Gollings & Scott
[2007] FamCA 397
•4 May 2007
FAMILY COURT OF AUSTRALIA
| GOLLINGS & SCOTT | [2007] FamCA 397 |
| FAMILY LAW - APPEAL – Property settlement – Husband appeals orders that he transfer to the Wife his interest in the former matrimonial home and discharge the mortgage of about $274,000 – Disputed asset pool – Husband earning capacity in excess of $500,000 per year – Add back of the $72,281 gifted by the Husband to his new partner to acquire property set aside in light of the principle that parties are entitled to reasonably conduct their affairs post-separation – Tax debt owing at date of hearing of $88,000 included even though partly attributable to income spent on the husband’s new partner – Property order exceeds value of asset pool – Normally an order adjusting property interests under section 79 ought not exceed the totality of the net assets of the parties – In the re-exercise of discretion, noting a concession as to equal contributions, the relevant section 75(2) factors: · the Husband’s overwhelmingly larger earning capacity; · the Wife’s health; · the Wife’s ongoing responsibility for the children; · the Husband’s benefits from his occupation of his partner’s property; · the Husband’s obligations to pay spousal maintenance and child support; and · some of the tax liability relates to monies spent for the benefit of the new partner favour a very significant adjustment in favour of the Wife of 98% of the asset pool, whereby the Husband discharges $150,000 of the mortgage and the Wife retains the former matrimonial home Spousal Maintenance – $48,000 per year – As the needs of the Wife were unchallenged and the Husband did not show he could not reasonably meet the amount ordered, appeal dismissed |
| Family Court Act (1997) WA |
C & C [1998] FamCA 143
Chang v Su (2002) FLC 93-117; (2002) 29 Fam LR 406
Chorn and Hopkins (2004) FLC 93-204; (2004) 32 Fam LR 518
HDM and MM and SJM [2006] FamCA 47
Kowaliw (1981) FLC 91-092
Milankov and Milankov (2002) FLC 93-095; (2002) 28 Fam LR 514
Omacini and Omacini (2005) FLC 93-218; (2005) 33 Fam LR 134
SMB and MFB [2006] FamCA 46
Weir and Weir (1993) FLC 92-338; (1992) 16 Fam LR 154
| APPELLANT HUSBAND: | MR GOLLINGS |
| RESPONDENT WIFE: | MS SCOTT |
| FILE NUMBER: | PTW | 143 | of | 2004 |
| APPEAL NUMBER: | WA | 5 | of | 2006 |
| DATE DELIVERED: | 4 May, 2007 |
| PLACE DELIVERED: | Melbourne |
| JUDGMENT OF: | Finn, Kay and Boland JJ. |
| HEARING DATE: | 17 October 2006 |
| LOWER COURT JURISDICTION: | Family Court of Western Australia |
| LOWER COURT JUDGMENT DATE: | 1 March 2006 |
REPRESENTATION
| COUNSEL FOR THE APPELLANT: | Mr Bennett |
| COUNSEL FOR THE RESPONDENT: | Mr McCormack |
| SOLICITORS FOR THE RESPONDENT: | Paynes |
Orders
(1) That the appeal be allowed.
(2)That orders 2 and 3 of the orders made by the Honourable Justice Martin on 1 March 2006 be varied by substituting the sum of $150,000 for the sum of $274,361 therein appearing.
(3)That within 21 days the appellant file and serve any submissions that he seeks to make concerning his appeal against the order for costs made by the Honourable Justice Martin on 28 March 2006 and concerning the costs of this appeal.
(4)That within 14 days of receipt of same, the respondent file and serve any submissions in response to the costs appeal and any costs issues arising out of this appeal.
(5)That within 7 days of receipt of same the appellant file any further submissions in reply.
| FAMILY COURT OF AUSTRALIA AT PERTH |
Appeal Number: WA5 of 2006
File Number: PTW143 of 2004
| MR GOLLINGS |
Appellant Husband
And
| MS SCOTT |
Respondent Wife
REASONS FOR JUDGMENT
This is the husband’s appeal against property and spousal maintenance orders made by Martin J on 1 March 2006. A cross appeal by the wife was not ultimately pursued.
The property orders the subject of challenge by the husband require him to transfer to the wife his interest in the parties’ former matrimonial home (“the house”) and to discharge a mortgage over the home in the sum of $274,361 at the rate of $3,000 per month until paid in full. The spousal maintenance orders require the husband to pay $48,000 per annum. The husband also challenges an order requiring him to provide tax indemnities to the wife.
In his written submissions in support of the appeal the husband seeks orders to the effect that his obligation to discharge the mortgage be set aside, that his maintenance obligation be reduced to $30,000 per annum and that he not be required to give the wife the tax indemnities as ordered.
The husband also appeals against, and seeks the discharge of, a costs order made on 28 March 2006 and that he be awarded costs of not less than $20,000 in respect of the substantive proceedings. The appeal against the costs order is to be determined by written submissions following delivery of judgment on the substantive appeal.
Background
The parties commenced cohabitation upon their marriage in March 1986 and separated in May 2003. There are four children born of the marriage, between 1986, 1988, 1989 and 1992. At the time of trial the three younger children were still at school while the eldest was a first year university student. They all reside with the wife.
The parties divorced in April 2005. The wife has not repartnered. The husband commenced living in a de facto relationship shortly after separation with Ms Y. We have been informed they married some time after the hearing before Martin J.
At the time of the proceedings before Martin J the husband was the managing partner of a professional partnership. He has subsequently left that business and commenced a new partnership. The wife was not working at the time of the trial but was intending to return to part-time work coordinating an educational course.
In her primary judgment delivered on 20 January 2006 her Honour concluded that there was a pool of assets of $797,106 plus superannuation of $73,221, making a total pool of $870,327. In a supplementary judgment issued 7 April 2006 there was an agreed adjustment to the husband’s superannuation reducing its value from $54,241 to $38,492. This resulted in the consequential diminution of the value of the superannuation of the parties to $57,472 and a consequential diminution of the total pool down to $854,578.
The assets of the parties as found by the trial judge (after the superannuation adjustment made on 7 April 2006) were as follows:
Husband
Wife
Bank Accounts
A Bank account
909
B Bank account
(E)10,500
Real Estate
Former matrimonial home
760,000
Proceeds of sale D property
145,925
Funds spent by husband on F property
72,281
Shares
Z Ltd shares at 23.50c per share
15,168
Interest in partnership
348,000
Motor Vehicles
VW Beetle
18,000
1994 BMW
28,000
Other Assets
Boat
95,000
Monde
Household effects
17,885
30,635
Jewellery
3,645
YYY Charters (business)
NK
Total:
733,668
812,280
Liabilities
Mortgage on former matrimonial home
274,361
C Bank loan
22,000
Business loan
195,000
D Bank loan (for boat)
51,000
Income tax
161,481
Loan from parents
(E)10,000
Capital Gains Tax on sale of D property
35,000
Sub total:
452,481
296,361
Net total:
281,187
515,919
Superannuation
U Super Fund
16,490
W Super Fund
2,490
Gollings Super Fund
38,492
Total:
319,679
534,899
A significant issue at the trial was the value to be ascribed to the husband’s partnership interest. The husband had asserted his interest should be valued to represent the balance of his current account and equity fund in accordance with the terms of the partnership deed. The wife had asserted that the valuation should make allowance for capitalised super profits. This issue was resolved by the trial judge in favour of the husband and is not the subject of an appeal before us.
the judgment
At the commencement of her judgment the trial judge noted that the principal issues were as follows:
1.Whether the husband was bound by the wife's acceptance of an offer made by him in December 2004.
2.The value of the asset pool, the most significant issues being the valuation of the husband's interest in his professional partnership, but there were also issues of appropriate adjustments for add-backs and debts.
3. The appropriate adjustment for s 79(4)(e) factors.
4.The precise provision for spousal maintenance, and whether, in effect, all the mortgage payments for the former matrimonial home, in which the wife resides, and which the husband had agreed to pay for the next ten years, were to be characterised as being spousal maintenance, or settlement of property.
5.The precise arrangements for child support and adult child maintenance.
Her Honour then set out, by way of background, the parties’ working history during the course of their relationship and findings relating to the acquisition of assets. It is unnecessary for us to repeat in detail the findings by her Honour made in relation to these issues because as her Honour said at para 159:
Mercifully, the parties agreed that contributions overall, both before and since separation, should be regarded as being equal…
In the course of detailing background matters, her Honour touched on some issues that are the subject matter of the appeal and it is perhaps convenient that we simply identify those at this stage.
At para 34 her Honour said:
On 30 June 2004, [Ms Y] purchased [the F property]…for $655,000. The husband paid the deposit of $10,000 and stamp duty of $34,170. [Ms Y] has contributed about $123,000. The husband has since paid for improvements, including $16,677 sourced from long service leave entitlements, and $11,440 from other funds. He also meets the mortgage payment on the property of about $3,500 per month.
At para 36 her Honour said:
In July 2004, the wife sold her Honda Odyssey motor vehicle, receiving $17,000, which was used to pay legal fees, some living expenses and to visit her expert valuer…in Sydney.
When identifying the assets her Honour said:
54For the wife, it was submitted that the sum of $72,281, spent by the husband on [Ms Y’s] property should be included as an asset in the husband's hands, as it should really be an add-back. In closing, it was suggested that one of the reasons for this was that the parties had agreed contributions overall should be regarded as being equal.
55The husband's position was that this was not appropriate since the stamp duty paid was irrecoverable in any event, and the funds have been paid from earnings made since separation.
56The husband pays the mortgage on the property on an ongoing basis, but would have to accommodate himself in any event, but not at such a high cost. The husband has clearly contributed to the property, and would be given credit for this, whether or not the relationship continues. I have therefore determined that these funds should be included as an asset in his hands.
…
Motor vehicles
58…The husband included as an asset in the pool the wife's 1998 Honda Odyssey motor vehicle which she sold for $17,000 using the proceeds to fund legal fees to travel to Sydney to see [her expert valuer], and meeting legal expenses. The husband claims the vehicle should have been sold for as much as $25,000. I do not propose to add the value of the vehicle back, in circumstances where I have decided not to add back the paid legal fees, and the sale proceeds have been largely used for the cost of litigation.
…
Other chattels
65As to the husband's household effects, for the wife it was submitted they should be included at $17,885 which was the estimate of her valuer… In closing, the wife accepted this figure. The wife's chattels were agreed at $30,635.
As will become apparent when we deal with the grounds of appeal, one issue raised by the husband concerned her Honour’s failure to add back into the pool of assets the motor vehicle that had been sold by the wife.
Her Honour, after setting out the principles as outlined in Chorn and Hopkins (2004) FLC 93-204; (2004) 32 Fam LR 518 at paras 56-60 where the court discussed the discretion as to the manner in which paid legal fees might be treated, identified the wife’s paid legal fees in the sum of approximately $100,000 (see para 131) and the husband’s in the sum of $62,500 (see para 132).
Her Honour noted that the husband’s fees had been met from post-separation earnings and the wife’s fees had been met by post-separation borrowings (having earlier noted, of course, that part of the fees came from the sale of the Honda). Her Honour concluded that she would not include the fees paid by either party as an add-back.
There was an issue concerning the amount to be allowed as a liability owed by the husband for income tax. Her Honour allowed the sum of $161,481 which was a figure agreed by the parties as owing by January 2005 but made no allowance for a further sum of $88,034 in relation to a quarterly payment that was due for the first quarter of 2005. Her Honour said:
143The wife does not accept this item, as for her it was submitted that this payment should have been funded out of future earnings of the husband over the next few months. I do not accept the sum should be regarded as a joint liaiblity in the absence of agreement, being tax on post-separation earnings.
Her Honour, having noted the agreement of the parties that contributions should be regarded as equal then turned her focus to considerations under s 79(4)(e) identifying that the wife had health problems. In December 1989, a few months after [the third child’s] birth, the wife suffered a stroke which caused her some permanent loss of left field vision and residual weakness in the left side of her body. She was diagnosed as suffering from depression in April 2004, which condition, her Honour found, should improve once stresses, including the proceedings, were reduced. Her Honour found further that the wife had a severe iron deficiency and that the anaemia would preclude her from employment for several months.
She noted that the husband over the last five years had a consistently high income, saying:
165…the husband is the managing partner, and an equity partner, of a major Perth professional firm. The husband has a very high income, although this has been variable over the years and it is only in that last five years or so he has had a consistently high income. His income from all sources in 2003 was about $782,000. In the 2004 financial year he earned about $840,000 from all sources. However, his evidence was that there was cause for pessimism in the 2005 year, and his income to June 2005 could be as low as $558,000…
Her Honour noted further that he received other benefits from his employment, including expenses of running a motor launch, and she concluded at para 169:
While the husband’s very high income earning years have been recent, I have considerable confidence he will continue to earn over $500,000 per year and probably in the range of $700-$800,000 per annum.
Her Honour noted the wife was in receipt of distributions of approximately $100,000 per annum from the family trust which trust derived income from a service trust associated with the husband’s partnership. Her Honour noted that the wife claimed that the necessary expenditure for herself and the children was $216,202 per annum and that the husband claimed that the expenses were excessive. Her Honour said:
176I accept some of the challenges to the wife’s expenses of being overstated but do not criticise her in this regard, appreciating that children of this age are very expensive, and that the family should not have to reduce its standard of living in the circumstances.
She said of the wife’s earning capacity:
177The wife has earned some income from part-time employment since separation, and her evidence was that she had obtained a position at [a university] which would pay her $22,000 per year. The wife is a qualified [professional] and I accept that she has a reasonable part-time earning capacity while she has the children residing with her, and this should soon be at considerably more than $22,000 per annum. I accept the children require a great deal of "ferrying" for the time being, being involved in many different activities, and the other children's commitments limit the wife's reasonable employability at this stage. Her earning capacity should increase once the children become more, and then fully, independent, but the husband's earning capacity will still remain very much greater, even when the children are totally independent. I note that her income from employment was much the same as [Ms Y’s], who is also a qualified [professional].
Her Honour noted that the husband had living expenses of $10,553 per week, not including tax. Ms Y with whom he lived was working on a part-time basis as a qualified … earning $400 per week and the support the husband was paying towards Ms Y and her children extended to $1,352 per week. It is not clear from her Honour’s judgment whether that was inclusive of or in addition to $3,500 per month that he was paying in respect of the mortgage of the home owned by Ms Y that they both occupied.
Her Honour identifed that the extent to which each party had contributed to the income, earning capacity, property and financial resources of the other party was a signficant consideration.
Her Honour concluded that a just and equitable outcome would be for the wife to receive the matrimonial home unencumbered “in due course”. She calculated that this would mean that the wife would receive 93 per cent of the asset pool that she had identified, saying that “this is not as extreme as it sounds, as the parties agreed that the husband may pay the mortgage off over several years”.
Her Honour then turned to issues of child support and spousal maintenance and whilst she said that there was little dispute about the amount the husband ought to pay for each child ($13,000 per year as sought by the wife versus $12,500 as conceded by the husband) she said that the wife’s expenses greatly exceeded the funds available to her and that she had an ongoing need for spousal maintenance that was likely to continue until the youngest child left school. Her Honour concluded that the sum of $48,000 per annum was appropriate having regard to the husband’s ability to pay and the wife’s present earning capacity.
Her Honour then outlined the orders that she was proposing to make and invited the parties to address her further upon them.
We do not have in the appeal book any transcript of the proceedings after the original judgment was delivered nor any copy of the minutes proposed by each party.
The supplementary judgment
In her supplementary reasons for judgment delivered on 7 April 2006 her Honour noted that the proceedings were adjourned for argument in relation to the proposed orders until 2 February 2006 and then to 22 February 2006. She dealt with an application by the husband to reopen his case relating to superannuation and his taxation liability, allowing the superannuation issue to be reopened and adjusted, but refusing to allow the matter to be further reopened saying:
16.I am not satisfied on this issue that the husband should be permitted to reopen after the judgment, when he could readily have done so in the, unfortunately, many months since trial. I was aware from press reports that the husband’s position has changed significantly since trial, yet neither party sought to reopen in this regard. Admittedly, to have done so would have meant a reconsideration of the whole of the husband’s financial position. The issue of taxation cannot be considered in isolation. Having regard to these issues, I am not prepared to vary my decision as to the liability for taxation.
Her Honour went on to then deal with the form of the orders that ought to be made accepting that it was appropriate to release to the husband the proceeds of sale of the D property in the sum of $145,925 to enable him to have funds to pay his assessed tax. Her Honour made orders that would provide for the husband to discharge the mortgage on the home over a number of years.
Her Honour concluded her reasons by explaining why she intended to make one of the orders complained of in this appeal, namely the provision of a tax indemnity to the wife, saying:
22.As to the issue of the orders sought by the wife in relation to tax effective payments of funds to the wife and children, payments for the children being expressed net of tax, and the preamble sought by the wife in relation to the wife’s earnings, these partly appeared in the husband’s Minute as well and otherwise were not really disputed by the husband. The orders proposed by the wife reflect what has really been happening for some time, so in these respects I have made orders as proposed by the wife.
The appeal
At the hearing of the appeal before us the husband’s counsel sought to argue that the trial judge was in error in determining the size of the pool of assets available for distribution between the parties and that accordingly an order by way of property settlement whereby the wife received the home unencumbered effectively meant that she received more that 100 per cent of the pool of assets available for division between the parties. It was submitted that such an order was beyond power or, if within power, was patently unjust and inequitable.
The alterations to the pool of assets that he submitted ought to have been made were as follows:
a.There should have been included in the pool of assets the proceeds of the sale of the wife’s Honda in the sum of $17,000;
b.There should have been deducted from the pool of assets the value attributed to the husband’s interest in [Ms Y’s F property] of $72,281;
c.The husband’s furniture should have been excluded resulting in a deduction of $17,885;
d.The husband’s superannuation entitlements should have been reduced from $54,241 to $38,492;
e.The liabilities should have been increased to allow a further $88,034 for the husband’s taxation;
f.The liabilities should have been increased to allow for liabilities paid off by the husband post-separation, being
· AGC car loan, $32,000;
· [D Bank] loan, $9,000
· Parents’ loan, $7,000;
g.The liabilities should have been increased to make allowance for tax claimed by the wife as owing after separation being identified after the hearing in the sum of $61,000.
If each of these allowances were made, the pool of assets originally identified by the trial judge as being worth $870,327 would be increased by the value of the Honda ($17,000) but decreased by the removal of the assets referred to in b, c and d ($105,915) and further decreased by the inclusion of the other liabilities identified in e, f and g ($197,034). This would result in a pool of assets worth $584,378 of which the wife would already own either actually or notionally assets to a net value of $490,899 (being the amount set out by her Honour at para9 above plus the car less the tax debt) and the husband the balance of $93,479.
If no further adjustments were made by way of an order for alteration of property interests the wife would receive approximately 84 per cent of the pool of assets as calculated by the husband, and the husband the balance. In argument before us his counsel appeared to concede that there would still be scope for us to order by way of property settlement a further sum (albeit on terms as to payment), as long as that sum did not exceed the value of the total pool of assets.
Discussion
The superannuation adjustment
As was acknowledged by the trial judge in her supplementary judgment, it is clear the original pool needed to be adjusted to correct the error relating to the husband’s superannuation and the sum of $15,749 was appropriate to be deducted from it. Her Honour gave effect to this complaint in her supplementary judgment.
Discharge of debts post separation
Given the parties’ concession that contributions of all kinds up to the date of the trial should be considered as equal, it would be inappropriate for a separate allowance to be made in relation to debts discharged by the husband between the date of separation and the date of trial. Any contribution made in that regard had already been subsumed into the concession made by the parties of an equal contribution. The husband’s contribution post-separation included the support of the family and the discharge of the family’s debts acquired prior to separation. The wife’s contribution was constituted mainly by her physical care and parenting of the four children of the marriage post-separation. As the parties had conceded to the trial judge that such contributions were to be seen as to be of equal value, there is no warrant for paying special consideration to the discharge of post-separation debts (although not necessarily assets acquired or notionally acquired post-separation).
The wife’s taxation
As to the suggested increase in the amount of the liabilities for the wife’s tax, this matter was the subject of a separate ground of appeal (Ground 4) which can be seen in broad terms as asserting that the order (Order 22) requiring the husband to provide a tax indemnity to the wife was unsupported by any reasons either in her Honour’s reasons for judgment of 20 January or 7 April 2006. It appears that the order was sought by the wife subsequent to the delivery of the judgment on 20 January 2006, presumably in a minute of orders provided on the wife’s behalf or orally at the hearing on either 2 or 22 February 2006. However as we noted earlier (para 31), we have not been provided with any minute of orders or transcripts of those subsequent hearings, which might well have explained her Honour’s reasons for the order in question. It fell to the appellant husband to provide us with such material if he was to endeavour to establish the ground in question.
Furthermore we were informed in the husband’s written submissions in support of the appeal that on 27 July 2006 the wife wrote to the husband for the first time to advise him that an amount of $36,000 should be forwarded by him to her accountant for tax liabilities of the wife arising from distributions from the Gollings Family Trust in the year ending 30 June 2004 and a further $25,000 for the year ending 30 June 2005. No application was made to us to lead any further evidence relating to this submission and absent any successful application, it could not be said that there was any error by the trial judge in her calculation of the pool of assets or any potential miscarriage of justice that needed to be corrected by allowing this further evidence. In the circumstances we do not think it appropriate that we make any adjustment to the pool of assets as established by the trial judge to make allowance for the wife’s post-judgment tax assessment.
It was suggested that the trial judge ought to have taken steps at the trial to satisfy herself whether any such liability existed and that it was a serious error for the trial judge to determine that it was necessary and appropriate to impose an obligation on the husband for the payment of further taxation liability for a period prior to the trial when at the same time concluding there was no such liability for the purposes of calculating the net property position of the parties.
We were not directed to any information whatsoever that would lead us to conclude that the trial judge ought to have made any inquiry about this matter. The husband, who was appearing for himself, was a senior partner in a professional firm. The tax liability, which was eventually passed to him by reason of the indemnity orders, arose because of the manner in which he and his wife had organised their affairs so as to minimise the incidence of taxation. It was clearly open to the husband to draw her Honour’s attention to the possibilities of a further tax liability becoming known to the parties after judgment but no such submissions appear to have been made. There is nothing in any of the material before us that would suggest that the course adopted by the trial judge of leaving the husband to bear the burden of the tax liabilities that were incurred in relation to money which was ultimately utilised by the wife and children for their support was inappropriate. We were not taken to any passage in the material that would suggest that the husband sought to raise this point before the trial judge or to seek any adjournment until any potential problems were clarified. In the circumstances we see little merit in the argument advanced by the husband in relation to the wife’s taxation debt.
The wife’s Honda
At the date of separation the wife owned a Honda Odyssey motor vehicle. Prior to the trial the wife had sold the vehicle for $17,000 and applied the proceeds to fund legal fees and to travel to Sydney to see the witness who gave expert evidence on her behalf as to the value of the husband’s interest in his partnership. It was the husband’s assertion at trial, and repeated before us, that those monies should have been notionally included in the pool of assets available for division between the parties and credited to the wife. The trial judge determined in the passage we cited above that she would not include the legal fees paid by either of the parties as an add-back.
The Full Court in Chorn and Hopkins, after an extensive examination on the authorities relating to the treatment of paid legal fees, concluded that ultimately whether or not they were to be added back into the pool of assets available for division was a matter for the discretion of the trial judge. The Court said:
56. In summary, we consider that the above mentioned decisions of the Full Court establish that, while the treatment of funds used to pay legal costs remains ultimately a matter for the discretion of the trial Judge, in determining how to exercise that discretion, regard should be had to the source of the funds.
57.If the funds used existed at separation, and are such that both parties can be seen as having an interest in them (on account, for example, of contributions), then such funds should be added back as a notional asset of the party, who has had the benefit of them.
58.If funds used to pay legal fees have been generated by a party post-separation from his or her own endeavours or received in his or her own right (for example, by way of gift or inheritance), they would generally not be added back as a notional asset; nor would any borrowing undertaken by a party post-separation to pay legal fees be taken into account as a liability in the calculation of the net property of the parties. Funds generated from assets or businesses to which the other party had made a significant contribution or has an actual legal entitlement may need to be looked at differently from other post-separation income or acquisitions.
59.Outstanding legal fees themselves are generally not taken into account as a liability.
60. If in the exercise of the discretion, it is determined that legal fees already paid should be taken into account as a notional asset, then normally any liability associated with the acquisition of the monies used to pay the legal fees should also be taken into account.
It must always be remembered that the Full Court in para 56 of Chorn and Hopkins expressly recognized that the treatment of funds used to pay legal costs remains ultimately a matter for the discretion of the trial judge.
In para 58 the Full Court identified that if the funds used to pay legal fees had been generated by a party post-separation from his or her own endeavours they would generally not be added back as a notional asset. That general statement was made subject to the caveat that
...funds generated from assets or business to which the other party has made a significant contribution…may need to be looked at differently from other post-separation income or acquisition.
It seems clear that her Honour in the exercise of her discretion was entirely conscious that some of the source of funds expended by each party could properly be attributed to either property owned by them at the date of separation or to earnings generated post-separation in circumstances where the capacity to generate that income had been significantly contributed to by the other party.
It was in our view entirely appropriate for her Honour, as an exercise of her Honour’s discretion, to make no requirement that either party’s expenditure for legal costs should be added back into the pool of assets in the circumstances where the husband had already expended $62,500 and the wife about $100,000.
In any event, we are of the view that the notional inclusion of the sum of $17,000 might be seen in the context of this case as fitting comfortably within the application of the de minimis principle as discussed in the Full Court in Milankov and Milankov (2002) FLC 93-095; (2002) 28 Fam LR 514. In that case, a potential error of $11,000 in a pool of $854,810, and where the husband was earning in excess of $150,000 per annum was viewed by all members of the Full Court as being, in the context of that case, negligible. In so finding the Court was careful to note that in other factual circumstances where the assets and income earning capacity of the party claimed against were less, it would be unjust to invoke the de minimis principle even in appeal proceedings. In their majority judgment Nicholson CJ and Buckley J said at para 45 the disputed amount must be examined with regard to the factual context surrounding the claim.
In the circumstances of this case, where the husband’s earning capacity was conceded to be in excess of $500,000 per annum, a dispute about $17,000 that the wife had utilised from the joint assets of the parties to assist her in ameliorating her legal expenses, is not an issue which we can say ought to have led the trial judge inexorably to include the sum in the pool of assets.
The husband’s furniture
In the Notice of Appeal the husband submits that the trial judge
…erred in finding that $17,885, being the value of the husband’s household effects, all of which were purchased with monies earned after separation, should be considered as assets in the husband’s hands.
The husband’s written submissions do not expand on the ground and it was touched on only briefly in the oral submissions.
The contents of each of the party’s homes appear in their lists of assets and liabilities made available to the trial judge. In his schedule the husband included as Item 18 contents of the F property, $17,885 (AB 1059). In the same set of submissions the husband said at AB1051 “the parties have agreed that contributions are equal, prior to and post-separation”.
No issue appears to have been joined by the parties as to the inappropriateness of including amongst the pool of assets, to which the parties were said to have been joint contributors, assets acquired by either of them after separation.
Given that this was not a matter of contention at trial we are not persuaded that there was any error demonstrated by the trial judge in including the post-acquired furniture in the pool of assets constructed by her.
The F property
In a document headed “Papers for the judge” filed on behalf of the wife at the commencement of the hearing on 3 March 2005 the wife said at AB1014 under the heading “Contributions”:
39.All contributions have been agreed as equal. This includes contributions as envisaged by the parts of s 75(2) relevant to s 79(4).
She then asserted at AB1017 under the heading “Monies paid to [Ms Y] by the husband”:
69.It is not yet known precisely how much the husband has advanced to [Ms Y] during the three years of their relationship. The wife’s position is that monies advanced to her by the husband used to acquire assets and to renovate the [F] property ought to be added back into the asset pool.
70.It may be appropriate for some other funds advanced to [Ms Y] to be added back to the asset pool.
In a document entitled “Papers for the judge” filed by the husband on 4 March 2005 the husband acknowledged under the heading “Contributions under s 79(4)” that:
The parties have agreed that contributions were equal, prior to and post-separation.
Then, under “Summary of issues for determination” and the heading “[F] property” the husband said (AB1055):
The husband has no interest (legal or beneficial) in the [F] property.
As we discussed earlier her Honour found that Ms Y had purchased the F property in June 2004 for $655,000. The husband paid a deposit of $10,000 and stamp duty of $34,170. He subsequently paid improvements, including $16,677 sourced from long service leave entitlements and $11,440 from other funds. Additionally he had been meeting mortgage payments on the property of about $3500 per month.
Her Honour determined to add back into the pool of assets the capital sums expended by the husband in relation to the F property but not the mortgage payments. As already referred to she said:
The husband has clearly contributed to the property, and would be given credit for this, whether or not the relationship continues.
It was forcefully submitted on behalf of the husband that there was no basis in law or equity for the trial judge to conclude that because the husband had made payments in relation to Ms Y’s property that he would be given credit for it. At the time of the trial the husband and Ms Y had been living together for less than two years. Any claim in relation to recovery by the husband of monies advanced to Ms Y would have to be dealt with either in accordance with general equitable principles or brought under s 205Z of the Family Court Act 1997 (WA). The jurisdiction to make an order under the Family Court Act requires a de facto partner who applies for an order in a relationship that has lasted for less than two years to have “made substantial contributions of a kind mentioned in s 205ZG(4)(a), (b) or (c)” and to also establish that the failure to make an order would result in serious injustice to the applicant. Whilst the evidence firmly established is that the husband had made a direct financial contribution to the acquisition of the F property it did not necessarily follow that had he brought an application under the provisions of the Family Court Act he would recover the amount that he had put into the property or succeed in establishing that there would be a serious injustice if he was denied relief. It was submitted that claims for an equitable interest in the property were even more speculative given that the husband had made it clear that monies advanced to Ms Y were by way of gift.
At best at the time of trial the husband had a speculative chose in action which might have enabled him to recover some of the monies that he had advanced towards the acquisition by Ms Y of the F property. It was entirely speculative as to whether the value of that chose of action equated to the amount of capital that he had spent on assisting Ms Y to acquire the property or to improve it. Absent any such findings as to the value of the chose in action the more appropriate question for the trial judge to have asked herself was whether the justice of the case required that monies spent by the husband post-separation in the furtherance of his relationship with Ms Y should be notionally added back into the pool of assets divisible between the parties.
In Omacini and Omacini (2005) FLC 93-218; (2005) 33 Fam LR 134 the Full Court identified three clear categories of cases where it was appropriate to notionally add back to the pool assets which were said by the Full Court to “no longer exist”. Those three categories were:
(a) monies spent on legal fees;
(b)monies disbursed by way of premature distribution of matrimonial assets; and,
(c)monies lost by one party either during or after the marriage as a result of a course of conduct designed to reduce or minimise the effective value or worth of matrimonial assets or as a result of reckless negligent or wanton behaviours which had the effect of reducing or minimising the value of assets.
What had been urged upon the trial judge in this case is that the monies spent by the husband in assisting Ms Y to acquire assets should be seen as a premature distribution of matrimonial assets to which the wife had made an equal contribution.
The matter is complicated in this case by the concessions made by each party as to contribution.
As a general rule once the parties have separated, subject to obligations of maintenance and support, and subject to the type of considerations described in Kowaliw (1981) FLC 91-092 relating to waste, each party is entitled to get on with his or her life independent of the other. The husband would be free to go about spending the money he earned post-separation in the furtherance of his relationship with Ms Y if he chose to do so providing that at the same time he properly met his obligations towards his wife and children for their due support. It would not normally be appropriate some years after separation to require each of the parties to account for any monies they had spent post-separation so as to determine whether or not that expenditure was reasonably necessary for their own self-support, and to the extent that it was not, to determine whether it would be proper to add it back into the pool of assets available for division between the parties. As we have said, the matter is clouded in this case because of the nature of the concession made as to the equality of contribution both prior to and post-separation. The pool of assets to which the husband was prepared to make that concession did not include in it any monies spent by him on the F property. It is doubtful that one can properly bind the husband to a concession that would have the effect of entitling the wife to claim an equal share of all monies earned by the husband post-separation.
In C & C (1998) FamCA 143 the Full Court (coram: Nicholson CJ, Ellis and Kay JJ) when examining some small add-backs into a pool of $3 million said:
45.Although it is not one of the Grounds of Appeal, we would also like to make the observation that we were troubled by her Honour adding back into the pool of assets the sum of $15,000 provided by the wife to [A] to enable her to place a deposit on a unit. The provision of modest amounts of capital by parents to their adult children to enable the children to get a start in life is a normal experience in our society. In a case involving the magnitude of the assets of this case, in our view it is unreasonable to conduct a microscopic examination of each of the parties’ items of post-separation expenditure with a view to determining whether or not it is appropriate that they be brought into account in dividing up the asset pool between them. The cases which deal with notional add-backs are generally examples of circumstances in which it would be clearly unjust and inequitable not to take those matters into account. (See Kowaliw (1981) 7 Fam LR 13; [1981] FLC 91-092, esp at FLC 76,645; Townsend (1994) 18 Fam LR 505; [1995] FLC 92-569; Farnell, (1995) 20 Fam LR 513 (expenditure on legal costs notionally added back because of s117).
46.Whilst not seeking to place a fetter upon the exercise of discretion of a trial judge in individual cases, it seems to us that the concept of adding monies reasonably disposed of back into the pool ought to be the exception rather than the rule. The parties are entitled to reasonably conduct their affairs post-separation in a manner that is consistent with properly getting on with their lives. Providing modest support for their adult children or taking not inappropriate holidays for themselves seems to fit comfortably within that description.
This passage was cited with apparent approval by Finn, Kay and May JJ in Chorn and Hopkins at para 24.
The ultimate resolution of the manner in which the monies spent by the husband in furtherance of his relationship with Ms Y should be categorised in this case is not without difficulty. It might well have been seen by the trial judge as appropriate that some allowance be made in favour of the wife under s 75(2)(o) for the husband having effectively gifted $70,000 to Ms Y in the comparatively short period between separation and trial particularly as this sum included the husband’s long service leave entitlement acquired during the marriage. But at the same time the magnitude of the gift needs to be viewed in light of the general economic circumstances of the parties which included the husband earning between $700-800,000 a year over that period and making generous provision for the wife and children from his income. The law imposed no further obligation upon him to continue to accumulate assets during that period and he was in a sense free to do with his income as he pleased.
The adding back of the whole of the capital amount so gifted into the pool of assets, is not adequately explained by the trial judge and as such ought to be viewed as an appealable error. While the treatment of the funds in question was ultimately a matter for her Honour’s discretion, given the matters referred to in C & C she needed to explain more fully her reasons for adding back the amount which she did, and she has erred by not doing so.
The husband’s income tax
In a list of assets and liabilities prepared for the trial judge, under the heading “Liabilities” the wife said (AB1022):
Item 27 Income Tax husband $161,481
Item 28 Quarterly instalment of tax (husband) $88,034
Whilst there was no dispute about the quantum of the husband’s tax liabilities, in her Papers for the Judge, in closing submissions the wife’s counsel did not accept that the quarterly instalment of tax of $88,034 should be included in the parties’ liabilities. The sum related to tax payable by the husband in the first quarter of 2005, during the period which the trial was being conducted, the last hearing date being 21 March 2005. He asserted that it should be excluded on the basis the husband should have applied the funds expended on the F property in meeting his tax liabilities, or that he should meet the assessment which was shortly due and payable from his future income.
Her Honour’s reasons for rejecting the inclusion of the sum as a liability to be properly taken into account on the balance sheet between the parties appear at para143 of her first judgment where her Honour said:
I do not accept the sum should be regarded as a joint liability in the absence of agreement, being tax on post-separation earnings.
When the husband sought to reagitate the issue in the hearing on 22 February 2006 after judgment had been delivered her Honour said in her reasons of 7 April that she was not prepared to consider the issue in isolation having regard to other changes that may have occurred in the husband’s financial position in the meantime.
Given that the date of the trial was seen by the parties and her Honour as being an appropriate date upon which to ascertain the assets of the parties, it seems to us that it was also an appropriate date to ascertain the liabilities of the parties.
The issue of a tax liability in respect of income earned in a previous year being paid out of future income is not an unusual occurrence in cases involving a party involved in a professional practice, and each case must be considered on its own facts, particularly having regard to how the income derived was expended post-separation (see HDM and MM and SJM [2006] FamCA 47 at paras 31 to 35 and SMB and MFB [2006] FamCA 46 at paras 77 to 81)
There was no issue that the liabilities included the quarterly payment that was about to fall due and it would seem on the face of it that there is no valid reason for the sum being left out of the pool of assets, particularly where it was tax on income that was utilised in part to provide for the support of the wife and the children. At the same time it was also tax assessed on income that had been utilised for making gifts to Ms Y. Whilst it seems to us to be wholly inequitable for the wife to be responsible for the tax liability in respect of substantial gifts made by the husband to Ms Y in the post-separation period, we have not been provided with any calculations that would enable us to determine how much of the husband’s tax liability can be fairly attributed to any money spent on Ms Y. Given our proposed outcome, we think it safest to include the whole tax liability as claimed by the husband but make allowance for this element in determining what is ultimately an appropriate outcome.
The effect of these adjustments will be to diminish the adjusted pool of assets as found by the trial judge in her second judgment as follows:
Total $854,578
Less amount for F property 72,281
Less tax liability 88,034
Total $694,263
Of that pool of assets the wife remains possessed of assets to a value of $534,899 which include the former matrimonial home subject to a mortgage of $274,361. As can be seen, an order requiring the husband by way of property settlement to discharge the mortgage would mean that the wife would receive by way of property settlement $809,260 which exceeds the value of the pool by approximately $115,000.
Orders that exceed the pool of available assets
There remains some difference of opinion as to whether or not such a result would be within power. Section 79(1) provides as follows:
In property settlement proceedings, the court may make such order as it considers appropriate:
(a)in the case of proceedings with respect to the property of the parties to the marriage or either or them – altering the interests of the parties to the marriage in the property…
including:…
(d)an order requiring
(i)either or both of the parties to the marriage;…
to make, for the benefit of either or both of the parties to the marriage…such settlement or transfer of property as the court determines.
In his dissenting judgment in the matter of Milankov Kay J said:
111.The wife's claim for alteration of property interests was brought pursuant to the provisions of s 79 of the Family Law Act 1975 which provides:
"(1)In proceedings with respect to the property of the parties to a marriage or either of them, the court may make such order as it considered appropriate altering the interests of the parties in the property, including an order for a settlement of property and substitution for any interest in the property and including an order requiring either or both of the parties to make, for the benefit of either or both of the parties or a child of the marriage, such settlement or transfer of property as the court determine."
112.The process to be followed in s 79 proceedings is well settled (see Pastrikos v Pastrikos (1980) FLC 90-897, 6 Fam LR 497; Lee Steere v Lee Steere (1985) FLC 91-626, 10 Fam LR 431; Ferraro v Ferraro (1993) FLC 92-335, 16 Fam LR 1; and Davut v Raif (1994) FLC 92-503, 18 Fam LR 237). It generally involves the Court first determining what the parties' property consists of before determining whether it is appropriate and just and equitable to make an order altering the parties' interest in it.
113.In several circumstances, well identified by the cases, this first step often involves including in the "pool of assets" items which no longer exist but which in order to do justice and equity to the parties need to be notionally considered in determining what a fair share of the existing pool of assets should be (see Kowaliw v Kowaliw (1981) FLC 91-092, 7 Fam LN 13; Townsend v Townsend (1995) FLC 92-569, 18 Fam LR 505; Farnell v Farnell (1996) FLC 92-681, 20 Fam LR 513; C & C (1998) Fam CA 143 unreported). Frequently this involves a notional consideration of assets which have been in the possession of one of the parties at some time after separation but which have been dispersed for that party’s own use. It often includes adding back monies that each party has spent in respect of their legal costs. Not to do so would be to offend the principles of s 117 of the Family Law Act which require that each party to proceedings should bear their own costs unless the Court otherwise orders.
114.The inclusion of these notional add-backs to the pool of assets ought not to be seen as a method of increasing the size of the pool but merely assists the Court in determining what should be a fair share of the pool that is available for distribution.
115.In my view, the law is well settled. The Court cannot make an order for the alteration of property interests that extends beyond the available assets of the parties (see Walters v Walters (1986) FLC 91-733, 10 Fam LR 1006; Evans v Public Trustee (1991) FLC 92,223, 14 Fam LR 646; and Grace v Grace (1998) FLC 92-792, 22 Fam LR 442. However, this restriction does not require the Court to be able to clearly identify those assets (see Briese v Briese (1986) FLC 91-713, 10 Fam LR 642; Weir v Weir (1993) FLC 92-338, 16 Fam LR 154; Giunti v Giunti (1986) FLC 91-759, 11 Fam LR 160; Mezzacappa v Mezzacappa (1987) FLC 91-853, 11 Fam LR 957; Black and Kellner (1992) FLC 92-287, 15 Fam LR 343; and Monte v Monte (1986) FLC 91-757).
In their majority judgment Nicholson CJ and Buckley J concluded that an order beyond the extent of the actual pool of assets which identified pool included paid legal fees in that case was open to the trial judge firstly because it only exceeded the actual pool of assets by a very small amount which might not have reflected the position as at the date of the hearing before the Full Court, and secondly because any inability that the husband had at the time of judgment to meet the orders made by the trial judge was as a direct consequence of his receipt of a pre-hearing distribution to meet his legal expenses.
The case law as developed establishes that generally an alteration of parties’ interest in property under s 79 is to be made out of their identified property at trial. Exceptions are recognised to this general principle, for example, in the cases involving failure to make a full and frank disclosure of assets where the property at the date of trial cannot be precisely ascertained (see Weir and Weir (1993) FLC 92-338; (1992) 16 Fam LR 154; Chang v Su (2002) FLC 93-117; (2002) 29 Fam LR 406). In ensuring an order made under s 79 is just and equitable, the Court has regard to the “mix” of assets to be retained by each party. This is of particular relevance where the asset or specie of asset to be retained by one party is substantially comprised of a superannuation entitlement or paid legal fees. It follows normally an order adjusting property interests under s 79 in favour of one spouse cannot exceed the totality of the net assets and/or superannuation entitlements of the parties. The peculiar circumstances in Milankov that saw the majority conclude that the award to the wife of slightly larger than the actual assets that existed as at the date of trial should be seen as an exception to the rule rather than conforming with it. Nicholson CJ and Buckley J had said at para 34:
Before us there is no suggestion nor was it put that the husband would have been required to borrow to satisfy the order. Rather the husband sought to rely upon the fiction of the assets at the date of trial to justify his position.
Further in Milankov the husband had agreed to an add-back of the legal costs into the pool which had the effect that an order giving the wife the whole of the pool, effectively gave her more than was actually there. The majority saw the concession by the husband’s counsel at trial that was an appropriate course to be adopted as creating an unanswerable argument to the submission that having adopted that aspect at trial the husband could not now be seen to withdraw from it. Their Honours said:
20.This was a hard fought case where the parties were represented by very competent counsel. The subject of the concession was a minor issue in the case. It must have been obvious to all concerned that if the wife were to fail in her principle contention as to the extent of the husband’s assets, she would be likely to recover most if not all of the available assets. In making concessions as to the extent of the assets, counsel for the husband would have been well aware of this fact and would surely have offered a reservation to any concession that he made as to the size of the pool had he wished to do so.
Re-Exercise of the discretion
Once we have adjusted the pool to make allowances for the issues agitated before us, it becomes necessary to revisit the orders made by the trial judge, firstly to give effect to the general principle that the orders ought not exceed the available pool of assets and secondly to determine what would be just and equitable in the circumstances. We note we are not required to undertake the exercise of assessing the parties’ contribution based entitlements given the agreement between the parties that those contributions up to the date of hearing before the trial Judge were equal. We therefore focus on the appropriate adjustment to be made in favour of the wife having regard to relevant factors in s 75(2).
Before us both parties agreed in the event the appeal succeeded that we should re-exercise the discretion. We invited the parties to provide us with further evidence relating to the amount of the mortgage at the present time and evidence relating to the wife’s current financial circumstances although we consider that any evidence that relates to the wife’s earning capacity would be a matter for an application for variation of maintenance at first instance rather than a matter for the Full Court. Subsequent to the hearing before us on 17 October 2006 the Appeal Registrar received the following correspondence:
· a letter from the husband dated 18 October 2006 indicating that the further information would have to be provided by the wife;
· a letter from the wife's solicitors dated 19 October 2006 saying it was hoped to provide the information by the following week;
· a letter from the husband's counsel dated 23 October 2006 advising that no information had been received from the wife and submitting that in those circumstances the husband was unable to agree to a re-exercise of the discretion by the Full Court but rather sought that the matter be remitted for retrial;
· a further letter from the husband's counsel dated 23 October 2006 stating that he had been contacted by the wife's solicitors saying mortgage statements had been received and would be made available to the husband's representatives on the following day, but that instructions were yet to be obtained in relation to income figures.
We understand that no further communication has been received by the Registrar from either party.
Notwithstanding the husband's request for a retrial because of the wife's failure to provide updating evidence concerning the mortgage or her income position, we nevertheless consider that given the relatively small size of the pool, the fact that we have determined that only two adjustments are necessary to the pool, and having regard to the public interest in bringing litigation to an end, that we should re-exercise the discretion on the material before us at the hearing of the appeal.
In the course of discussion at the hearing it was apparent that no serious suggestion was being raised to the concept that the wife should receive the home with a minimum mortgage. The husband’s earning capacity was so overwhelming larger than that of the wife that a significant adjustment of this comparatively modest pool of assets in favour of the wife would be seen to be an appropriate outcome to the proceedings. We also have regard to the wife’s health, and ongoing responsibility for the care of the children, particularly [the youngest], and the benefits flowing to the husband by his occupation of Ms Y’s property. We also have regard to the husband’s obligations to pay spousal maintenance and child support to the wife.
The wife’s contribution based entitlement on the adjusted pool of assets of $694,263 is $347,131. We are satisfied having regard to the relevant s 75(2) factors a very significant adjustment in the wife’s favour is warranted. We think ultimately that a just and equitable outcome to these proceedings would be for the husband to be obliged to contribute $150,000 towards the reduction of the wife’s mortgage by way of alteration of property interests and for the wife to otherwise retain all of the assets already owned by her. This will raise her entitlement to $684,899 or approximately 98 per cent of the asset pool.
The appropriate manner of achieving that result will be to allow the appeal and to vary Orders 2 and 3 by substituting for the figure $274,361 the sum of $150,000. This will leave the wife with responsibility for servicing approximately $124,361 of the mortgage secured over the home. We are satisfied that this represents a just and equitable outcome in the circumstances.
There appears to be no substance in the remaining matters sought to be argued by the husband, namely a reduction in the maintenance order made in favour of the wife and a removal of the requirement that the husband indemnify the wife in respect of any taxation liabilities.
We have already discussed the tax indemnity at para 44 above. It was clear that the husband was the source of income during the course of the marriage and that any taxation liabilities for which the husband has been required to give the wife an indemnity arise as a result of the arrangements put in place to assist in the minimisation of taxation for the benefit of the whole of the family. Whilst such arrangements have worked for the benefit of the family as a whole, the husband is in a clearly much stronger financial position to meet any liabilities that have arisen or may arise as a result of the manner in which the parties arranged their financial affairs. Further, the maintenance and child support are all calculated on a basis that the husband will have to pay the wife post-tax income. The provision of indemnities is made available to assist the husband in arranging his affairs so as to minimise the incidence of taxation without jeopardising the sums that the wife is to receive. Nothing was put to us to dissuade us from the view that the indemnities should not stand.
Insofar as the appeal included a request that the amount to be paid by the husband to the wife by way of periodic maintenance should be reduced from $48,000 to $30,000 per annum, it is clear that the trial judge made findings which are not challenged before us, that the reasonable expenditure of the wife for herself and the children of the marriage far exceeded the amount of maintenance that was assessed after allowing for the wife’s earning capacity. Nothing was demonstrated to us to suggest the husband could not reasonably meet the amounts that had been ordered to be paid. In the circumstances the maintenance appeal must fail.
There is a costs appeal and there are issues relating to the costs of the appeal. It is agreed that they should proceed by way of further submissions once this judgment has been published.
I certify that the preceding ninety-seven (97) paragraphs are a true copy of the reasons for judgment of the Honourable Full Court.
Associate:
Date: 4 May, 2007
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