife’s father] was not prepared to seriously countenance the possibility that his daughter would ever contemplate selling the business as a going concern. Whilst he did give an answer to a question about a hypothetical request from his daughter for a lease, my impression was that [the wife’s father] did not really think it would ever happen and for that reason was confident to maintain the position that he would repurpose the building if his daughter did not want to continue operating the [business]. However, if confronted with the reality that his daughter’s business might realise well over $400,000 (on [the husband’s expert’s] evidence) if sold with a lease, I have considerable doubt, given his previous acts of generosity, that [the wife’s father] would deny his daughter the opportunity to realise the fruits of her 25 year investment. His concerns about the capital gains tax consequences of a sale implicitly acknowledges inherent value in the business.
…
187.Here the expert evidence is that the business is unsaleable in its current state because of the absence of a lease. If there was a lease in place or if the landlord was prepared to offer one to a willing purchaser, there is no question that there is a market for [businesses] and no question that the wife’s business could be sold as a going concern at a fair market value. However, notwithstanding the unsaleability of the business and the minimal value attributed to it by [the wife’s expert], the wife clearly wants to keep it, has no intention of walking away from it and her father/landlord has no intention of pulling the rug from under her. Justice and equity demands that the Court look to the reality of the situation and value the owner’s interest accordingly.
…
188.Having regard to the evidence, including the expert opinions, I am satisfied that in the circumstances of this case the “value to owner” approach to valuation is appropriate for the following reasons:
(1).[T]here is no market for the wife’s interest in the business. In the absence of a written commercial lease, the business is not saleable as a going concern to a third-party purchaser and cannot be valued on that basis;
…
(3).[A] unique benefit to the owner of the ongoing business is the security of its tenancy on favourable terms notwithstanding the absence of a written lease. While the wife’s father says that he could re-purpose the premises and derive a greater commercial return from it, he has not done so and I consider there to be no likelihood of him doing so while the wife operates the business. Moreover, the wife has been prepared to invest considerable funds from the business into renovations and improvements to her father’s property, suggesting that she has no concerns about the security of her tenancy;
…
(6).[A] further significant benefit to the wife is the very real likelihood that her landlord father would act in his daughter’s best interests should she ever decide to sell the business. There is evidence that there is a market for [businesses] and if a standard industry lease were in place, the wife could expect to realise in excess of $400,000.
(Citations omitted)
Neither legal principle nor logic precluded the primary judge from rejecting the wife’s father’s unconditional denial of his willingness to grant a lease. His Honour was entitled to infer the wife’s father would grant a lease so she can later sell the business, if she elects to do so. It was rational to infer the wife and her father would act to maximise the value of the business in such circumstances by the grant of a lease, but counter-intuitive to conclude they would instead sabotage the prospect of future sale by withholding a lease. An inferential probability may be deduced from a number of pieces of evidence, without any individual piece rising above the level of possibility, so long as the inference is reasonably drawn (Seltsam Pty Ltd v McGuiness & Anor (2000) 49 NSWLR 262 at [275]–[278]; Carr v Baker (1936) 36 SR (NSW) 301 at [306]–[307]). It was reasonable to draw the inference when the business had continuously operated in the premises for some 25 years, the wife had recently paid $105,000 to renovate the premises for future use, and the wife was on good terms with her father.
In any event, the husband’s expert acted on the assumption that the wife’s father would not grant any lease and so calculated the value of the business in the wife’s hands by applying a multiplier to the future annual maintainable earnings of the business. The finding by the primary judge that her father would grant a lease only related to her ability to sell the business as a going concern at some point in the future and, hence, its value to a prospective purchaser.
The wife did not identify any error of legal principle by the primary judge, which is another dimension to this ground. On the topic of evaluating conflicting expert valuation opinion evidence, the High Court of Australia said this in The Commonwealth v Milledge (1953) 90 CLR 157 at [160]–[161]:
The learned judge formed a confident opinion that all six of these valuers were men of experience and integrity, and he drew no distinction among them in regard to soundness of judgment or otherwise. Since they differed so widely, not only in result but in approach and in choice of material, the task presented to a judge to whom they all seemed equally reliable was one which could not be satisfactorily performed in any other way than by making a critical selection of the most helpful facts from the mass of information provided by the evidence, and applying correct principles in the light of the select material.
(Emphasis added)
The “correct principles” of valuation to which the High Court was there referring were later described as a factual determination in these terms at [162]:
…It was indeed a jury question, in the sense that it was to be decided, not by strict adherence to precise arithmetical calculations, but by a commonsense endeavour, after consideration of all the material before the court, to fix a sum satisfactory to the mind of the court as representing the value [of the asset on a certain date]. … The problem was … to form an estimate which really satisfied his Honour’s mind as being the value of the [asset] to the [party] on the material date.
The primary judge undertook and fulfilled that task. Because the business was long-standing, secure, profitable, and attractive enough for the wife to want to retain, his Honour accepted the husband’s expert’s opinion evidence about applying a multiple of 2.75 to the future annual maintainable earnings of $156,082, yielding a value rounded to $429,500 (at [150]).
In Samper & Samper (2021) FLC 94-041 at [21], the Full Court said an appellate court will not upset a valuation finding made at first-instance unless satisfied the primary judge acted on a wrong principle of law or that the valuation finding was entirely erroneous. Neither of those alternatives was demonstrated here. The wife’s assertions of legal, factual and discretionary errors do not identify any errors – only her dissatisfaction with the valuation finding.
Moreover, the reasons given by his Honour for the valuation approach taken are quite adequate. The wife contended there was an unexplained “leap” from [188] to [189] in the reasons for judgment, but the contention is rejected. The conclusion expressed in [189] is the denouement of the valuation discussion which extends back over many pages of the reasons. No reader can be left in any real doubt about why the primary judge reached the valuation finding.
Ground 6
The primary judge identified one contentious issue between the parties to be the notional add-back to the parties’ assets of $106,681.87, which sum the wife paid to her father in August 2018, supposedly in repayment of loans extending back some 20 years (at [6], [47], [66], [69], [92b] and [190]), about six months before the parties separated in February 2019 (at [48]).
The primary judge discussed the evidence adduced on that issue (at [191]–[209]) and concluded the sum of $106,682 (rounded up from $106,681.87) should be added back to the asset pool (at [210]–[229] and [299]).
Ground 5, which attacked the finding of the add-back was abandoned, but Ground 6 was pressed in these terms:
6.Having determined to ‘add-back’ the wife’s savings, the learned trial judge failed to take the monies advanced by [the wife’s father] to the wife and the parties into account as a contribution by or on behalf of the wife, and failed to consider the accrual of savings as a further contribution by the wife.
(Emphasis added)
The wife contended that, having notionally added back the sum of $106,682 to the asset pool as an asset enjoyed by her, the primary judge ought to have given her credit in the evaluation of the parties’ respective contributions for having provided it. The assertion that the primary judge wrongly failed to do so is rejected, meaning this ground fails.
The wife impermissibly seeks credit for contribution of the $106,682 in two ways: first, as monies advanced to her by her father; and secondly, as a “further” contribution by her accrual of the savings. But the wife’s contribution could only be properly taken into account in one way, given the finding that the money was not advanced by the wife’s father as a loan. Either the money was a gift received from the wife’s father, for which the wife obtains credit as a contribution, or alternatively, she accumulated the money from revenue generated by the business, in which case she would derive credit for the contribution of the earnings.
The wife admitted putting aside the sum of $106,682 from revenue generated by her business and the primary judge expressly acknowledged her contribution by bringing in the business, running it, and generating income. The primary judge said this in that regard:
306. In addition to her financial contribution to the matrimonial home, at the commencement of the relationship the wife was the sole director and shareholder of [the business], a business which had been successfully operating for about 10 years under her ownership. This business must also be taken into account as part of the wife’s initial contribution to the parties’ assets.
307.Based on the evidence discussed earlier in these reasons, I consider that this business was a significant contribution. Although there is no evidence of the value of the business at the time of cohabitation which commenced in 2008, I am satisfied that it had a value to owner at that time of not less than $150,000, quite possibly more. I reject the submission on behalf of the husband that no value should be attributed to this contribution because there is no expert evidence of its valuation at the commencement of the relationship.
…
316.The wife contends that throughout the marriage she was responsible for the payment of utility bills, home and contents insurance, rates and many of the children’s expenses, all of which was paid from her personal savings. She says that the husband paid for his car insurance and the children’s motor bike activities.
…
324.All contributions made during the relationship and post-separation must be considered. The Court must evaluate the quantity and quality of the parties’ contributions holistically and then compare them.
…
328.I consider the wife’s initial contribution of property at the commencement of the relationship to be significant and foundational to the position in which the parties found themselves a decade later. It did in a sense act as a springboard for the accumulation of wealth but it was not the only contributing factor. The disparity in the initial contributions does not carry forward forever. In a holistic assessment it would be contrary to principle for the initial contribution to be quarantined from all the other contributions which followed.
329.In my view, before considering the parties’ future needs, I consider that the contributions of the parties to the property pool over the entire period of the relationship should be assessed at sixty-five percent (65%) thirty-five percent (35%) in favour of the wife.
(Footnotes omitted)
Grounds 7, 8 and 9
These grounds all concern the application of s 75(2) of the Act and are pleaded as follows:
7.Having made adverse findings of the husband and indicating they would be taken into account as part of consideration of s.75(2)(o) of the Family Law Act (Cth) 1975, the learned trial judge failed to do so and/or gave inadequate reasons as to how the issue of the true value of the husband’s retained assets was taken into account, and/or improperly exercised his discretion pursuant to s.75(2)(o) to ‘add back’ the sum of $106,000 as against the wife.
8.Having adopted a methodology with respect to the wife’s [business] which capitalised the income of the wife as notional property, the learned trial judge erred in then ‘double counting’ the wife’s income when considering s 75(2)(b) of the Family Law Act 1975.
9.The learned trial judge erred in failing to consider the nature, form and characteristics of the assets as he found them to be, and the actual effect of the orders:
9.1.As part of his Honour’s consideration of s 79(2)(n) of the Family Law Act; and
9.2.When ensuring that the orders made were just and equitable.
Ground 7 represents a complaint that, when applying s 75(2)(o) of the Act, the primary judge erred by failing to take into account, against the husband’s interests, a series of factual findings which should have off-set the add-back of $106,682 determined against the wife. Those factual findings were said to be: the items of personal property retained by the husband, which the wife estimated to be worth $80,200 but he alleged were only worth $28,400; a tax refund of $9,507 received by the husband in 2019; some cash kept in a gun safe; the sum of $9,000 derived from the sale of a car; and the sum of $1,500 derived from the sale of a boat.
The primary judge considered the evidence adduced in relation to those issues (at [230]–[249]), concluding that the husband’s admission of the property’s value at $28,400 should be accepted and the property included in the asset pool at that value (at [299]), but that his evasive evidence on those factual issues form part of the discretion exercise (at [277]–[283]). More particularly, the primary judge said this:
283.I have decided to adopt the husband’s asserted valuation ($28,400) for the purposes of the asset pool. However, in considering relevant matters under s 75(2)(o) and exercising my discretion in terms of the just and equitable adjustment of property, the husband’s non-disclosure on this issue and his failure to assist in the process of valuation weighs against him.
(Emphasis added)
As can be seen, the primary judge said the husband’s obfuscation was taken into account under s 75(2)(o) of the Act in the ultimate exercise of discretion under Pt VIII of the Act. His Honour did not expressly mention the issue again when later assessing the parties’ respective proportional entitlements in a 66/34 division (at [353]), but the wife assumes the failure to mention it a second time must mean it was overlooked, which assumption is rejected. The way in which the issue was comprehensively addressed in the reasons reasonably implies that it featured in the finding that the wife should have an adjustment of one per cent made in her favour pursuant to s 79(4)(e) and s 75(2) of the Act without having to discuss it a second time.
The primary judge said this:
352.Taking into account and weighing all of the above matters, including the superannuation disparity, I consider that a further small adjustment of 1% should be made in favour of the wife.
(Emphasis added)
The husband’s evasion about the items of personal property he retained was one of the “above matters” to which the primary judge expressly referred (at [277]–[283]). Having dealt with the factual dispute at length and recording that the findings would feature in the adjustment, it was unnecessary to refer to it again when dealing with other factors which would influence the exercise of discretion under s 79(4)(e) and s 75(2) of the Act (at [330]–[351]). Ground 7 fails.
Turning to Ground 8, as already noted, the primary judge accepted the valuation evidence given by the husband’s expert and valued the business at $429,500, including it at that value in the table of the parties’ assets (at [189] and [299]).
When later discussing the statutory considerations prescribed by s 79(4)(d)-(g) of the Act in the reasons for judgment, the primary judge considered the wife’s income-earning potential in light of her ownership of the business. Relevantly, the primary judge said this:
332.… The wife enjoys good health and can be expected to continue working as owner and manager of the [business]. …
…
335.The wife contends that the husband has a higher earning capacity. In her outline of case, the wife says that her income is limited to the amount the [business] can afford to pay her, which has been approximately $60,000 for the past 4 years. She says that if she was to no longer work in that business, her earning capacity would be limited to the [allied health industry], subject to her commitments to the children.
336.The wife’s income earning potential is a matter in dispute. In his trial affidavit the husband alleges that the wife has manipulated her income in order to misrepresent her true potential. Referring to her income tax returns, the husband says that she earned $144,480 in 2017, $128,480 in 2018, $83,280 in 2019 and $62,400 in 2020. The husband submits that the wife has consciously reduced her income in the period post separation with a view to misleading the Court, an allegation the wife denies.
337.The wife says that as a business owner, she can only pay herself a wage that will enable the business to remain solvent. She claims not to receive dividends or a share of profits or any other financial reward from the business other than her wage. In her trial affidavit the wife says that her income is “currently” $62,400 per annum, but there is no evidence that it has been at that level for the past 4 years.
338.Objectively, evidence given by [the wife’s expert] estimates that the average salary for a [business] manager is in the order of $130,000-$140,000. Research undertaken by [the husband’s expert] revealed that [business] managers are generally paid between $90,000 and $115,000 per annum. Financial records for the [business] revealed that the wife has earned well in excess of $100,000 in previous years. For example in 2014/15 her salary was $110,000 on a revenue of $872,000 and in 2018/19 her salary was $130,000 on a revenue of $939,000. It is also notable that as the wife’s salary income has reduced in recent years, profits retained in the business have increased.
339.Having regard to all of the evidence, I am of the opinion that the wife’s income earning potential is at least equal to the husband’s. I accept that as a business owner there will be variability in her income but the business has in the past been able to pay her wages which are significantly greater than she now receives. If she stopped working in the business and had to hire a manager, there is evidence that the market rate for such an employee would be in the range of $90,000 - $140,000.
340.If the wife chose not to work within the business, or decided to sell it and seek employment elsewhere, she should be able to secure employment as a [allied health] worker. However, because of her decades of experience and skills as a [business] manager, her real potential income should be measured by the market rate for that position.
341.The wife seeks orders that she retain the business. Even if I was persuaded that her income potential is only $60,000 per annum for the work she performs, I would regard potential profits in the business as a further financial resource. I note also that the wife concedes that the business pays for her mobile phone and petrol and that the husband claims it also paid for other household expenditure. The ability of the wife to structure her affairs in a tax advantageous manner is a benefit to her.
342.The wife says that orders sought by the husband will impact her future earning capacity (s 79(4)(d)). In her case outline, the wife contends that she will not be able to keep the [business] if the husband’s valuation is attributed to it. She submits that the effect of the husband’s valuation and the orders sought by him will be that she will be forced to buy a substantial portion of the business back from the husband, for a price which exceeds its realisable value. The wife also submits that the husband’s valuation capitalises her only source of income, such that she would not have an effective income for the next seven (7) years.
342.I do not accept these submissions. A proper valuation of the [business] for family law purposes is necessary to allow a just and equitable division of property. I see no basis for the submission that she will be unable to keep the business and I do not accept that she will be forced to close it. Moreover, the submission that the valuation capitalises her income and will deprive her of effective income in the future is misconceived. The capitalisation of future maintainable earnings including the proprietors salary is an accounting exercise directed at revealing the true value of the business as a going concern. That exercise has no cash flow impact. The orders proposed will not reduce her earning capacity.
(Emphasis added)
On account of those findings, used in conjunction with others which are not now challenged, the primary judge found an adjustment in favour of the wife was warranted, assessed at one per cent (at [352]).
The wife’s submissions in the appeal do not demonstrate any error by “double-counting” her future income after having already valued the business at $429,500. Her submissions in the appeal replicate those made to the primary judge, which were rejected (at [342]). The business was valued at an amount which represented its value to her as its owner, based on her expected earnings into the future. When taking into account the parties’ respective future income-earning capacity for the purpose of s 79(4)(e) and s 75(2) of the Act, it would have been oddly inconsistent to ignore the wife’s likely future income and pretend she would have none just because her future income was a co-efficient in the equation used to value the business.
The business is an asset of the corporation, which in turn is an asset of the wife by reason of her exclusive shareholding in the corporation. The shareholding is an alienable asset with a capital value, which fact is not open to dispute. There is only room for dispute about the value ascribed to the asset. It was common ground the business could not be sold by the wife as a going concern without a lease in place, but the business was valuable to the wife even without a lease and would be a valuable asset to sell with a lease, which the primary judge found the wife’s father would be willing to grant if necessary. The findings reflected the reality that the wife controlled a valuable business, generating her annual income, which could be sold to a willing purchaser (with a lease). Whilst ever she retained the business, she had an income.
Contrary to the wife’s submissions, the task of valuing the alienable asset (being the business in its incorporated form) was not a comparable exercise to the actuarial valuation of an inalienable defined-benefit pension, which methodology capitalises a dependable future income stream to produce a notional current value of the superannuation interest for the exclusive purpose of subjecting it to a superannuation splitting order. In that situation, one must certainly avoid double-counting the income stream as both the notional asset and future income (Preston & Preston (2022) FLC 94-108 at [8]–[22]). Ground 8 fails.
Ground 9 asserts the primary judge erred by failing to consider the actual effect of the orders, as part of the consideration required by s 75(2)(n) of the Act, when ensuring the orders were just and equitable. The complaint is rejected.
The primary judge expressly found the division of net assets in 66/34 per cent portions to the parties, favouring the wife, was an “appropriate, just and equitable outcome” (at [353]). The orders made to effect that division reflected the parties’ proposals. The wife kept both the business and [Suburb C], as she proposed (at [71]). The husband kept [Town E], as he proposed (at [69]). The only difference is that the wife was ordered to pay the husband $410,542 in order to keep the assets she wanted, instead of the lesser sum of $39,932 she had proposed (at [71]). But the pay-out figure was not as much as $550,000, which figure the husband had proposed (at [69]). The parties agreed upon the values ascribed to [Suburb C] and [Town E] (at [87]), so the wife’s complaint necessarily defaults back to the value ascribed to her business, which has already been covered in discussion of the other grounds.
The wife now submits in the appeal, implicitly if not expressly, that she lacks the resources to borrow sufficient money to pay-out the husband. She knew that prospect existed from the way in which the trial was run, but she did not adduce any evidence to prove the limit of her borrowing capacity. On the contrary, she said this in her affidavit:
137.I seek to retain the matrimonial home (and the Business) as part of the property settlement between [the husband] and me. In order to achieve retention of the matrimonial home, I am aware that I may need to make a payment to [the husband]. If I am to make a payment to [the husband], I would seek 90 days to borrow funds to do so. I am hopeful my father would loan me such monies if a bank would not.
The appealed orders gave the wife the 90 days reprieve she sought.
Disposition
The appeal is dismissed.
The husband consequently sought his costs of the appeal from the wife, assessed by him at $24,352.82.
A costs order should be made in the husband’s favour because the appeal was wholly unsuccessful, but the costs should be reduced because they were not computed by him on a party/party basis, even though scale costs prescribed by the Rules might have been applied to each item of work undertaken by his lawyers. The wife submitted the party/party costs should more properly be assessed at $12,500, but that figure is too low.
The wife gave several examples from the husband’s schedule of costs where items of work were not genuinely party/party items and the costs were excessive. Without resorting to an intricate assessment, in reliance upon r 12.17(1)(a) of the Rules, the husband’s party/party costs are fixed at $18,000.
I certify that the preceding seventy-eight (78) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Austin. Associate:
Dated: 23 June 2023
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