Grey & Stone
[2008] FamCA 238
•7 April 2008
FAMILY COURT OF AUSTRALIA
| GREY & STONE | [2008] FamCA 238 |
| FAMILY LAW – PROPERTY SETTLEMENT - Contributions - Superannuation |
| APPLICANT: | Ms Grey |
| RESPONDENT: | Mr Stone |
| FILE NUMBER: | TVF | 262 | of | 1998 |
| DATE DELIVERED: | 07 April 2008 |
| PLACE DELIVERED: | Townsville |
| PLACE HEARD: | Townsville |
| JUDGMENT OF: | Monteith J |
| HEARING DATE: | 24, 25, 26, 29, 30 & 31.10.2007 and 18, 19, 20, 21 & 22.02.2008 |
REPRESENTATION
| COUNSEL FOR THE APPLICANT: | Mrs Pack SC |
| SOLICITOR FOR THE APPLICANT: | Wilson Ryan and Grose, Solicitors |
| COUNSEL FOR THE RESPONDENT: | Mr George with Mr Hanlon |
| SOLICITOR FOR THE RESPONDENT: | Bennett Caroll Lawyers |
IT IS NOTED that publication of this judgment under the pseudonym Grey & Stone is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth)
| FAMILY COURT OF AUSTRALIA AT TOWNSVILLE |
FILE NUMBER: TVF 262 of 1998
| Ms Grey |
Applicant
And
| Mr Stone |
Respondent
REASONS FOR JUDGMENT
INTRODUCTION
The applications before the Court relate to issues of property settlement between the parties although the husband asserts that I should treat payments of interim spousal maintenance to the wife as part of the property settlement. I will deal with that matter later in the Judgment.
THE RELEVANT BACKGROUND
The essential background of this case is as follows:
·The applicant wife was born in September 1947 and is presently approximately 60½ years of age.
·The respondent husband was born in March 1953 and is 55 years of age.
·The parties commenced cohabitation on the wife’s case in March 1993, although the husband contended in his trial affidavit that it was February 1994. However, in evidence he conceded that they commenced cohabitation in March 1993.
·There are no children of the relationship. However, the parties each have two adult children from previous marriages. The children of the respondent husband were young and members of the household when cohabitation commenced in March 1993. One of those children, the husband’s daughter, swore an affidavit on behalf of the wife filed 30 August 2007, and was called as a witness in these proceedings. These matters go to questions of contribution and I will deal with them later in the Judgment.
·The parties finally separated on 5 May 2005 and divorced on 6 October 2006. However, there was an earlier separation. Its length is in dispute. The husband deposes in his trial affidavit that they separated in late 1997 and did not resume cohabitation until September 1999. On the other hand, the wife deposes that they separated for the first time on 20 August 1997 and resumed cohabitation on or about 25 December 1998. I will deal with this issue later in the Judgment.
The Court has made the following orders that have relevance to these proceedings:
a)An Order on 9 March 1998 which was in essence a restraining order against both parties with some procedural orders pending resolution of the property matters.
b)On 25 November 1998 final consent orders with respect to property were entered into which provided in essence that the husband transfer to the wife the real property situated at W, a Honda Accord motor vehicle, that the husband pay the wife $26,000 within 12 months, pay the wife’s ANZ Visa Card of $12,500 and further pay the wife the sum of $66,000 within three years by way of instalments in an amount of not less than $500 per week. In exchange, the wife forewent any interest in the real property situated at D, real property situated at A, and in addition, that she transfer to the husband her shareholdings in S Nominees Pty Ltd, R Pty Ltd, J Holdings Pty Ltd, M Pty Ltd, W Pty Ltd, H Pty Ltd, and that the wife resign from all office holdings in those entities. In addition the wife was to transfer to the husband any moneys owing to her in Loan Accounts in those entities, and the wife was to assign to the husband any dividends owed to her by those entities. The husband forewent any interest in the wife’s superannuation policies and the wife forewent any interest in the husband’s superannuation policies. However, in addition, the husband was to sign all documents necessary to forfeit $90,000 of his interest and entitlement in the S Superannuation Fund, the effect of which was he was to sign a Consent to Forfeiture and the trustees were to hold the forfeited benefits for the benefit of the wife. Those benefits held for her benefit were then to be transferred to a fund nominated by her and that required a Transfer in Specie of real properties bounded by Y and S Streets, Townsville. The husband was to indemnify and keep indemnified the wife with respect to debts owing to QIDC, St George Bank and Metway, and the wife was to transfer to the husband the Mitsubishi Altera motor vehicle. These orders were set aside by consent on 13 March 2006. This will need further consideration in the body of the Judgment.
c)The next order of significance is one made on 17 June 2005 upon certain undertakings being given by both the wife and the husband. It was ordered by consent that the husband pay to the wife the sum of $1,000 per week for her maintenance, that the wife relinquish any control of, and participation in the business of T Pty Ltd in favour of the husband and that the wife’s interim application be dismissed. The wife’s interim application was for her to have sole management and control of T Pty Ltd. Again, this will need further consideration in the body of the Judgment.
d)There was a further order made on 5 December 2005, also by consent, which again provided that the husband pay the wife, until further order, the sum of $1,000 per week for her maintenance, provided for the husband to further encumber the property situated D to the extent of $50,000 and further provided for the sale of what was known as the “[E] Unit” with the net proceeds to be held on trust in a solicitor’s trust account, in the joint names of the parties, pending a final property settlement.
e)The only other order of significance is an order made on 5 May 2006 which related to each of the parties’ superannuation interests and required notification to the respective trustees and prevented any splittable payments being made to either of the parties.
The applicant deposes that she is not currently employed and is in receipt of $1,000 per week as spousal maintenance.
The respondent is employed fulltime and conducts primarily a business under a corporate structure and the value of the structure is in issue and will be dealt with further in these Reasons for Judgment. It appears that his remuneration, as assessed by the valuers, is approximately $100,000 per annum.
ORDERS SOUGHT BY THE PARTIES
The wife in her further amended Application for Final Orders filed 5 March 2007 seeks that all matrimonial assets of the parties be valued and divided equally between the husband the wife.
The husband in his amended Response filed 9 February 2007 seeks that the matrimonial assets of the parties be valued and divided upon the basis that the husband receives 90 percent and the wife receives 10 percent of the net property pool.
In final addresses, Mrs Pack, Senior Counsel on behalf of the wife, sought 40 percent of the asset pool, whereas Mr George, on behalf of the husband, submitted that the wife has had her entitlement and that I should make no order in her favour whatsoever.
However, it was agreed, between Counsel, that in the event I was to find that it was just and equitable to make an order in the wife’s favour, I would give my Reasons for Judgment and then invite Counsel to make submissions as to the form of orders I should make.
PRINCIPLES APPLICABLE TO THE MATTERS BEFORE THE COURT
The provisions of s79 of the Family Law Act define the Court’s power and obligations in determining applications for property settlement. The Court has a discretion to make orders altering the interests of parties in property, provided the Court is satisfied that such orders are appropriate, just and equitable.
The Court is obliged by the provisions of s79(4) to take into account the following matters:
(a) the financial and non-financial contribution made directly or indirectly by or on behalf of a party to the marriage or a child of the marriage to the acquisition, conservation or improvement of any of the property of the parties to the marriage or either of them (sub-paragraphs (a) and (b));
(b) the contribution made by a party to the marriage to the welfare of the family, including any contribution made in the capacity of homemaker or parent (sub-paragraph (c));
(c) the effect of any proposed order upon the earning capacity of either party to the marriage (sub-paragraph (d));
(d) the matters referred to in s75(2) so far as they are relevant (sub-paragraph (e));
(e) any other order made under the Act affecting a party to a marriage or a child of the marriage (sub-paragraph (f));
(f) any child support payable (sub-paragraph (g)).
Accordingly, in assessing the entitlement of each of the parties to property settlement, there is both a retrospective element relating to the contributions of each of the parties and a prospective element relating to matters referred to in s75(2).
According to guidelines established through a series of leading decisions, the Court should determine the following matters on the evidence, that is:-
· Firstly, the Court must determine the assets, liabilities and financial resources of the parties to the marriage.
· Secondly, the Court must consider all relevant contributions of each of the parties and, where possible, the Court should assign an entitlement of each of the parties arising as a result of those contributions.
· Thirdly, the Court should then consider the prospective components of the claims of each of the parties arising as a result of the provisions of s75(2). The Court should then identify what alteration, if any, should be made to the entitlement of each of the parties earlier assessed on account of contributions as is deemed necessary having regard to the s75(2) factors.
· Fourthly, having determined and considered the entitlement of each of the parties to property settlement, the Court should consider whether there is, in addition, any entitlement to spousal maintenance, either periodic or lump sum, in accordance with the provisions of ss72 and 74 of the Family Law Act.
The Income, Property, Financial Resources, Superannuation Interests and Liabilities of the Parties
The parties have reached agreement in relation to some of these matters and have not reached agreement in relation to other matters.
I set out hereunder a Schedule which is contended for by the wife and shows what is agreed and what is not agreed.
| Description assets | Total | Status | Possession |
| Former matrimonial home at D | $690, 000 | Agreed | Husband |
| Proceeds of sale of E Unit held in trust account of husband’s solicitors | $66,386 | Agreed | Joint |
| Add back proceeds of boat sold by husband | $1,000 | Agreed | Husband |
| Interest of the parties in the entities | $502, 544 (Mr K’s value) | Not agreed | Husband |
| Add back wife’s total entitlement in G Super Fund at 30 June 2005 ($351,448) (Exhibit 16) LESS allowance for tax paid of $23, 141 | $328,307 | Not agreed | Wife |
| Add back of husband’s paid legal costs to 30.6.07 | $186,281 | Not agreed | Husband |
| Add-back trade in value of Mitsubishi Verada motor vehicle owned by wife at separation | $12,000 | Agreed | Wife |
| Husband’s interest in S Superannuation Fund (business premises valued at $610,000) and funds invested in MLC Masterkey Superannuation Fund ($394,395.87) | $1,004,396 | Agreed | Husband |
| Husband’s interest in MLC Masterkey Superannuation Fund | $144, 622 | Agreed | Husband |
| Subtotal | $2,935,536 |
Apart from the items appearing in that schedule which are designated “not agreed”, there is one further matter in contention between the parties. That is the wife’s Macquarie Bank account in an amount of $2,731 which the husband contends should be brought into account.
So it can be seen that the matters that are in dispute in relation to the asset pool are:
(a)The wife’s Macquarie Bank account in the sum of $2,731;
(b)The add-back of the wife’s entitlement in the G Superannuation Fund as at 30 June 2005. She withdrew $351,448 (See Exhibit 16) but in doing so incurred a tax liability of $23,141. The wife’s contends that the add-back should therefore be $328,307, whereas the husband contends that the full amount of $351,448 should be added-back;
(c)The add-back of the husband’s paid legal costs at 30 June 2007 which were $186,281. The wife contends that that should be added back because of the source of the funds whereas the husband contends they should not be;
(d)The interests of the parties in the corporate entities wherein the wife relies on a valuation by Mr K of $502,544 and the husband relies on a valuation by Mr H of $340,000.
Wife’s Macquarie Bank Account - $2,731
With respect to the $2,731 in the wife’s Macquarie Bank account with respect to which the husband contends that it should be included in the asset pool as part of the wife’s assets, I have concluded that the husband’s contention is erroneous.
The actual figure of $2,731 appears in the Financial Statement of the wife filed on 27 September 2007 under the heading “Part 11 – Financial Resources” as “Offset Account Macquarie Bank - $2,731”.
Apart from it appearing in a Schedule of Assets and Liabilities provided to me by Mr George, on behalf of the husband, it was neither referred to in written submissions by either Counsel or in their oral submissions. The only reference to it is that Mrs Pack indicated that she did not agree that it should be included.
After a rather time-consuming examination of the Transcript, it appears that the explanation for this amount is that it was the balance standing in that account as at the date of the Financial Statement. The offset Macquarie Account was a loan account obtained by the wife from the Macquarie Bank which related to the purchase by her of a house in which to live after the final separation. She purchased the house for $325,000, using in part the benefits from her Superannuation Fund and in part, a loan in an amount of $227,500 from Macquarie Bank. This loan is the genesis of the Macquarie Offset account.
It is unnecessary for my purposes to trace how these funds were used other than to make a finding that not all of the draw-down from the mortgage was needed to finance the purchase of the house as it was partly financed by the funds obtained by the wife from her Superannuation Fund. The balance left in the Offset account, which is a loan account secured by a mortgage over her home, is, or was at the date of the Financial Statement, $2,731. It is therefore clearly not an asset in her hands.
Mrs Pack, Senior Counsel on behalf of the wife, has dealt with these matters in a global way. By adding back the $351,448, or if Mr George is correct the $328,307, the purchase of the wife’s new house, the mortgage draw-down from the Macquarie Bank and the withdrawal of her superannuation funds from the G Superannuation Fund are all dealt with. It is clear that the $2,731 is the amount referred to in the wife’s Financial Statement although from Exhibit 23, it appears that as at 23 October, the balance was $3,853. I am not sure why Mr George has chosen $2,731 rather than the $3,853. In her evidence, the wife said that she thought there was $3,000 - $4,000 available to access in that account. However, whatever the correct amount is, it is the product of the funds raised by loan by way of mortgage against her home and a sum left over after having used her superannuation benefits and the loan obtained from Macquarie. In my opinion, the add-back, whichever figure is chosen, either the full amount of $351,448 or the $328,307 adequately provides for this sum and it is quite unnecessary to take it into account in relation to establishing the asset pool.
Add-back of wife’s entitlement in G Superannuation Fund as at 30 June 2005
It is clear on the evidence that the wife withdrew from the G Superannuation Fund $351,448 (see Exhibit 16). It is also clear that as a result of withdrawing those funds at the time that she did, she suffered a tax penalty of $23,141.
The competing arguments are that Mr George, on behalf of the husband contends that the add-back should be the full amount of $351,448, whereas Mrs Pack SC on behalf of the wife contends that the add-back should be only the net benefit that the wife received, namely $328,307.
I have been referred to DJM and JLM (1998) FLC 92-816 (at p 85,262), Chorn v Hopkins (204) FLC 93-204, Harrington and Harrington (207) FLC and Wilde and Wilde (207) FamCA 1044.
As was said in Chorn’s case at para 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.”
Although most of these cases have been dealing with legal expenses, it would seem that the same principles apply. Namely, this is a premature distribution which should be accounted for so as to provide a just and equitable distribution of the property at the time of Judgment.
No one suggested that the superannuation funds of the wife in the G Superannuation Fund were not such that both parties could be seen as having an interest in them at the time of separation and therefore should be added back. The only issue has been whether it should be the gross amount or the net amount.
Mr George advanced no specific argument to me as to why I should take the gross amount other than that is the amount of the value of that asset at the date the wife accessed it.
On the other hand, Mrs Pack SC submitted that I should take the net amount on the basis that that was the actual amount of the premature distribution in her hands. She argued that the husband continued to reside in the former matrimonial home, after separation, free of rent. He kept all or most of the household furniture and the wife had to withdraw her superannuation to provide a house for herself and to purchase furniture to furnish it so she had some place to live. In those circumstances, it was submitted by Mrs Pack SC, that the add-back should be the net amount, namely, $328,307. I accept that submission. It seems to me to be grossly unfair to add-back the full amount when the wife suffered a tax penalty as a result of having to “cash in” her superannuation to provide a house and furniture for herself. In any event, the actual premature distribution in the wife’s hands was $328,307, not $351,428.
I therefore intend to add back $328,307.
Husband’s paid legal costs to 30 June 2007
The husband’s total paid legal fees are $261,188 (see Exhibit BB). However, Mrs Pack SC submits that I should add back $186,281 which is the total amount of the husband’s paid legal expenses as at 30 June 2007, which is the date of the valuation of the trusts.
Mr George submits that I should not add-back any amount with respect to the husband’s legal expenses, because his legal fees have been sourced from post-separation earnings, a personal expense in the financial records and accounts, debited to the husband’s Loan Account within his family trust.
The problem with this submission was identified by Mrs Pack SC and arises from the evidence of Mr M, the accountant for the corporate structure.
As at 30 June 2005, which is shortly after separation, the Loan Account in the name of the husband stood at $334,609. Clearly, in my opinion, that formed a joint matrimonial asset. As at 30 June 2007, the husband’s Loan Account stood at $176,165, the difference being $158,444.
Mr M gave evidence that the reduction in the Loan Account was due to the payment of legal fees.
The husband gave evidence that he paid his legal costs by debiting such costs against credit cards that were in the name of the business. Liabilities both personal and business incurred on the credit cards have been discharged by the business and trust. He was unable to say how his payment of legal fees was attributed, and he has no personal bank account from which they could be paid. As I have said, Mr M identified the source of most of the funds, being the husband’s Loan Account.
Consequently, in my discretion, and relying upon the cases of DJM and JLM, Chorn v Hopkins, Harrington and Harrington and Wilde’s case, I have decided it is appropriate to add back the husband’s paid legal expenses as at 30 June 2007, being the date of valuation of the trust in the sum of $186,281, on the basis that in my opinion they have been paid out of joint matrimonial assets.
Interest of the parties in the entities
As I have indicated, the wife contends for $502,544, being the valuation placed on this interest by Mr K, whereas the husband contends for $340,000 being the value placed on this interest by Mr H. It is therefore necessary for me to critically examine their respective valuations and evidence.
I take the view that it is necessary for me to critically examine their respective valuations and evidence, because I do not accept the submission made by Mr George that I should accept a Single Expert, namely Mr H, over Mr K because it was up to Mrs Pack SC to challenge Mr H successfully, not up to Mr George to challenge Mr K.
I am afraid that I do not understand that submission.
Mr H was appointed as a Single Expert. That much is true. However, at the beginning of the trial, the wife filed an Application in a Case supported by affidavit material seeking an order under Rule 15.49(2).
Mrs Pack at page 2 of the transcript said:
“I understand from my learned friend, your Honour, that he has no objection to Mr [K’s] affidavit being read as part of the wife’s case.
Mr George: That’s so, your Honour.”
I then raised Rule 15.49 with the parties, and after some discussion about whether Mrs Pack had satisfied the criteria in Rule 15.49(2), the transcript shows at page 4:
“His Honour: Alright. Do you consent to Mrs Pack being allowed to produce in evidence the report of Mr [K]?
Mr George: Yes, I do.
His Honour: And do you waive any right you may have under Rule 15.49?
Mr George:I do.”
In my opinion, once the evidence of Mr K is admitted under Rule 15.49, it stands in exactly the same position as the evidence of the previously Single Expert, Mr H. The fact that Mr H had previously been appointed as a single expert does not raise his evidence above that of Mr K. In my opinion, once the evidence of Mr K has been admitted, it is necessary for me to critically examine both Mr K’s and Mr H’s evidence and come to a conclusion. In my opinion, Mr H’s evidence is not raised above that of Mr K’s in that critical examination on the sole basis that he had been appointed a Single Expert witness prior to the appointment of another expert witness under Rule 15.49.
As Mr K gave evidence prior to Mr H giving evidence, it is convenient to deal with his evidence before I deal with Mr H’s evidence.
The evidence of Mr K is contained in an affidavit sworn by him and filed on 25 September 2007, a report by him dated 18 February 2008, which became Exhibit II and his oral evidence.
Mr George, on behalf of the husband, submitted that I should reject the evidence of Mr K on the basis that he was extraordinarily biased towards the wife. In addition, he was critical of Mr K for retracting allegations of fraud in the witness box and for his acceptance of what Mr George said were baseless allegations by the wife. He submitted that Mr K was the antithesis of an expert as his opinions were unqualified and at the very least, coloured by his partisan desire to assist the wife’s case.
Mr K has been the wife’s accountant for approximately 15 years. He was her accountant prior to her commencing a relationship with the husband. His relationship with the wife appears to have been principally the preparation and filing of tax returns, other than his involvement in the previous property dispute between the husband and wife in 1998. It is important to examine his involvement in the earlier property dispute because it explains, in part, his approach to the present property dispute.
In Annexure E to his affidavit, Mr K states:
“I have been requested to review the [S Company] records provided and to advise as to any matter relevant arising from this examination and in particular the valuation of the above business.
My examination of the records has primarily been centered on the financial year ended 30th June 2006 which was the basis of [V Chartered Accountants] valuation of the business at $307,795.
[V Chartered Accountants] then ascribed a necessity of a 40% return for on arms length purchaser to purchase the business and thus valued the business based on this rate capitalised ie
$123,118 X 100 = $307,795.
40
I was surprised on reading the valuation, that I could not identify (in my opinion) the necessary tests of the records, and the [S Company] accountants profit and loss and balance sheet, in order to evaluate the correctness of the profit recorded in the 2006 year.
In the main, the accountants figures were accepted despite the valuer being in possession of my earlier report which should have alerted him to possible irregularities in recording the profitability of the business in past years.
In particular, I had identified in my earlier report an understatement of work in progress and stock on hand.
[V Chartered Accountants] accepted the stock and Work in Progress at $7,100 (an estimate journalled in by the […] Accountant) and stated that as the opening stock of the next year is the closing stock of the previous year, then the adjustment does not change overall profitability if the understatement applies to both the opening and closing stocks/work in progress in a year.
I note however that the unwarranted decrease in Closing Stock or Work in Progress does effect the year in which it happens and will adversely effect the valuation of a business if that year is the year chosen to identify profits for capitalisation.
I contend that this is exactly what happened in this instance with a drop in the value of Work in Progress/Stock from $67,891 to $7,100 in the 2006 year.
WORK IN PROGRESS
In support of this contention I have provided a printout from the management accounts of the business that details the Trade debtor accounts (invoices) issued by the business for work completed to the 30 June 2006, and debtors invoices dated the next day being 1 July 2006.
Invoices dated on that day were as detailed below and total $86,541.13. (See Appendix A(1) General Ledger printout of Debtors commencing 1 July 2006)
I have also attached a copy of the [S Company] “Audit Trail” for June and July 2006 (Appendix A(3).)
The sales register reveals that sequences relating to the 2006 year were dated to be delayed to the 2007 year.
The audit trail reveals numerous changes to transactions and deletions of invoices eg. Page 5 and Page 6.
The adjustment to profit net of GST is $71,573. (In this regard I have taken the value of Work in Progress to be the $7,100 recorded).
Sale 01/07/06 $15,000.00
GST $1,500.00
Sale 01/07/06 $62,375.25
GST $6,237.53
Sale 01/07/06 $1,298.50
GST $129.85
$86,541.13
Less GST $7,867.38
$78,673.75
Less WIP recorded $7,100.00
Net adjustment to Profit $71,573.75
Note other invoices could be included but I have only include those dated as 1 July 2006.
An examination of Invoices issued on 1 July 2005 to test the work in progress, are commensurate with the Work in Progress figure stated of $67,891, so no adjustment to opening work in progress is necessary.
STOCK ON HAND
As regards the valuation of Stock (which now is recorded as Nil as the $7,100 value recorded has been ascribed to Work in Progress as above). I note that the [V Chartered Accountants] valuer has not tested the correct value.
For example, the following enquiries could have been conduct.
1.Stock sheets examined
2.Stock room inspected
3.Order frequency and amounts correlated/calculated
4.Suppliers and types of product correlated to calculate the necessary for stock on hand of parts, insulation, wiring, pipes and air conditioners etc.
I have been informed by [the wife] that a stock room/shed at [A property] comprises shelving capable of holding at least 100 [product units]. It is noted that the sales proposal for the business dated May 2005 states that “an estimated stock value of $200,000 is generally carried by the business”.
In my experience, such statements by vendors are usually a correct estimation and allows purchasers to calculate finance and cash flow requirements.
It is my opinion on examination of cost of goods sold that a minimum of $20,000 (net of GST) stock should be required for the conduct of this business.
Due to the fact that the value recorded in the accounts of $7,100 has been deducted from Work in Progress in calculating the net adjustment to work in progress, then the $20,000 minimum stock requirement is an adjustment to 2006 year profit.
SALES AND INCOME
I have attached a copy of [S Company] management accounts for the year ended 30th June 2006 at appendix C.
These accounts detail sales of $1,852,656 ($426,552 + $863,248 + $562,856) and a net profit of $182,340 after writing off $196,638 in Bad Debts.
The [V Chartered Accountants] valuer had identified $155,492 (net of GST) of these Bad Debts being with respect to the previous year and added them back to ascertain the profit of $123,118.
He however excluded rent received of $4,800 and Hire of Cold Rooms of $28,600 as non business income (Total of $33,460 in the financial statements).
In my opinion, this income should have been included in business profits and future maintainable earnings due to the following:
1.The Hire of these mobile cold rooms is directly associated with this type of […] business and is invoiced by this business. As well, the valuer had not included any value for the [unit trust trading as H Pty Ltd] as it had ceased trading and assumed there were “no movement in the net assets of these entities since that date” (June 2005). Who then does the value of the income relate to and whose loan account is required to be adjusted? In my opinion the hire of this plant (presumably a previous asset of [H Pty Ltd] and now an asset of [S Company] is an adjustment to the loan account owing to [S Company]) is ongoing and should be included ie. $28,600 being 2006 income included in 2006 capitalised profits.
2.The valuation includes an adjustment for commercial rent to the superannuation fund (being a decrease in profit) then any subletting of the premises should be included as some recovery of this rent expense adjustment. Profit adjustment $4,800.00.
In examining Sales, I have examined bank deposit records and the [S Company] accountants general sales ledger.
I noted from the bank deposits slips that virtually no cash is banked and recorded as [S Company] income.
In examining the accountants general ledger regards sales, it is noted that these are recorded at $1,547,556.
This figure is obtained from deposits to the bank less adjusting journals by the accountant.
One adjusting journal to sales (reducing sales) appears to be in error by an amount of $26,831.70 as a debit amount of $53,663.20 (See appendix D) adjusting sales for Hire/Rent received is double the required journal of $26,831.70.
EXPENSES
My examination of expenses details the following adjustments.
1.$20,000 accrued by the [S Company] accountant is still payable to a Consultant and included in “purchases” by the accountant. Cheques were written for these amounts and not presented and indications are that this amount is “not owing”. (Appendix C).
2.$22,000 accrued by the [S Company] accountant in purchases (Appendix C) is owing to [Z Company]. [Z Company] was excluded by [V Chartered Accountants] valuer as no interest being held.
I have detailed adjustments as discussed above as listed below:-
Work in progress $71,573
Stock on Hand $20,000
Adjustment Sales Journal $26,831
Rent – Subletting $4,800
Hire Mobile Cold Rooms $28,600
Accrued Management fees $20,000
Accrued Purchases $22,000
$193,804
=======
In my opinion the valuation capitalised income should therefore be adjusted by the amount as detailed below:-
[V Chartered Accountants] (FME) $123,118
Plus adjustments $193,804
$316,922
=======
FME capitalised at 40% return = $792,305
The net value of the business in my opinion, is thus $792,000.
By the time Mr K was called to give evidence of the detailed adjustments referred to in his report, only three were in issue namely:
(a)Work in progress $71,573
(b) Stock on hand $20,000
(c) Adjustment Sales Journal $26,831
The other amounts, namely rents subletting $4,800, hire mobile coldrooms $28,600, accrued management fees $20,000 and accrued purchases $22,000 had been conceded.
After Mr K gave evidence, Mr M, the accountant for the corporate structure, conceded in his evidence, the error identified by Mr K, namely the $26,831 identified to sales journal.
After Mr K had completed his review as set out in Annexure E to his affidavit which is dated 18 September 2007, the husband and his accountant, Mr M, produced Financial Statements for the year 2007. As a result of that, Mr K prepared a further report dated 18 February 2008, which became Exhibit II. I set out hereunder that report:
“I refer to your letter of 12 February and previous correspondence.
The production of the 2007 financial statements confirm that profitability of this business at in excess of $300,000 p.a. which was the figure arrived at in my previous report (after adjustments) with respect to the 2006 year.
I was instructed to do a limited audit of the business. However, I was not delivered the documents I identified as being necessary to conduct an audit.
My task was to correlate quotes to jobs listed as undertaken as debtors issued and via purchase invoices to ascertain stock delivered to sites (jobs). In particular I required the documents particularized in my letter dated 6 December 2007 (Attachment A). I have not received the documents identified in 2 (a) and (b).
Having identified jobs undertaken with associated quotes then a lack of a debtor invoice would reveal cash jobs unbanked and their quantum.
This procedure would also verify if the creditor values at the 30 June 2007 were authentic ie. amounts owed by the business to suppliers.
This procedure should also identify unbilled work in progress as purchase invoices would identify stock deliveries.
I was instructed to do an audit on the basis of my previous reports.
In my 12 January 1998 report, I noted that stock and work in progress totalling $90,644.86 was journalled out of the accounts to nil with an annotation that the accountant had been instructed by [the husband] that the amounts were zero (0).
This understated the profit for the year ended 30th June 1997 by $90,644.86.
However, as I noted in that report, a statement to lenders QIDC included the stock and work in progress as $90,644.86 and the profit of the business was stated to be $319,452.06 (in 1997).
Similarly to the 1997 year, I reported in my reported dated the 18 September 2007 that work in progress/stock in my opinion had been understated by $91,573 to reduce profit by this amount for the year ended 30th June 2006.
In order to further verify this fact I attach (at attachment C) print outs of Debtors as at 30 June 2006 and 1 July 2006. It is evident that the value of Debtors had increased in one day by $86,541.13.
I also noted that the sale proposal dated May 2005 states that $200,000 stock is “generally carried by the business. Work in progress can be adjusted to meet the needs of the buyer”.
Other false journals were also identified in the 1998 report utilised to understate assets in companies in which [the wife] had shareholdings ie – [S Nominees] Pty Ltd (50%) – [M] Pty Ltd (50%).
False journals were made to appropriate a total of $527,682.98 from these companies (effectively an unpaid dividend).
[The wife’s] share of this dividend if paid to her would have been 50% of this amount ie. $263,841.49.
Mr [H] in his report states that these journals have no current relevance but they have, due to the fact that he includes values of these companies at item 3.1 of his report in the value of the parties interests ($59,633 and $124,927).
That is, the net assets of these companies were reduced falsely by the amount of $527,682.98 by a direct debit to their retained profits account and a credit to amount owed to them by the […] Family Trust.
QUERIES OTHER ENTITY
I have been handed a building approval by the Townsville City Council for $14,000 for works to be completed by [R Pty Ltd (T/a H Pty Ltd)] and dated 13 January 2006. (Attachment B).
In Mr [H’s] report on this 2006 financial year at 3.9 he stated that the [unit trust trading as H Pty Ltd] had not operated for years that any of my concerns re [H Pty Ltd] trading were irrelevant and thus no enquiries were made.
Inquiries I made indicate the applicant for the works […] was the owner of the […] Motel, […] and extensive renovations including cold room and air conditioning were carried out at this hotel.
I examined deposit slips but could not locate any deposit for $14,000 from [the applicant for the works or the Motel] and similar nor any deposit at about that time.
As stated in my report, I have not been able to do the tests on the 2007 accounts I planned.
I note the following:-
1. His capitalisation rate has been improved to 35%.
2.He now includes Rent and Hire of Cold Rooms as part of business income as this increase is derived both in 2006 and 2007.
3.He now bases his future maintainable earnings profit on the average of the two years profit 2006 and 2007.
I agree with the adoption of a 35% return as a capitalisation rate.
I note that Mr [H] has excluded Sale of Scrap income of $11,919 from future maintainable profitability. This amount should be included to be consistent with his approach to rents as scrap income was also delivered in 2006.
In my opinion, the value of the business is as detailed below:-
Future Maintainable earnings 2007 $250,958
Plus scrap sales $11,919
Total Future Maintainable Earnings 2007 $262,877
Plus Future maintainable earnings as per my
Report Re 2006 earnings $316,922
Total Earnings 2006 and 2007 $579,799
Average earnings $289,900
Value of Business capitalised at 35% $828,285
I have detailed as attached my Assets and Liabilities.
Core assets are fixed assets of $30,816 + Stock and WIP of $91,573 totalling $122,389.
Goodwill as calculated at $705,896 ie. $828,285 (value of businesses) – Core assets $122,389.
There are two matters that I need to comment on immediately. The first is his reference to false journal entries. Mr George in his submissions was critical of Mr K retracting the fraud allegations in the witness box. There are a couple of things that need to be said about these matters to place them in context.
Firstly, Mr K did withdraw in the witness box the fraud allegations. However, that was done after I had raised in Court with Mrs Pack whether this evidence left the parties open to suggestions of imposing upon the Commonwealth or other criminality. She asked that the matter be stood down and then, on resumption, advised that having discussed the matter with her client and with her opponents, the allegations of fraud were going to be withdrawn. I can understand why that occurred and I do not draw any adverse inference against Mr K because of that. Further, Mr M, the present accountant for the corporate structure, conceded that the entries identified by Mr K were incorrect. A previous accountant, Mr B, had made the entries and it was necessary for Mr M to reverse them because Mr B had left a ticking time-bomb in the books in the event of a tax audit.
This gives colour to Mr K’s contention that something similar occurred in the 2006 and 2007 Financial Statement.
A separate issue that needs to be identified now is that at the very end of Mr K’s report of 18 February 2008, he valued goodwill at $705,896. What is important about that is that the goodwill is calculated by the deduction of core assets which he values at $122,389. He asserts the core assets are fixed assets of $30,816 plus stock and work in progress of $91,573, totalling $122,389. He was never challenged as to that figure or to his methodology.
Further, Mr H of V Chartered Accountants, in his report being Exhibit 1 at page 33, under the heading “Note 7 – Net core tangible business assets”, it states at 3.11.19, “I have calculated that the net core tangible assets of this business are approximately $100,000.” Then, under the Note 8 – goodwill – at 3.11.20, “Applying the capitalisation rate of 40% to the adopted FME of $123,118 results in a calculated business value of $307,795. After deduction of the net core tangible business assets of $100,000, the value determined for goodwill is $207,795.”
Consequently, both valuers used the same methodology and approximately the same value of net core tangible business assets.
In Exhibit 36, Mr H of V Chartered Accountants gives an updated valuation after having seen the 2007 financials of the Family Trust.
Under the heading “Scope” at 2.0, he states:
“2.1I refer to my previous report in this matter, dated 3 November 2006, and the Scope (and limitations) noted therein.
2.2I have only been provided with updated financial information, for the year ended 30 June 2007, for the […] Family Trust, which conducts the business trading as [S Company]. Therefore my opinion of value of all other entities is unchanged from my previous report.
2.3A summary of the updated financial information is attached at Schedules 3.1 and 3.2 (I have retained the schedule numbering adopted in my report of 3 November 2006).
2.4As instructed I have accepted the latest financial statements “at face value” in making my updated valuation.”
Then, under Summary of Opinion, he sets out his valuation:
“Business Goodwill
[S Company] $482,194
[T Pty Ltd] Nil
Entity Valuations
[S] Nominees Pty Ltd atf the […] Family Trust (including
the goodwill of [S Company] operated by it) $422,515
[R] Pty Ltd atf the [S] Discretionary Trust (including
goodwill of the T Pty Ltd business operated by it) $10
[S] Nominees Pty Ltd $59,633
[M] Pty Ltd $124,927
W Pty Ltd atf the [S] Unit Trust 0
W Pty Ltd 0
[J] Holdings Pty Ltd atf The [J] Trust 10
Total $607,095
Interests of the Parties
[The husband]
Interest in Entities (refer above) $607,095
Loan Accounts
The […] Family Trust (net) $108,085
The [S] Discretionary Trust $12,909
[W] Pty Ltd $2
The [S] Unit Trust (263,067)
The [J] Trust (194,610)
$270,414
[The wife]
Loan Account
The […] Family Trust (74,382)”
The $482,194, being the Business Goodwill of S Company which is calculated in Schedule 3.3 to that valuation, shows that it is being calculated by using Maintainable Earnings average of two years of $203,768 capitalised at 35%, giving a business value of $582,194 less net core tangible assets of $100,000, noted as being calculated as similar to that calculated in 2006 giving a value of goodwill of $482,194.
The only other matter I want to comment on at the moment is that the amount of $74,392 standing in a Loan Account to the wife is disputed by the wife. However, for the purposes of these calculations, it is irrelevant. Either the husband or the wife owes that amount to the Family Trust. The husband asserts that the wife owes it. The wife asserts the husband owes it. This is a matter that I will have to determine later in this Judgment. Mrs Pack has indicated that in the event that I decide this has been wrongly attributed to the wife, then I should make an order that the husband indemnify her with respect to that sum.
Mrs Pack in her written submissions shows the values of the parties’ interests as calculated by Mr H at $340,000 and as calculated by Mr K as $502,544.
From the schedules provided in her written submissions, it is not possible to understand how those figures are arrived at. Moreover, nowhere in the evidence can I find the expression of an opinion by Mr K that the value of the parties’ interests is $502,544.
There is direct evidence from Mr H with respect to the $340,000 calculation. By a somewhat laborious exercise, it is possible to reach a conclusion that Mr K may have come to a conclusion that the interests of the parties was, on my calculation, $503,175. I cannot make the figures add up to $502,544 and nowhere in Mrs Pack’s submissions does she identify how that figure is arrived at.
For the purposes of this case, whether it was $502,544 or $503,175 would not matter much. However, what leaves me with a considerable sense of unease is that Mr K, nowhere in his evidence or reports, identifies either of those figures.
Although I was impressed with Mr K as a witness, and impressed with his evidence, I have to act on the evidence before me.
My problem is that Mr H gave evidence last. He was invited to depart from his earlier valuations and opinions in cross examination, by the putting of various matters to him. The net result was that he made substantial alterations to his calculations and valuations including the valuation of the parties’ interest in the entities, which involved amongst other things, alterations to the Balance Sheets. None of these matters were canvassed with Mr K and I have no idea what his evidence would have been on these matters.
All I know for certain is that he valued core assets as being fixed assets of $30,816 plus stock and work in progress of $91,573, totalling $122,389 and calculated goodwill at $705,896, being $828,285 being the value of the business, less the core assets of $122,389.
In his evidence, Mr H valued the goodwill of the business of S Company at $547,000. He valued S Nominees Pty Ltd as the trustee for the Family Trust including goodwill at $567,000. This valuation required adjustments to the Balance Sheet of S Nominees Pty Ltd which appears in Schedule 3.4 of his report of 26th October 2007, which is Exhibit 36. Those adjustments involved increasing stock on hand and work in progress from $8,236 to $90,000 and increasing goodwill from $428,194 to $547,000. Those adjustments meant that the net assets of S Nominees Pty Ltd became $567,000 instead of $422,515.
As a result of those adjustments, the Summary of Opinion at paragraph 3.1 of his report of 26th October 2007 also altered.
Firstly, the goodwill changed from $482,194 to $547,000. Secondly, the S Nominee Pty Ltd valuation changed from $422,515 to $567,000. That made a total of $752,000 rather than $607,095. When that figure was carried over the page, it meant that the value of entities changed from $607,095 to $752,000 making a total of $415,000 less the Loan Account of $74,392 making a total therefore of $340,618 being the $340,000 contended for by the husband.
It is possible to rework the figures using the figures that have been provided by Mr K, so that the goodwill becomes, in round figures, $706,000 and by altering the Balance Sheet to reflect his evidence with respect to stock on hand and work in progress to $91,573 and the goodwill to $706,000, one ends up with a total of $729,658.
If those figures are then inserted into the Summary of Opinion of Mr H of 26 October 2007 at 3.1, the figures change to $706,000 for goodwill, $729,000 for the value of S Nominees Pty Ltd, making a total of $914,238 which when carried over the page and replacing $607,095 with $914,238, gives a total of $577,557 less the $74,382, gives a total of $503,175 which is close enough to the $502,544 contended for by Mrs Pack.
However, I do not know whether that is what Mr K would have said. It is at best, my interpretation from his valuation of 18 February 2008, being Exhibit II, of what he might have said had he been asked.
The matter becomes incredibly more complex because of the viva voce evidence of Mr H.
Although it is very cumbersome to set out his evidence in full, I cannot see any way around following that course because it is only by reading all of his evidence, that sense can be made of the conclusions that he ultimately formed, which I have recently set out.
It also demonstrates where he and Mr K differ which are on a number of important issues and because these issues were never put to Mr K, I have the largely unchallenged evidence of Mr H on these matters. Having read his evidence with great care, I have come to the conclusion that I should accept the contention of the husband that the value of the parties’ interest in the entities is $340,000, not the $502,544 contended for by the wife.
I set out hereunder the transcript of his evidence:
“HIS HONOUR: Mr [H], can you hear me?
MR [H]: I can, your Honour.
HIS HONOUR: Mr [H], is your full name […]?
MR [H]: It is.
HIS HONOUR: And is your business address […]?
MR [H]: Yes, it is.
HIS HONOUR: You are a chartered accountant by occupation?
MR [H]: Yes.
HIS HONOUR: And a partner in [V Chartered Accountants] in Brisbane?
MR [H]: That is correct.
HIS HONOUR: You were appointed by the Court as a single expert in this matter?
MR [H]: Yes.
HIS HONOUR: And as a result of that appointment you prepared a valuation on 3 November 2006?
MR [H]: Yes.
HIS HONOUR: And in addition to that you prepared answers to some questions that were put to you by the solicitors for the wife and the answers - you set out the questions and the answers in a letter to Mr Chris Bowrey dated 23 October 2007.
MR [H]: Yes, I did.
HIS HONOUR: Then on 26 October 2007 you sent a further report to Ms Kate Murphy for the husband and Mr Chris Bowrey for the wife in relation to the valuation of the various entities in dispute, correct?
MR [H]: Yes, updated the 2007 figures available, yes.
HIS HONOUR: Just so that we know where we are going, have you been provided with a copy of an affidavit and annexures by Mr [K] sworn on 27 September 2007?
MR [H]: Yes, I have, yes.
HIS HONOUR: And a report from Mr [K] in a letter to Mr Chris Bowrey for the wife, with annexures dated 18 February 2008?
MR [H]: I have, yes.
HIS HONOUR: All right, thank you. Well now, how this will proceed is that I will get you sworn by my Court Officer and then Mrs Pack, on behalf of the wife, will cross-examine you and then Mr George on behalf of the husband will cross-examine you.
MR [H]: Okay.
HIS HONOUR: Do you understand that?
MR [H]: Yes, that is fine.
HIS HONOUR: All right, thank you. Swear the witness.
CROSS-EXAMINATION BY MRS PACK
HIS HONOUR: Thanks, Mr [H]. Yes, Mrs Pack?
MRS PACK: Yes, thank you, your Honour. Mr [H], in your valuation exercise you first of all assessed what the future maintainable earnings of the business, [S Company], were. Did you not?---Sorry, you just broke up a little bit there.
I am sorry, I will speak more loudly?---Thank you.In your first valuation exercise the first thing you did was to assess the future maintainable earnings of the business, [S Company], did you not?---Yes, I did, yes.
Your calculations in that regard are set out at schedule 3.3 page 36 of your first report?---That's correct.On that page you set out the adjustments that you made to the financial statements of the business for the year ended 30 June 2006?---Yes.
One of the adjustments that you made was to make an adjustment for commercial rent that was payable by the business for the premises it occupied?---Yes.
You base your assessment of that commercial rent on the advice of Mr [E], who had indeed valued the business premises shortly before you wrote your report?---I did, yes.
And that was the amount, then, of $53,800?---Yes.
You also then made an assessment of the proper remuneration that should be paid to [the husband], having regard to the hours he worked, the level of responsibility and similar matters, I take it?---Yes.
Again, you made the assessment that a proper commercial remuneration for [the husband] would be the sum of $100,000 gross?---That was my estimated figure, yes.That then was clearly another adjustment that you made to the figures in the financial statements?---That is correct.
Then also, the other major adjustment that you made for reasons you explain in your report was to add back some bad debts that were written off?---Yes.
Now, if I could then take you to the first report of Mr [K], which is annexed to his affidavit that was filed on 25 September 2007, and in particular to annexure D which is his report dated 18 September 2007? I may have said "annexure D", it is in fact annexure E.
HIS HONOUR: Have you found that? It is dated 18 September?---I have that, yes.
MRS PACK: If I could take you to the fourth page of that report?---Yes.
You would be familiar, from reading that report, that in addition to the adjustments you made, and which are set out in schedule 3.3 page 36 of your first report, Mr [K] made some further adjustments?---Yes.And his further adjustments are summarised on that page under point 2:
I have detailed adjustments as discussed above as listed, and totalling a sum of $193,804.
?---Yes.
So then what Mr [K] then did was to take your future maintainable earnings of 123,118, and added to them the adjustments that he said should be made to the figures in the financial statements?---That is correct, yes.
Now, we start from the bottom of those adjustments. Mr [H], the parties have agreed that accrued purchases in the sum of $22,000 and accrued management fees in the sum of $20,000 should be added back in?---Right.
You now, as I understand your subsequent report, agree that the '06 figures should have been adjusted to allow for rent and the hire of mobile cold rooms?---That is correct.
So that in your subsequent report you make an adjustment yourself of 33,400 to your calculations and in particular the adjustments you made in your 2006 report?---That's correct.
His Honour has heard evidence from Mr [M] and cross-examination of Mr [M], his Honour has also heard evidence from Mr [K] on the adjustment of the sales journal in the amount of 26,831?---Yes.
So that I then wanted to take you to the last two adjustments that Mr [K] has made but which you have not, namely the stock on hand and the work in progress?---Yes.
Now, Mr [H], his Honour has heard much evidence about stock and stock takes. And I shall attempt to summarise that evidence as accurately as I can. And no doubt if I misstate the evidence I will be corrected by my learned friend, Mr George?---Yes.
His Honour was told that there was a physical stock take done in the 2006 and 2007 years?---Right.
Documents that recorded that stock take were the subject of the call for production?---Yes.
In other words, there was a call for the documents to be produced to the Court?---Yes.No documents were produced to the Court in answer to that call. The company accountant, Mr [M], said that he had never seen any documents evidencing the stock take. And indeed, when he prepared the financial statements for the company - and by "company" of course I mean the trust?---Yes.
He simply relied on what he was told by [the husband] or a member of [the husband’s] staff?---Yes.
Now, you say in your letter dated 23 October 2007 that you were advised by [the husband] that no stock sheets were maintained?---Yes.
HIS HONOUR: Which one is this, Mrs Pack?
MRS PACK: Number 4, your Honour, of the letter dated 23 October 2007. And you then go on to say that [the husband] advised that he estimated the stock at 30 June each year and advised Mr [M] of that figure?---Yes.
Do I take it from that, Mr [H], that you were not told by [the husband] that there had been a stock take taken for the 2006 year?---No, that is correct, I don't have that in my notes. I have to get my notes from my conversation with him, were as per that letter.
Mr [H], you may or may not be aware that historically there have been years in which there have been no figures recorded for stock and work in progress for the trust.
HIS HONOUR: Actually, they have been recorded as nil, haven't they?
MRS PACK: I beg your Honour's - - -
HIS HONOUR: They have been recorded as nil?---Right.
MRS PACK: They have been recorded as nil.
HIS HONOUR: And again, Mr [M] told us that he did that because that is what [the husband] told him?---Right.
But he conceded that a company - that a business couldn't operate with nil stock and nil work in progress?---Yes.MRS PACK: You had noted when you were doing your valuation that there had been a reduction, a significant reduction in stock levels from the 2005 to 2006 year?---Yes.
And again, Mr [M] the company accountant said that the figure that was recorded in the 2005 year was not just a stock figure but also a work in progress figure. In other words, they were both combined?---Right.
You say, don't you, that you asked some questions about this and you were given a number of different explanations?---Where do I say that? That is in - - -In your report?---Yes, original, yes.
I will take you to it.
HIS HONOUR: The bottom line is in relation to work in progress and stock on hand. If you have relied on what [the husband] told you, and if what he told you is incorrect then the degree to which it was incorrect, your valuation is wrong?---Correct, yes.
And if I don't believe [the husband] about it, that affects the valuation, doesn't it?---It does, yes, your Honour.
And if you were to make the assumption for the purposes of these questions that I did not believe [the husband] about those matters, then what would you say historically, if anything - I don't know whether you can - about work in - I mean, obviously there has to been work in progress and stock on hand. If I was not to accept what [the husband] has given me in evidence and therefore you could not rely on what he had told you, are you in a position to be able to say anything about work in progress and stock on hand in relation to your valuation, or not?---Well only that we had to consider both the opening and the closing stock, because - whereas Mr [K] just seemed to consider the closing stock at 30 June '06 - so a combination of stock, work in progress and potentially debtors that were held over, really, the figure I think that we are talking about, isn't it?
Yes. There appears to have been - there appears to have been, at least in part, if we are talking about work in progress, a practice of seeking to defer. Did you agree with that?---It does appear that way, yes.
Yes. Yes, Mrs Pack?
MR GEORGE: Your Honour, I rise with the greatest of respect to put your Honour's question to this witness in context. The evidence before your Honour is not that this witness only spoke to my client in relation to these issues, and if I could invite your Honour to look at page 80 of Mr [H] report at paragraph 2.7.
WITNESS: I am sorry, are you still there?
HIS HONOUR: Yes, we are all here. I am just reading the paragraph. Have you found it?---Sorry, it was page 80, was it?
Page 80, 2.7?---Sorry, I don't have a paginated - my copy isn't paginated, I am afraid. I will find it, though.
MR GEORGE: Annexure 12, your Honour.
HIS HONOUR: I will see if I can - it is annexure 12?---Yes, it starts:
I am advised by staff of the business
Yes, I have to go back to the paragraph, now. Yes:
I am advised by staff of the business.
But if I - for the purpose of this question if you were to assume that I was to find that I didn't accept that evidence - in other words, that I didn't accept that there had been a physical stock take as no documents have been produced to establish it and certainly no documents were provided to the accountant, Mr [M], to substantiate what was said to be the stock, so that therefore we were reliant upon what [the husband] told us?---Yes.
And if I was not to accept the truthfulness of what [the husband] told us, where do we go from there, from your point of view, in relation to making a valuation of the business?---That was where the difficulty arose, that if we didn't accept a figure it would have required some sort of analysis of the invoicing in the early part of July each year to try and determine what, if anything, was carried over from the previous year.
Mr [K] did that, and I think came up - I have just forgotten the exact figure but came up with a figure somewhere around 80,000, wasn't it? Seventy-eight?---Yes, I think - correct me if I am wrong. My recollection of his explanation for that purpose, three invoices he identified that had been apparently, by looking at the invoice sequence they were originally entered into the MYOB accounting data file in June '06 and then got re-entered as July. So he took those as being - should have correctly been in June.
Yes, he worked on the basis that they were in fact invoiced out on 1 July?---Yes.
And they should have been included in the previous financial year?---And they should have really been debtors, I would have thought, rather than stock or work in progress. Because obviously if they have done an invoice on 28 June or whatever, the job is finished. So in reality the job is done and should have been a debtor. I looked at - - -
Are they a debtor if they haven't been invoiced?---Well if the invoice had gone out on the day that they apparently first entered them, which apparently appeared to be a June date, then they would have been included in debtors, yes. The difference being that if you include them as a debtors figure they are at their full invoice value, whereas if you include them as work in progress it would only be a cost. So you reduce that invoice amount by the mark up, which is about 40 per cent, I think, in that year. Plus the labour component. So potentially the value you would take up as - if it was counted as work in progress - may be 20 per cent to 40 per cent lower than the invoice value.
I see. But you say that it should be really debtors?---Yes, and then at that amount that Mr [K] took up. My only concern was what their corresponding - as this seemed to happen every end of financial year, what was the effect - the figures that I had included income, but for the '06 it maybe should have been included in the '05 year. So while we needed to increase income by the amount held over at the end of June '06, we needed to decrease the income by the amount that truly belonged in the '05 year.
And Mr [K] identified that as a very similar amount. I forget exactly, but I have got a feeling 67,000 or something like that?---I don't remember that he identified any invoices - - -
He performed the same task at the end of the - I think at the end of the '06 year and the beginning of the '07 year and the end of the '05 year, beginning of the '06 year. And came up with very similar figures. Without going through it now I can't find it, and Mrs Pack can do it if she wants to?---Yes.
But I think it was 67 plays 75, or - there wasn't much in it?---That 67 was the figure that was included as stock.Yes?---So therefore he is saying there was no understatement at June '05, if I am correct.
But there was in '06?---Yes. I just recall from my discussions with him that he didn't believe there needed to be an adjustment of 30 June '05.
Yes?---The only analysis I did on it, I looked at the bankings for the first ten working days in July of each year on the assumption that that probably included some potential debtors, and then jobs that were in some state of progress at the end of June and maybe some jobs that are totally done in July. But the figures were something like 125,000 was banked the first week of July '05, and the first week of July '06, it was in the ninety-thousands, so there was actually - if you took that as your rationale in saying, "Well, anything being in the first week or two" - - -
Related to the previous period?---Related to the previous period, in which case potentially he understated his opening stock by about 60,000, but understated his closing stock by about 80,000. So there should have been a further $20,000 increase to the net profit in the '06 year.
I see?---If you can follow all that.
I think I am following it?---And that sort of falls in with historically his closing stock figure seemed to be about 2 per cent of sales, for the couple of years before hand. And if you do that on the '06 turnover, closing stock should have been about $30,000 when he had 7000 and something in there. So again, he is in the low 20,000 short.
And Mr [K] said in one of his reports that a business of this nature couldn't operate without stock of about $20,000. Do you agree with that?---Well, I can image the little bits of consumables and so on would add up to at least that, yes. But most - I would have thought most major stock items would be ordered specifically for jobs. So there wouldn't be a carrying of huge volumes of actual stock. It would just be nuts and bolts, you know, and small items like that - that are used on all jobs.
I am just asking you, do you agree with what Mr [K] said, that - - - ?---I think it is a reasonable figure, yes. But that would be a consistent amount, opening and closing, so it wouldn't - and it hasn't been included in either opening or closing stock, therefore there is a nil effect on the profit reported for the year.Right. But you think that the '06 figures are understated by about 20,000?---If I had to make a - from what - yes, the limited analysis I have been able to do, that would be my conclusion, yes.
Thank you. Sorry, Mrs Pack, I have sort of taken over and I didn't really mean to.
MRS PACK: I am quite content. Mr [H], then just so that I am following totally the discussion between you and his Honour, I then go back to the adjustments that Mr [K] sets out in his report. Do I understand then, from what you have said that you accept that Mr [K’s] adoption of a stock figure of $20,000 in lieu of the $7000 that is in the books of - in the financial statements is within range?---Yes, but I consider it should be also - it would have been there at the start of the year as well, so I don't think you need to increase the profit by that amount as Mr [K] has done.
But the stock, surely at the end of the '05 year, it is described actually as stock and work in progress, is $67,891?---Yes.
So isn't that the significant fact, namely that there is such a drop from the '05 year to the '06 year?---Sorry, I am assuming that is all work in progress, in saying that, and that gets back to my - looking at what was banked in the first couple of weeks trading of each July, when I did that analysis to say that the movement in the work in progress is potentially a $20,000 to $30,000 increase in profit, whereas the stock figure, I am assuming, is a constant at 20,000.
Mr [H], it’s not clear exactly what that amount of $67,891 represents?---No, it is not, no.
Because Mr [M] gave evidence that that was just a figure communicated to him by [the husband] or a member of his staff, and that he assumed that it represented both stock and work in progress?---Yes.
Whereas the claim subsequently appears to be that the figure of $7160 is descriptive only of stock?---Yes.So then I go back to Mr [K’s] adoption of a figure purely for stock of $20,000, and again ask you whether that is within the realm of what you would expect with your experience of a building of this size and nature, given again that you inspected it, I understand from your report, whether you would accept that that is within the range of what you would expect a business of this size would carry in stock?---Yes, I do.
I take you then to the work in progress and direct your attention to the annexures to the report of Mr [K]. And if we could deal with annexure A1, the general ledger extract for July 2006?---Yes.
You would understand that what Mr [K] did was to total invoices with the numbers 58, 58, 84, 84, and then those invoices with initial M8361 on them?---Yes.
That he totalled those, took off the GST and then came to an amount that he said represented work in progress?---Yes.
You understood that that was his exercise?---Yes, yes.Like him, did you also examine the general ledgers somewhat forensically?---Well, only to the extent of just looking at what - because we obviously couldn't go back and work out when jobs went out of the shop, so I looked at more globally in terms of - as I have said to your Honour, that if you looked at the first ten days bankings in July each year and assumed that they really represented June's work, that is as far as I have gone on it.
Did you note, for instance, in the general ledger that the ledger - sorry, the invoice numbers in some cases appear to be out of sync with the dates on which the invoices were issued?---Yes.For instance, on the first page of A1 at about three-quarters down the page, there are numbers, invoices ended 8356, issued apparently on 7 July but clearly predate the 372 which appears to commence the invoice numbers in July?---Yes.
And similarly, 358, which is the first invoice on that page, again appears to relate to a point in time earlier than the issuing of the invoices in July 2006?---Yes.
Similarly I take it that you would have noted that in the audit trail again that is annexed, that there are a number of transactions deleted, transactions altered?---Yes, on A3, yes.
And again on the sales register on A2, you would have noted that invoices which sequentially should have been issued in July '06 have been backdated to August '06? For instance, I take you to page 2, the 11th bottom entry on that page?---Yes, the ones dated 13 June?
Yes, the invoices are 35, 36 and 37 which then go back to 13 June, and then an invoice, 8415, which is then backdated to 27 June?---Yes.
And so then you would understand, would you not, why, then, Mr [K] looked at the invoices that were issued on 1 July 2006 and determined that the work for which those invoices were issued had been work that was completed by 30 June 2006 and thus he classified it as work in progress as at that date.
MR GEORGE: I object, your Honour, that is an inappropriate question, asking this witness to comment on the state of mind of another.
HIS HONOUR: Sorry, say that again?
MRS PACK: Yes, I probably could rephrase it.
HIS HONOUR: I didn't hear what the objection was.
MR GEORGE: I am sorry, your Honour.
HIS HONOUR: But if you are going to rephrase it then go ahead.
MRS PACK: Do you follow, Mr [H], then, now after my taking you through these documents, do you follow the reasoning then of Mr [K]?---I do, yes, yes.
HIS HONOUR: Do you agree with that?---I agree that those invoices - - -
Sorry, we have got to be careful here. You conceded you agree with the reasoning of Mr [K]?---Yes.
My question is, do you agree with the reasoning?---I agree with the reasoning, yes.MRS PACK: And so, then, I take it that your only remaining issue then is whether or not a similar exercise occurred or a similar treatment of work in progress existed at the beginning of the financial year?---That's correct, that is my concern, yes.
You would understand, would you not, Mr [H], that - - -
HIS HONOUR: Could I just stop you there? What Mr [K] says in his report is, having carried out the exercise that you have just been asked about and the reasoning process which you’ve agreed you followed, and you agree with, he goes on to say:
An examination of invoices on issued on 1 July 2005
so therefore the same process that he had gone through in relation to 1 July 2006, to test the work in progress are commensurate with the work in progress figure stated of $67,891, so no adjustment to opening work in progress is necessary. In other words, as I understand it, what he is saying is that as at the end - as at 30 June 2005 work in progress was stated as 67,891, and when you look at the invoices that were issued on 1 July 2005, the next day, they show the same figure. Therefore, you do not have to make an adjustment to the opening figure. Now, that seems to be what he is saying. One, do you follow that reasoning?---Yes, his reasoning he attempted to identify specifically ones that he can definitely point his finger at.
But firstly, do you agree with his - sorry. Do you follow his reasoning?---I follow his reasoning, yes.
Do you agree with it?---I didn't redo the calculation.Assuming, therefore, that what he has said is accurate, do you agree with his conclusion?---No, I questioned it, that he looked at - he is looking for specific examples of backdated invoices. I consider it more in a global sort of case of looking at more what potential combination of debtors, stock and work in progress were there? And that is when I looked at the first ten days invoicing at each July of '05 and '06.
I understand that, and maybe we are at cross purposes?---Yes.
And I think there may be some shading in your opinion as opposed to Mr [K’s] in relation to the period - the year ended 30 June '06. But let us leave that aside – the shading for a moment. What Mr [K] did was, as I understand it, examined the invoices that issued at the beginning of the next financial period, on 1 July 2006?---Yes.And looking at those, he made a calculation that there was a work in progress of 71,000, I think. I just for a minute lost it. I just get this, $71,573. Now, you understand the way in which he went about that?---Yes, yes.
And he then, as I understand it, adopted the same process in relation to the
1 July 2005 and got a figure of 67,891?---Yes, that is what he said in his report, yes.
He says because the financial - the end of year financials recorded a work in progress as at 30 June '05 of $67,891, you don't have to make any opening adjustment because it already was there?---Yes.
Do you agree with that process of reasoning?---No, I think you have got to go beyond 1 July and maybe look at - if you are counting work in progress. I mean, jobs that are billed on 2 July - it will obviously depend on their quantum. But if you have a large invoice issued on 2 July - say, for example, yes, there is one for $6840 on 4 July '06, for example. Well, would all that work have been done in July? And without going back to job cards, you can't answer the question categorically. I just think you need to go a bit beyond just purely 1 July, because there would have been jobs billed all through the first week or two of July that would have had some element of work done on them in June, I would have thought.
Okay, I follow that. But having regard to what he has done - let me put it this way. To the extent that he has done an analysis in the way in which he has done it, do you agree with the conclusion that he comes to?---No, I don't.
Can you tell me why not?---I think you have got to go beyond just looking purely at 1 July and consider that also between the '05 year and the '06 year there was about a 50 per cent drop in turnover. So - and depending on exactly when that drop off happened. But you would have expected, given '05 had a higher turnover, that '05's closing work in progress was potentially larger than '06's.Yes?---And so I did the exercise, I said - I think as I explained before. If you look at the first ten days sales each year, in '05 in rough round amounts of 120,000, when they declared work in progress of 67. So there is a potential understatement of about $50,000 as at '05.
Yes?---Then in '06 the first 10 day's sales was 95,000 when they only showed work in progress as 7, so there is a potential understatement of $90,000. If that is the figure you would say, "Well, there is potentially about $40,000 understatement is the net effect in the '06 year."
Rather than the 71?---Yes. And then at all times you also had stock of 20, so you don't need - which is just your consumables. So you don't need to make any - you don't need to bring that account - in terms of the future maintainable earnings calculation you don't need to make any adjustment to stock. But when you are considering the value of the trust, you would need to include the $20,000 worth of stock. It is an additional asset that isn't reflected on the balance sheet.
The books only show it at 7?---Yes. Any reality - if that sort of rationale is used, the work in progress potentially should have been 95,000, which is about what Mr [K] said it should have been.
[Mr K] said it should have been 71?---The 71 understatement, sorry. He says 78,000 is the value of those invoices. And I am saying, "Well, there is potentially a few more in there as well."Yes?---Because he has only gone to 1 July, I am saying, "Well, there is probably some invoices in the 2nd, 3rd, 4th, 5th of July that is probably related to June work as well.
I understand what you are saying in relation to that, but how does it - for my purposes, where I have to value ultimately this business, how do I use this evidence? How do I - what I am really asking you is to what degree do you disagree with Mr [K]? I understand now that - I think - that you are saying much the same thing?---Yes.
The difference is in dollar terms something between 70 and 90. Am I right, or have I missed something?---No. Yes, well Mr [K] is really saying the combination - in terms of the future maintainable earnings calculation the understatement to profit is 91,000 being the 71 plus the 20.Yes?---I am saying the future maintainable earnings calculation, from what I see, is potentially - the profit is understated by 30,000 to 40,000 but then when you come to value - so that obviously increases the future maintainable earnings by, call it the middle of the range, 35,000. But when we come to do the entity valuation and plug in the goodwill and everything else against all the other assets and liabilities we need to say that as of 30 June '06, but now we have done it at 30 June '07. At 30 June '06 there should have been an extra $20,000 worth of stock on the balance sheet and there should have been work in progress of - I think the figure should be about 95,000, not 7000.
Sure. Just let me get a note of that. You’re talking about 30 June '06, aren't you?---Yes. The latest balance sheet - sorry, your Honour, before I go on?
Yes?---You have made your note? Yes.
I just wanted to get a note. In relation to these figures you are talking about '06?---Yes. We have now done - - -
Hang on, just wait for one sec?---Yes.
And you say that as at 30 June '06 work in progress should have been about 90,000?---That is under the assumption that the first couple of weeks sales really represent the work in progress.Yes?---Now, I can't say categorically that is the figure because I haven't done an analysis back to job cards and - - -
But that is the best - - - ?---That is the best.
You can do?---Yes.And the stock on hand should have been 20?---Yes.
Thank you, yes, Mrs Pack?
MRS PACK: So then do I take it, Mr [H], that you would then make an adjustment to your future maintainable earnings of the amounts that you have just told his Honour about?---For '06, yes.
Are you able then to make those adjustments, why you are giving evidence, by reference to schedule 3.3? Or is that too difficult, sir?---No, no, no, I am just re-reading the schedule.HIS HONOUR: Just let me make sure that I am understanding this. Because of what you just said, an adjustment needs to be made to the future maintainable earnings as at 30 June '06?---Yes.
And you’re being invited, I think, to do that, is that correct? Mrs Pack, is that what you want him to do?
MRS PACK: Yes, I am, your Honour. Mr [H], you, in your schedule 3.3, assessed maintainable earnings at $123,118?---Yes.
Now, I invite you then to - perhaps by reference to Mr [K’s] calculations, which are set out on the fourth page of his report, tell the Court what adjustments you would make then?---Sorry, I am just finding his report again.HIS HONOUR: I understand the difficulty, I have got the same problem here. I’ve got bits of paper everywhere?---Okay, the parties have agreed that the 22,000 and the $20,000 adjustment go in.
MRS PACK: You have now agreed that the cold rooms and the subletting, the rent of subletting, go in? That is 28,600 and 4800?---Yes.
HIS HONOUR: In relation to the 26,831, have you got that?---Yes, the sales journal adjustment.
Yes. Mr [M] in the witness box this morning conceded that the figures didn't add up, that it was a - you can - if you didn't say it specifically you can assume that I would find that that is an adjustment that should be made?---Right.
So therefore we are back to WIP and stock on hand, which we have just been talking about?---Yes, and instead of Mr [M’s] total of 91,000, I think the figure should be, as best I can work out, 35,000 is the effect of the movement in the WIP.
Yes?---If the additional understatement as at '06, than it was as at '05, I suppose is the best way of explaining it.
MRS PACK: So, Mr [H], so that we are clear, instead of 20,000, and 71,573 you are adjusting an additional 35,000, is that right?---Yes.
HIS HONOUR: As I understand it Mr [H] is saying that the stock on hand, if we’re making these assumptions, it remains constant at about 20,000, so it doesn't affect the maintainable future earnings calculation. Is that what you were saying?---That is correct, your Honour.
So what you are talking about is instead of the 71,000, you are saying it should be about 35, somewhere between 30 and 40, pick 35 as a mean?---Yes.
Is that it?---Yes, your Honour.
Okay?---I have just added all that up to be 260,349.
Could you say that again for me?---260,349.
Yes?---Would become the adjusted FME. And then my subsequent report - - -
And you picked 35 per cent, didn't you?---In my latest I have, yes. Given I have now got two years earnings. Then I did a revised schedule of the FME of schedule 3.3 in my memo dated 25 October '07.
Yes?
MRS PACK: Mr [H], are you still with us?
HIS HONOUR: I think he is. Are you now reworking schedule 3.3, is that what - - - ?---Sorry, your Honour, I was waiting for you to find the page.
No, I found it?---Okay. So obviously the 2006 figure increases from 156,260 in round terms.
Yes?---The 2007 figure, if we assume turnover in the '07 year has been similar to the '06 year, assume the closing stock and work in progress would be similar to as at 30 June '06, there shouldn't be any adjustment necessary for the movement in the work in progress or stock.
Yes?---So I don't think there needs to be an adjustment there. The only other item I think Mr [K] differed to me in '07 was the sale of scrap for 11,000.
MRS PACK: And, Mr [H], can I interrupt? It is Mrs Pack. There is now evidence before his Honour that in the 2005/2006 financial year there were in fact nine separate sales on account of scrap metal to Smorgon Steel, that totalled $1335?---Yes.
As opposed to the 200 or 300 that are in the financials.
HIS HONOUR: You can take it that on the evidence before me I will find that is a continuing operation of selling scrap metal?---In the '07 year, though, the scrap was about 11,000 from memory.
MRS PACK: That is right, Mr [H], it is approximately that?---Yes, which I thought was abnormally high, and based on that - so I still think it is not necessarily an amount that is going to occur every year at that level. So Mr [K] and I disagree as to whether that should be an adjustment, so I don't think there should be an adjustment to include that in the future maintainable earnings.
Mr [H], now that there is evidence, as I said, of those sales, on a recurring basis in the '05/'06 year, whilst I concede that the total is considerably less than the total for the '06/'07 financial year, surely you would agree that there has to be some adjustment - - - ?---Yes, but maybe if you take the '05/'06 year as a typical year then we should allow $1000 or $2000, yes.
HIS HONOUR: Rather than 11?---Rather than 11, yes. On that basis my '07 future maintainable earnings would increase by, say, $1500 to - that would make it 252-and-a-half, in round powers. So I then have an adjusted '06 profit of 260,000 and an adjusted '07 of 252,500, which averages out at 256,250.
256,250?---Yes, your Honour. And applying the capitalisation rate of 35 per cent gives a figure for the business of $732,143.
Thank you.
MRS PACK: Mr [H], the next step, having then calculated the value of the business, 732,143, is to then ascertain exactly what the goodwill of the business is?---Yes.
And I understand that you say in the preamble to your report, and indeed in some particularity in one of your annexures to your principal report, that you have adopted the methodology of assessing goodwill by subtracting the tangible assets from the valuation figure?---That is correct.
When I look at then, the calculations that you have made, in 3.3, you
have - - -HIS HONOUR: Hang on, 3.3 where?
MRS PACK: 3.3, your Honour, the one that we are looking at, at the moment.
HIS HONOUR: The one you were looking at at the moment. Which one is that?
MRS PACK: Your Honour, this is the 3.3 that is annexed to the report of Mr [H] dated 26 October 2007.
HIS HONOUR: Okay, I’ve got that.
MRS PACK: You have in fact deducted from the business value the sum of $100,000?---I have, yes. I have a similar amount in my report of - my 2006 report.
I’m correct in saying, am I not, that in your report, in your principal report, you have set out the assets of the business as including some plant and equipment?---Yes.
You set out the written down values of that plant and equipment, and you accept, for the purposes of the valuation exercise, the book values?---Yes. That is 3 point - - -And this occurs as - - -
HIS HONOUR: Hang on, don't cut across him.
Say that again, Mr [H]?
MRS PACK: You said this at?
HIS HONOUR: The middle of 3.4.
MRS PACK: 3.3, your Honour, page 10 of the report, you set out then the assets of the business - - -
HIS HONOUR: Which report are you talking about?
MRS PACK: Begging your Honour's pardon.
HIS HONOUR: I’ve got a million documents here?
MRS PACK: Yes, if I could take your Honour to the report of Mr [H] dated 3 November 2006.
HIS HONOUR: Yes, that is the original report.
MRS PACK: The original report.
HIS HONOUR: Yes, and where in that?
MRS PACK: 3.3 on page 10.
HIS HONOUR: Yes:
The value of the family trust - - -
MRS PACK:
The value of the family trust includes the following: motor vehicles.
And then at 3.4 over the page, you go on to say, Mr [H], that in the absence of an independent third party valuation you adopt the written down book value as at 30 June 2006 as representing a reasonable approximation of their value, correct?---That is correct.
Now, if I could then take you to page 35 of your original report of 3.2, you therein refer to the balance sheets of the trust for the '04, '05 and '06 years?---Yes.
You particularise that the stock on hand and work in progress is valued at 7000?---Yes.
According to the book, 7100. And the fixed assets of 37,172 which incorporate the motor vehicles to which I’ve just made reference?---That is correct, yes. That is relying on financial statements, yes.
So that the core asset, according to the balance sheet as at 30 June 2006, total about $44,200, correct?---Well no, the core asset is the net core tangible assets which also include debtors and creditors.Right?---So you’re saying, of all the - because debtors and creditors are part of your working capital which you need to - the potential purchaser of this business on those latest figures, I am saying based on its income stream the total amount they will want to have invested in the business is $732,000. And then so they wouldn't then go out and buy another $37,000 worth of plant and another - whatever the value of the stock is, because then their total investment might end up being $1 million, and they are only getting a return of $256,000 a year so suddenly they are only getting a 25 per cent return when they want a 35 per cent return. So the figure that I have - when I come up with $100,000, that is taking into account debtors, creditors, stock and plant.
HIS HONOUR: Just hold on. So your $100,000 which you deduct from the value of the business to get the goodwill is comprised the debtors, the creditors, the stock and the plant?---Yes, the debtors less the creditors - well, debtors plus stock plus plant minus creditors is the sort of working capital requirement, yes. And when I did that - - -
Hold on - - - ?---I didn't include the schedule within my report and I think that is where the confusion is arising.
I’ve got to get a note of this?---Yes.
So debtors, stock, plant, less creditors, is that right?---That's correct. So as at 30 June '07 - - -
Which in your - for your definition equals tangible assets?---Net tangible assets, yes, your Honour.
Which need to be deducted from the value of the business to get a goodwill figure?---That's correct, your Honour.
Yes, Mrs Pack?
MRS PACK: Mr [H], I am having some difficulty with that calculation. As indeed you say, you don't set it out in your report?---No.
Looking then at - - - ?---Can I read out to you the figures that I used in arriving at my $100,000? And the 100,000 will change now, given that I think we have agreed that the work in progress and stock figures are understated?
Mr [H], if I could then take you to the calculation we should be doing?---Yes. So as of 30 June '07 which - - -
There are trade debtors of $309,398?---Yes.
HIS HONOUR: Do this slowly, please.
MRS PACK: Looking at schedule 3.4, your Honour, which is part of Mr [H’s] 26 October 2007 report.
HIS HONOUR: Schedule what?
MRS PACK: Schedule 3.4 page 10.
HIS HONOUR: Yes, I've got that. I don't have a page. I will just make sure we are - - -
MRS PACK: I am reading the fax page up the top, the fax number, page 10 of 12.
HIS HONOUR: I don't have that either. Is it headed: "[S] Nominees Pty Limited as trustee for the […] Family Trust"?
MRS PACK: Yes, your Honour, trading as [S Company]. It’s the - - -
HIS HONOUR: Determination of adopted values.
MRS PACK: As at 30 June 2007.
HIS HONOUR: Have you got that, Mr [H]?---I have, yes. Yes.
MRS PACK: So, Mr [H], you mentioned trade debtors of 309,398?---Yes. I also - - -
To be added to stock on hand and work in progress. And what figure do you want to substitute there?---Well the stock will be the 20,000 we have agreed on, and the work in progress, I can't remember what we worked out it would have been.
Thirty-five, I think you added, didn't you?---Pardon me?
Thirty-five, was the figure you adopted?---No, 35 was the effect of the movement between the opening and the closing, so I will just find my notes again. I think it was potentially around 75,000. Would have been the true measure. We assume that two week's banking is roughly the work in progress. So we accept 75,000, so work in progress, 20,000 for stock.
Making a total of?---95,000 for stock and work in progress.
HIS HONOUR: Ninety-five, did you say?---That’s correct.
Did you say 75 for work in progress?---Yes, on that rough calculation I worked out, yes.
No, I wrote down 70, that’s all?---Sorry, I was - yes. It might have been 70, I didn't actually write it down, as we had a discussion 20 minutes ago, whenever it was. So 70 is probably correct. That would make the stock in hand and work in progress a total of 90,000.Yes, which is what I think you said?---Yes. I also put in there earlier - sorry, before I said the tangible assets are stock plus plant plus debtors minus creditors. There is also allowance for – you need some sort of cash balance, assuming you are not running an overdraft. And I did a calculation based on the - - -
This is like a float, do you mean?---A float, yes. And the figure I came up with is 26,148 which I think from memory was - it was either one week's or two week's outgoings, but you need to have a reserve of some sort there available.
Okay, and the plant?---The plant - I think this is where Mrs Pack and I are - there is some confusion arising. The adopted value - in terms of trying to work out these core net tangible assets, I’m saying that the value of 30,816 represents some very old equipment, some very old motor vehicles, which - - -
This is its written down value, isn't it?---Its written down value. And each of those utilities, their written down values were detailed at that paragraph Mrs Pack pointed out to you. I have allowed for the fact that a potential purchaser would discount what they are going to pay for goodwill for the fact that within the short term they would have to replace the vehicles, because they’re all rather old. And I allowed five vehicles at $15,000 each, assuming they bought themselves a reasonable second hand vehicle, without going out and buying - totally replacing with new vehicles. And then the plant and equipment - again, I have just made an estimate. Instead of - his current book value is only 9371, I have assumed that potentially there is another $40,000 worth of - I assumed that the figure should be closer to 50,000. I don't really have any basis for that figure, I have just assumed that 9000 just appears too low and some allowance should be made for some notional amount that a potential purchaser - or it stays in [the wife’s] hands. He will have to spend some money on some form of plant and equipment. It just seemed - didn't seem right that you only have $9000 worth of equipment in a business of this size. The plant and equipment, I have assumed a figure of $125,000.
Which is $15,000 for the five - - - ?---Five vehicles, making a total of 75,000.
Yes?---And now allowing a notional amount of $50,000 for plant and equipment.
Which is a guess?---Yes.MRS PACK: Mr [H], aren't you confusing your job as a valuer of a business? Let me take you back to basics. You calculate the value of a business as you have chosen to in this valuation exercise, by the capitalisation of maintainable earnings?---Yes.
Correct?---Yes.You have calculated maintainable earnings, and we have been through that exercise. And that calculation then gives you the value of the business, doesn't it?---That's correct.
That is a sum of money which the hypothetical purchaser would be prepared to pay for this business knowing that they are going to get a return of 35 per cent on their investment on top of an income of 100,000 a year, correct?---On top of the salary, yes.
On top of the salary of 100,000 a year?---Yes.
Now, the prudent purchaser then would look at the assets of the business and say, perhaps, "Well, the trucks are a bit old. I might have to invest some money in trucks. But I will either be able to do that by leasing, or if I have enough capital that then will increase the value of the business, surely"?---Well no, it won't increase - you just need five working vehicles to produce the income stream. The income stream, if you’ve got to go out and lease them, well, your income stream will be decreased by the amount of the leasing charges. Your turnover won't increase, you’ve still got five vehicles out there running around doing the work. They are five workable vehicles. So I am saying that to take into account that your income stream will decrease because you will have to go out and lease some vehicles, or else you will have to invest more capital in buying the vehicles. The goodwill needs to be discounted.You say in your report that you inspected the business?---I attended the business premises, yes.
On the day of your inspection all of the vehicles, other than, I recall, two, were out on jobs?---Yes.I take it that it is an assumption of yours that the vehicles need replacement?---I consider, yes. They may not need replacement tomorrow but within the next, yes, one, two years, the shorter term. And that’s by the depreciated value. They’re obviously older rather than newer vehicles.
Surely, Mr [H], a creditor and a debtor of a business do not fit within the concept of a core tangible asset of a business?---They do in a valuation, they don't in a sale. You don't sell your debtors and creditors.
Exactly. The exercise that you have done is to work out what the hypothetical purchaser would pay for the business. That’s the capitalisation of future maintainable earnings, isn't it?---Yes, and that is the total investment they would want to make in the business. Now, while they don't buy the debtors and creditors they will have to fund debtors and creditors. So in this case the debtors and creditors, by coincidence, basically cancel each other out. So we probably don't need to - if you want to exclude the debtors and creditors, in this example it doesn't make any effect on the calculation because the debtors are 309,000, the creditors are 311. The only other item I include in there was the credit cards on the basis that $54,000 worth of credit card balance, that the business was using credit cards as a - instead of paying the creditors they were using the credit cards. So our creditors balance is really greater than our debtors balance.
You are not suggesting a credit card liability is a core tangible asset, are you?---I am suggesting that if the credit cards weren't there, the creditors would be higher.Mr [H], I’ve been talking about the concept of a core tangible asset, and you would accept that what is described as a core tangible asset is what is deducted from the valuation of the business to establish the goodwill of the business?---Correct.
Correct? How do you define a core tangible asset of a business, when you’re valuing the business?---Any of the assets or liabilities that are essential to the operation of the business.
Any of the assets?---Or liabilities.
So that the only asset I suggest that are essential to the operation of this business are the stock, the work in progress, and the fixed assets, and nothing else?---Well no, you couldn't - unless you were going to run on COD, you would have to be able to fund your debtors. You’ve got to be able to fund the fact that if I started this business tomorrow I wouldn't get my first cheque in the door for probably 45 days. I’ve got to be able to fund - partially fund that, the fact that I won't pay my suppliers for 30 or 45 days. So I also take into account the fact that I will get free money, being my creditors, which will carry me over until such time as my customers pay me. That is what I said, in this example the disparity between the creditors and the debtors isn't that great, it doesn't have that much of an effect. But if you have a business that - a retail business, for example, that had no debtors, it’s all cash, you start collecting the cash from day one, you don't have to pay your suppliers until 30 days. You’ve potentially got negative core assets. In reality you probably - your creditors will offset your stock. And so really, you don't need to make any further investment in the business. You stock the place up. You owe your creditors that same amount. By the time it comes to pay your creditors you have made your sales. So a business such as that, in a retail business, the maintainable earnings divided by the capitalisation rate is your business value and is your goodwill, because your creditors are essentially funding all your other working capital requirements. Apart from potentially your fit out or whatever. So that’s why I am saying you need to include the debtors and the creditors. Because if, for example - or you didn't have any creditors but you did have $300,000 worth of debtors, well again, your supply and demand cash on delivery, for whatever reason, if we assume that. And you don't get paid for 60 days on average, you’ve got to be able to fund your operations for 60 days and you need to take that into account in working out the total investment the purchaser would pay or the income stream, that they will give you X amount for the goodwill for the business but then they need to factor in - they will also find another $300,000 on the working of the business for the next two months until they tried to get paid by their debtors.
Mr [H], you have deducted 100,000 on account of core tangible assets?---Yes.
Have you noted Mr [K’s] exercise where he has in fact deducted 122,389 from his exercise?---I recall a figure such as that. I’m just trying to find it again.
I take it you are not disagreeing with what he’s done?---Sorry, I am just trying to - - -HIS HONOUR: How much was it?
MRS PACK: 122,389, your Honour. This is on page 3 of his 18 February 2008 report, Mr [H]?---Yes, I am looking at his old report.
HIS HONOUR: Is this 18 February?
MRS PACK: 18 February 2008, your Honour.
WITNESS: Yes, I disagree with Mr [K] because he doesn't include the debtors and the creditors.
HIS HONOUR: That doesn't matter, as it turns out, does it? As I understand your evidence, having regard to the fact that the debtors and the creditors cancel one another out, doesn't really matter much, does it?---Well my difference is I’ve made an allowance for the fact that the purchaser would have had to spend 95,000 on capital expenditure. So I have increased the core assets by that amount. And I also - the creditors - I notionally included the credit cards as representing part of the creditors, which has the effect of bringing part of my upward adjustment back down again. I am just trying to work out the figure that I think it should be on the basis of my rationale, and if we assume work in progress is 70,000 and stock is 20, and I’ve got an allowance of working cash in there as well, which Mr [K] hasn't got. My figure would then become - I essentially increase it by the increase in the value of the stock and work in progress which is approximately an 80,000 increase. So I am now saying the working net core tangible assets should be about 180,000.
Mr [H], I don't follow your evidence. Are you now resiling from the $100,000 that I asked you about before?---On the basis if we’re making the adjustment in the FME for now no longer relying on the financial statements, if we are accepting that the true value of stock and work in progress is 20,000 plus 70,000, yes, I am adjusting my working net tangible assets figure for that amount.
To?HIS HONOUR: To 180?---180 all together.
MRS PACK: And again, just for my assistance, would you particularise how you made that up? How you calculated that 180,000?---Working cash requirement of 26,000. I will just do these in round figures. Debtors of 310,000 - just add this up as I go and make sure it agrees: stock and work in progress of 90,000, plant and equipment of 125, being the notional 50 for the plant and the 75 for the equipment.
HIS HONOUR: How much did you say that was again?---125, altogether, your Honour. And deduct 54,000 for the credit cards and deduct 311,000 for the creditors, comes to 186,000, sorry. I rounded it down earlier from my - that is why I came up with a slight few thousand dollar difference.
What were the creditors again?---311,000.
Thank you, equals, what did you say, 185?---Yes, 185, yes, your Honour. So if you take that figure from the calculated business value of 732,000, you get goodwill of 547,000 compared to my report of October '07 - sorry.
MRS PACK: Compared to 482,194?---That's correct.
HIS HONOUR: Just give me the figure again, for goodwill, as of now?---547,000.
Thank you. And Mr [K] values it at nearly 706,000?---That rings a bell, yes. Yes.
Is that right?
MRS PACK: And then clearly, Mr [H], the next part of the calculation is to work out the entity valuations - - -
HIS HONOUR: Hold on a tick. So that I understand this - so you value the business on net maintainable earnings at 732,000?---Yes, your Honour.
Mr [K] values it at 828,000?---Yes, your Honour.
You value the goodwill at 547,000, he values it at nearly 706,000?---That is correct, your Honour.
You deduct as net tangible assets 185,000, he deducts 122,000?---That's correct.
They’re the differences between you, correct?---That is correct, yes, your Honour.MRS PACK: Mr [H], the next step then of course is to value the trust, is it not?---Yes, it is.
This then is schedule 3.4, again?---That is correct.
Clearly there will be no alteration to the liabilities as you’ve set them out on 3.4?---No.
HIS HONOUR: Where are we, Mrs Pack?
MRS PACK: Your Honour, we are back at 3.4.
HIS HONOUR: Of what?
MRS PACK: Mr [H’s] October 2007 valuation.
HIS HONOUR: Yes. So let me understand this. You value the trust as at - - -
MRS PACK: 30 June 2007, your Honour. So that, Mr [H], there now has to be consequential amendments, does there not, to the value of the trust?---There does.
On your calculation, in lieu of the goodwill figure of 482,194, you would now substitute 547,000?---That is correct.
And I take it that you would then also make the alterations to the stock and the fixed assets?---No, to the stock, I would. I would increase the stock to 90,000. Stock and work in progress, sorry.
But you would not make any alteration to the fixed assets, is that right?---That’s right. I am saying that is in their present state, that is what they are worth.All right.
HIS HONOUR: So just let me understand this. The stock on hand and work in progress would go from 80,236 to 90,000?---That is correct, your Honour.
And the goodwill would go from 482,194 to 547?---That is correct, your Honour.
And the value of the trust, or the net assets, would go from 422,515 have you managed to - - - ?---No, it should be up to about 567,000.
567?---Yes, I rounded it to the thousands.
MRS PACK: All right. And then the final part of that exercise, then, is to do the entity valuations, is that right?---Yes.
And this is on page 3 of your 26 October 2007 report?---That is correct.
So that instead of the 482,194 - - -
HIS HONOUR: No, just hold on, Mrs Pack. I don't think - - -
MRS PACK: It is a summary of opinion, your Honour, on page 4.
HIS HONOUR: Mine isn't numbered, so give me a paragraph.
MRS PACK: Paragraph 3.
HIS HONOUR: "Summary of opinion"?
MRS PACK: “Summary of Opinion”, your Honour, yes. Instead of the goodwill figure of 482,194, you would now substitute 547,000?---That’s correct.
The entity valuation you would now substitute for 567,000 instead of 422, is that right?---That’s correct.
And then in the balance of that exercise you pick up as a positive the liability of the trust to [S] Nominees in the amount of 59,633, is that right?---Yes, that wouldn’t change.
You pick up the liability of the trust to [M Pty Ltd] in the sum of 124,927?---Yes.
And you pick up your valuation of [J] Holdings at $10?---Yes.
Then on the next page you then calculate that [the husband’s] interest – I am sorry.
HIS HONOUR: So just let me understand this. You have made alterations of 482,194, goes to 547. The 422,500 goes to 567. The rest stays as it is, is that correct?
MRS PACK: Yes. And what is the total then, Mr [H]? Are you adding with us?---I am. It is 752,000.
752,000?---Yes.
And that then is the carry forward figure to the next page?---Yes, [the husband’s] interest in the entity becomes 752,000.
Then all of the other figures stay the same?---Yes, and the total becomes 415,000 replacing the 270,000 figure.
And if we take up off that 74,382?
HIS HONOUR: Hold on just a tic, I have got to follow this. The 270,414 becomes what, Mr [H]?---415,000, your Honour.
Thanks?---And then yes, 74,382 in arriving at the value of the […] Family Trust, I’ve included that in assets so it needs to come off. So the net, the net - - -
MRS PACK: Is about 340?---Yes.
HIS HONOUR: That is if you take off the 74?---That’s correct, your Honour. [The wife’s] comes to 415,000.
Yes.
MRS PACK: So that, Mr [H], your value of the trust then is $340,000, is that right?---The value of the party interests in all the entities is 340,000.
Yes, I am sorry, is 340,000.
HIS HONOUR: That assumes that I find the amount of 74,000 owing by [the wife] to the trust?---Correct, your Honour. But if you don’t think it is a legitimate act to help the trust then the value of the […] Family Trust would also come down by that amount, because I have included it at schedule 3.4 - - -
As an asset?---As one of the assets of the trust.
Okay. So it doesn’t much affect it, does it?---No, you take it out of the trust and – yes, it is not a legitimate liability of [the wife’s], it’s not a legitimate asset of the trust.
Yes, so you still end up with 340?---Correct, your Honour.
MRS PACK: Mr [H], you would understand from Mr [K’s] report that he disagrees with your assessment of the core assets of this business?---Yes, I do, yes.
You would understand from his report that he disagrees in the other areas identified by his Honour?---I do understand that, yes.
I have nothing further, your Honour.
HIS HONOUR: Where is the 74,382 identified as an asset?---Schedule 3.4, your Honour, of my 26 October ’07 - - -
Did you say 3.4?---Yes, your Honour. It should be the last page of my 26 October.
Got it?---If they’re in the right order it should be the last page.
Yes, no, I have got it, 74,382 yes?---Yes, have you found it, your Honour?
Yes, I have. That is where I – the problem with this, Mr [H], is that some time in the future I am going to have to go back and try and make sense of all of this. And I need to have notes that make sense to me?---Yes, your Honour.
I have got it now, thank you. Yes?
CROSS-EXAMINATION BY MR GEORGE
MR GEORGE: Mr [H], it is Tony George speaking, can you hear me?---I can, yes.
Just a couple of questions, firstly a general question. In relation to the moneys owing to [the husband] and his family trust, his loan account. If that sum were higher, the value of the trust would be lower?---Correct.
The amendments you’ve made to the various figures include as a starting point the concession that’s been made in relation to the two cheques for 20,000 and 22,000?---That’s correct.
You’ll recall I drew his Honour’s attention to that paragraph in your first report in which reference was made to discussions with staff in relations to stock levels?---Yes.
Were they discussions that you had with members of staff?---My recollection, it was [the husband] and I can’t recall the other lady’s name off the top of my head.
Ms [O]?---Yes.
Any other members of staff?---No, the two of them were in the room and I couldn’t recall in answering that question exactly who made the comment. So that is why I called it members of staff.
Did you actually inspect the premises to see the current levels of stock at that time?---No, I attended the premises, and I wouldn’t call them inspections. I had a general look around.
Did you see any levels of stock being maintained in the property to cause you to suspect that there was such a significant disparity in stock figures?---Well again, I don’t think I’m expert to sort of – yes. It is hard to tell what things are worth, so I wouldn’t have wanted to hazard a guess as to what some of the items would have been worth. I have no basis from making any sort of estimation from just a – what was essentially a cursory look over the place.
All right. I will conclude with this: you were asked a number of questions by my learned friend, Mrs Pack, in relation to Mr [K’s] report. Having considered all of his reports and his affidavit is there anything contained in those that causes you to in any way otherwise amend the evidence that you’ve given today?---Only to the extent I have, yes, I have amended my report by the evidence I have given.
Right. Your Honour, I have nothing further, thank you. Thank you, Mr [H].
HIS HONOUR: Thank you, Mr [H], you are excused from giving evidence, you have been most helpful?---Thank you very much.
Consequently, I find the asset pool at $2,772,992 of which $1,149,018 is comprised of the husband’s superannuation interests.
THE EVIDENCE
On all of the evidence, I find that the husband was an untruthful witness.
Mrs Pack SC, in her written submissions, sets out pages of inconsistencies in the husband’s evidence contained in his various affidavits, financial statements and viva voce evidence. I accept her submissions with respect to these matters.
I find that the husband deliberately lied to me on several occasions. Some of his evidence was simply incredible. I formed the view that he was prepared to say almost anything in the witness box if he thought it would advance his case. By the end of his cross examination, his credit was in tatters.
The wife was a difficult witness. She was defensive, argumentative, emotional, was somewhat disorganised in her thought process but on the whole, I thought she was honest. Further, there was considerable corroborative evidence that supported her case.
On the whole, I accept her evidence and certainly prefer it to the evidence of the husband.
I do not accept the submission of Mr George that the wife has failed to make full and frank disclosure. I find there was nothing in the suggestions that she has hidden assets or income or that she has been operating a business through a company or trust. I accept her evidence that the companies and trusts have never traded. The husband’s accountant, Mr M, gave evidence that supports that finding.
Although the wife had some difficulty initially explaining the offset account and the transactions recorded in it, it became clear enough, as I have already found, why it was established and how it was used. Further, this was all accounted for by the add-back of the $328,307.
The first period of separation, as I have said, is in dispute. What is in contention is whether the parties reconciled at Christmas 1998 or September 1999. The wife gave evidence that it occurred at Christmas 1998. This was supported by evidence given by her son and by the husband’s daughter. The husband asserted that the wife and his daughter were lying. However, in his affidavit, he deposed that they reconciled shortly after the original property orders were made. They were made on 28 November 1998. Therefore, his evidence in his affidavit, supports the wife’s case. The only difficulty with the wife’s case is part of a letter, being Exhibit 32. It is dated 16 September 1999 and states that all of the wife’s furniture is in Brisbane. This is inconsistent with her evidence that the furniture was returned to Townsville at Christmas 1998. However, the evidence about the furniture is somewhat confused. It is clear the wife was back in Townsville in early 1999 from her credit card records. She and the husband went overseas together in the early part of 1999. She was employed in Townsville in later 1999. On all of the evidence, I find that it is more probable that the parties reconciled at Christmas 1998 than September 1999. Therefore, the relationship was for approximately 11 years, not for the 10 years contended for by the husband.
As I have previously said, there is an amount of $74,382 in the wife’s loan account showing that she owes the Family Trust that amount.
That was dealt with by the wife in her trial affidavit at paragraph 188. However, that paragraph was struck out and I gave leave to Mrs Pack to lead viva voce evidence as to that matter.
That was done by putting to the wife, in chief, the document prepared by Mr M, the accountant for the husband and his corporate structures, which became Exhibit C in the proceedings. It was identified as “Extract from [S] Nominees General Ledgers”.
It had been supplied by Mr M to the wife as a result of a request to itemise the $74,382.
It shows a number of entries dating from 21 July 2003 through to 10 November 2004, with a balance of $74,382.24.
It was prepared by Mr M from the Annual General Ledger and he had prepared the Annual General Ledger on instructions from the husband.
Having heard both the husband and Mr M in evidence, it became clear that Mr M simply carried out the instructions given to him by the husband from time to time, without making his own enquiries. This related to issues such as work in progress, stock on hand and the attribution of expenses. It appears that the husband simply told Mr M to debit the sums to the wife’s loan account.
The document being Exhibit C was shown to the wife and at pages 68 and 69 of the transcript, the following is the wife’s evidence:
MRS PACK: Would you look at this document? I have a copy of the document for your Honour, to enable your Honour to follow the evidence.
HIS HONOUR: Thank you.
MRS PACK: Ms [Grey], is that a copy of a document that you received after a request being made from Mr [M]?---Correct.
Does that document set out particulars of amounts that you said you owe the company [S] Nominees Pty Ltd as trustee; Is that right?---Yes, that’s what it’s saying.
Now before I ask you questions about this document, after 21 July 2003, did you have access to any credit cards in the name of your husband?---No.
Did you have access to any credit cards in the name of [S] Nominees or, indeed, any other of the companies in the [S] group?---No.
Were you a signatory on any cheque accounts operated by [S] Nominees or any of the other entities in the [S] group?---No.
Were you a signatory on any cheque accounts operated by [the husband]?---No.
Did you give anybody who perhaps may have had authority to operate on any credit cards, either in the name of [the husband], or any of the companies including [S] Nominees, did you give any of those persons authority to make purchases using those credit cards?---No.
Have you had a look through the particulars of the amounts that it is said you owe [S] Nominees as trustee?---Yes.
Did you authorise the expenditure of any of those amounts?---Not one, no.
Having regard to my assessment of the credibility of the husband and the way in which this ledger account was created, namely on his instructions to his accountant, Mr M, there being no other independent record but only his instructions to Mr M to treat these amounts as being owed by the wife, I accept the evidence of the wife.
Consequently, I find that she does not owe the $74,382 to the Family Trust as is recorded in the books of account.
The last matter that I want to deal with prior to turning to contributions and s 75(2) factors, is the 1998 consent orders which I have already referred to.
The wife deals with that issue in her trial affidavits at paragraphs 89 to 94. I set them out hereunder:
“89.[The husband] and I agreed as part of these proceedings, that the 1998 property settlement be set aside. Annexed and marked “B” is a true photocopy of our 1998 property settlement order.
90.I make the following comments with respect to the assets and payments I received or was to receive pursuant to the 25 November 1998 property settlement order.
90.1The property at [W] was transferred to me. I then sold that property for $32,000 to pay towards my $35,000 in legal costs.
90.2I retained the Honda Accord motor vehicle.
90.3I retained my jewellery. However, at our final separation in May 2005 and since then, [the husband] has refused to give the jewellery to me.
90.4The order provided for a cash payment to me of $26,000. I do not recall receiving that payment, nor can I find any record of that payment.
90.5I believe the payment of $12,500 to my credit card was made by [the husband]. I recall that after paying the balance of my legal fees and repaying to friends and family money which I had borrowed from them to support myself, I had no cash available following the property settlement order, subject to what I say in paragraph 88.6
90.6I did receive some or all of payment from [the husband] of $66,000 referred to in the order, but not in the way it was intended and not as a capital amount by way of property settlement as intended. I refer to this below.
90.7[The husband] retained the matrimonial assets in his name being the various companies and trusts which he owned or controlled including the business [S Company]. He also retained his superannuation (subject to paragraph 22 of the order) and the matrimonial home at [D].
90.8The small residential properties in T and S Streets] Townsville which had originally been held by [the husband’s] superannuation fund were sold and my super fund received the sale proceeds. The sale proceeds were used to purchase a house at […] on the Gold Coast via the superannuation fund I had established with my son, […], called “The [G] Superannuation Fund”.
91.I say that with respect to the payment of $66,000 at $500 per week (paragraph 6 of the order), I did not receive that money as a capital payment, nor was it received to my benefit. [The husband] and I reconciled about one month after the order was made. [the husband] paid me $500 per week but this was fully used for housekeeping. [The husband] did not draw a wage from [S Company] at that time. The $500 per week was used by me to provide for necessary expenses at the [D] home, including for our groceries and domestic expenses.
92.[The husband’s] payment of $500 per week continued not just for the three year period referred to in the 1998 property settlement order but for the whole period until we separated in May 2005. On some occasions when extra money was needed such as for car payments, [the husband] increased the payments to me to $1,000 per week. I spoke to the [S Company] staff about increasing those payments. However, I say that I paid all household expenses from that money including buying groceries and buying [the husband’s] clothes as well as items for me. Accordingly, I did not receive $66,000 or any part of such payment, as a distinct capital payment.
93.As referred to above, [the husband] did not take a salary or drawings from [S Company] during this period. He may well have received payments whether in cash or otherwise, which usually were not known to me. The $500 per week (which later increased by salary payments) which [the husband] paid to me following the court order and following our reconciliation, was never available to me as a settlement of property. That weekly payment was totally used by me for our household expenses and including:
93.1Groceries for [the husband], me and the children.
93.2All medical and dental bills, including [the husband’s] medication.
93.3Clothing for the four of us.
93.4Purchases for the home, as referred to below.
I have noted that my 1999/2000 credit card accounts show contributions from my wages and purchases of furniture items including about $7,000 for a lounge suite and $2,500 for a bed.
94.The end result of the 1998 property settlement for me was that my legal costs and other personal debts were paid off and the sale proceeds of the [Y and S Street] properties were paid to the [G] superannuation fund which then purchased the Gold Coast home. I retained was [sic] the Honda Accord vehicle and my furniture which I moved back into the [D] home.”
In relation to the consent orders, Mrs Pack makes the following submissions:
“8.1The 1998 Consent Orders were made during a period when the business and by extension the trust were in a parlous financial position according to the Financial Statements of the trust at that time. That the trust had financed the business of [H Pty Ltd] had caused considerable financial difficulties. Income from sales had halved. It is however somewhat difficult to assess just exactly what the financial position of the trust was because of the irregular treatment by the accountant of entity loans.
8.2The overall effect of the Order was that the wife resigned as a director and divested herself of her shareholding in all of the entities in the [S] Group. She also received in lieu of her member benefit entitlement in the [S] Superannuation Fund real property in Townsville that was owned by the fund.
8.3The 1998 orders were not implemented fully:-
8.3.1the husband concedes that the sum of $500 each week that was paid to the wife was applied in the most part to joint household expenses.
8.3.2The orders contemplated of course a payment to the wife of a capital sum payable by periodic payments;
8.3.3The reconciliation of the parties soon after the orders were made altered the character of those payments;
8.3.4There is no reliable evidence for your Honour to calculate any percentage division of property in the 1998 orders. The balance sheet of the […] Family Trust as at 30 June 1998 (omitting inter entity loans) may be adjusted:-
Current Assets
Deposits $450.00
Trade debtors $150,043.64
Plant and equipment WDV $10,333.75
Motor vehicles WDV $3,779.00
Units: [W] Unit Trust $39,059.90
$203,664.00
Liabilities
Overdraft $69,850.65
QIDC $300,280.89
Trade creditors $402,796.79
$772,926
($569,262)
8.4 The husband alleges (paragraph 46 of his trial affidavit) that “during the week before [the wife] and I separated, they withdrew $15,000 from the company account … [the wife] also used approximately $18,000 from company funds to pay credit cards that were in her name, not the company cards”.
8.5 The husband also alleges (paragraph 57) that “on one of the days of one of the hearings [the wife] somehow withdrew without my permission $13,000 from my credit card for which I have never been repaid. This money was taken on top of what agreed [sic] in the terms of the consent orders”.
8.6 The wife agrees that $15,000 was withdrawn from the company account but says that she did not use $18,000 from company funds to pay her credit cards. She refers to a [S Company] debt that the husband put on her credit card in the sum of $18,000, that debt being partly reimbursed by the $12,500 payment to her as part of the property settlement order over one year later (paragraph 46 of Wife’s affidavit in reply).
8.7 The wife also denied taking $13,000 from the husband’s credit card deposing to not having access to his credit card (paragraph 57 of wife’s affidavit in reply).
8.8 It was not put to the wife that the wife had used $18,000 from company funds to pay credit cards or that on one of the days of the hearings she had withdrawn $13,000 from the husband’s credit card.
8.9 It was not put to the husband that he was responsible for a business debt on the wife’s credit card as he concedes that this is so in his 1998 affidavit and also that inference can be drawn from the terms of the November 1998 orders.
8.10 The wife was entitled to receive the sum of $66,000 pursuant to the November 1998 Orders, however, those monies as was conceded by the husband, at least in part, were utilized by the wife as these monies were paid on a periodic basis for housekeeping.”
Mr George submits that the result of the November 1998 consent orders were that the wife obtained a massive result, beyond that anticipated by the orders, purchased the E unit, and made baseless assertions of impecuniosity. His basic submission is that as a result of the orders made in November 1998 coupled with the interim spousal maintenance, that the wife has received all she is entitled to.
I do not accept that submission.
I accept the evidence of the wife and the submissions made by Mrs Pack.
I will deal with the question of the interim spousal maintenance under the s 75(2) factors which is where I think, if it is to have any relevance, it should be considered.
Contributions
Mr George submits that when the parties first commenced cohabitation, the husband had approximately $1 million in assets, and that the wife entered the relationship with no assets.
To deal with the wife’s position first, Mrs Pack submits that I should accept the evidence of the wife, in her trial affidavit, in which she deposes that she brought into the relationship assets to the value of $90,000. She submits that I should do that because her evidence in the affidavit was not objected to, and she was not cross examined on it.
On the other hand, in relation to the submission by Mr George that the husband brought into the relationship assets approximately to the value of $1 million, he refers to paragraph 17 of the husband’s affidavit in chief. The problem with that is that paragraph 17, and 18 for that matter, of the husband’s affidavit in chief filed 17 September 2007 were objected to and were struck out and I gave Mr George leave to lead evidence from his client with respect to those matters.
Mr George attempted to do so but it became obvious that the husband’s evidence was largely inadmissible and certainly unreliable.
Mrs Pack’s submissions in relation to contributions of the husband were as follows:
“5.1 Husbands Asset position in 1993
5.1.1The Balance Sheet for the […] Family Trust for the year ended 30 June 1994 (read from 30 June 1995 Balance sheet being the earliest year disclosed) notes assets and liabilities (excluding inter entity loans) of the trust as being:
5.1.2Assets
Deposits $200.00
Trade debtors $182,419.96
Work in progress $51,095.00
Plant and equipment WDV $34,023.55
Motor Vehicles WDV $14,973.30
[W] Unit Trust $39,059.00
TOTAL ASSETS $321,770.81
5.1.3Liabilities
Westpac $22,134.07
Trade creditors $390,522.88
Loan [W] Unit Trust $8,466.94
TOTAL LIABILITY $421,123.89
Net asset ($99,353.08)
5.1.4In addition to his equity in the trust the husband owned real estate. There is no reliable evidence of the value of the husband’s real estate interests.”
As I have said, I accept the submissions by Mrs Pack that there is no reliable evidence of the value of the husband’s real estate interests.
The direct financial contributions are a little opaque. This is because of what I might call the irregular journal entries. In the 1996/7 year, his taxable income was a loss of $5,000 or so. In the 1997/8 year, his taxable income was $160,000 or so. Of that $160,000 plus, $10,5000 was director’s fees and the balance was by way of dividend from the Family Trust. However, in 1994, the husband owed the Family Trust nearly $325,000, but in the 1995 financial year, that had increased to nearly $500,000. However, by means of irregular journal entries, this had been reduced to nil by June 1997.
I accept the evidence of the wife that she utilised the income she had at her disposal for the joint expenses of the household.
I also accept the evidence of the wife that she made contributions as a surrogate mother.
As I have indicated earlier in this judgment, when she formed a relationship with the husband, he had two reasonably young children. That was because their mother had unfortunately died.
I accept the evidence of the wife that she adopted the role of the children’s surrogate mother. That is supported by the husband’s daughter, who, I have already indicated, gave evidence on behalf of the wife.
I accept the wife’s evidence with respect to her contributions in this regard, both physical and financial.
The wife also contributed to the business and corporate structure. As can be seen from the terms of the orders made in November 1998, she was a director and shareholder of all of the companies, equally with the husband, and one of the expenses incurred by the trust was the contributions it made on behalf of both the husband and the wife to the superannuation fund.
The wife did the weekly wages, assisted with marketing the H Pty Ltd products, and contributed significantly to T Pty Ltd. The wife had significant prior experience in network marketing with an international company.
From the wife’s Income Tax returns, it appears that she gross income in 2002 of nearly $38,000, 2003 - $50,000, 2004 - $60,000, 2005 – nearly $15,000.
I accept the wife’s evidence that she was primarily the driving force behind the T Pty Ltd distributorship.
In addition, the wife made a significant contribution as a homemaker. The husband worked long hours and as a result, the wife was primarily responsible for household duties which involved cooking, cleaning etc as well as her surrogate mother role.
As I have already found, the period of cohabitation is approximately 11 years. Mrs Pack submits that in all the circumstances, I should assess her contribution at between 30 and 35 percent.
I find that over the 11 years, the wife has made a significant contribution both direct and indirect to the acquisition, conservation and improvement of the property of the parties to the marriage including the superannuation which has been paid out of the trust. She has also made a significant contribution to the welfare of the family, made in the capacity of homemaker and surrogate parent. In the circumstances of this case, I assess that contribution at 30 percent.
Section 75(2) adjustments
The wife is 60 years of age and has not re-partnered. The husband is 55 years of age. The husband is continuing to run S Company and T Pty Ltd. In his evidence, he indicated that he had plans, once this litigation was over, to advance the interests of T Pty Ltd. There is of course some uncertainty with respect to that but that is his intention.
The wife has been excluded from T Pty Ltd which was to a very large extent an area in which she was competent. The reason that she was excluded is that, although she brought proceedings on an interim basis to run that basis, those proceedings were settled by consent orders in which the husband had sole control of T Pty Ltd, and the wife was to be paid $1,000 per week interim maintenance.
When I make final orders in this matter, the interim maintenance payments will cease.
There is no evidence showing that the wife has any medical conditions that would prevent her from working. However, having been deprived of the opportunity to continue to run T Pty Ltd which I have said is a network marketing company, there is no evidence before me that she has any immediate prospects of being able to continue such a network marketing business. Much of it depends upon a network.
I do not discount the fact that she has some earning capacity but it has not been demonstrated to me, to my satisfaction, the extent of such earning capacity. It is, in my opinion, highly speculative.
Although she owns her own home, that home is heavily mortgaged.
The husband, on the other hand, has a significant earning capacity. Mrs Pack asserts that it is $300,000 per annum. Both valuers assessed the value at $100,000 per annum when making the valuation of the trust.
He has paid all his legal fees through the business. He owns his own home valued at nearly $700,000. He has a successful business and a potential to make T Pty Ltd profitable again. He has a large superannuation entitlement and that superannuation entitlement will grow because A property, which is owned by the superannuation fund, is rented by the business at nearly $50,000 per annum.
Further, the husband is five years younger than the wife.
The last matter that I need to consider is the interim spousal maintenance. Mr George suggests that I should take that into account under s 75(2)(o).
As I have already indicated, this was a consent order made in the circumstances where the husband agreed to pay $1,000 per week interim spousal maintenance, on the wife abandoning her claim to run the business T Pty Ltd, leaving it to be run solely by the husband.
No application by the husband has been brought before me to vary that order.
I see no reason to go behind the order, nor do I see any reason to treat it other than what it is, namely, an order for interim spousal maintenance which was made by consent in the circumstances that I have here set out.
Mrs Pack submits that I should make an adjustment under s 75(2) in the range of five to ten percent. As I have already indicated, Mr George submits that I should make no alteration. He submits that the factors balance once another out.
I cannot accept that submission. I do not think that the factors balance one another out at all.
I have found the total asset pool to be $2,772,992. Consequently, ten percent is $277,299. Five percent is $138,649.
Taking into account the matters that have been raised with me under s 75(2), I conclude that an adjustment of 7.25 percent is appropriate to make. That amount is just a little over $200,000 out of a total asset pool of $2.75M and I think that is a just and equitable adjustment for s 75(2) factors.
Overall then, that would mean that the wife would receive 37.25 percent of the asset pool.
In all the circumstances of this case, I consider that to be a just and equitable adjustment of the parties’ property interests.
As Mrs Pack invited me to seek further submissions in relation to the form of order that I should make, and Mr George indicated that in the event that I was minded to make orders in favour of the wife, then he agreed that further submissions on the form of orders should be made, I will invite counsel to make further submissions with respect to the form of the orders that I should make, having regard to the findings that I have made on a date to be fixed.
I certify that the preceding one hundred and forty-nine (149) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Monteith.
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