Kruger & Kruger (No. 3)
[2008] FamCA 971
•11 November 2008
FAMILY COURT OF AUSTRALIA
| KRUGER & KRUGER (NO. 3) | [2008] FamCA 971 |
| FAMILY LAW – SUPPLEMENTARY REASONS – Subsequent to the Reasons for Judgment of 27 June 2008 and further submissions as to the form of orders appropriate to give effect to the Court’s Reasons, further Reasons as to the treatment of and division of certain assets and liabilities – No impediment to the making of orders altering the interest in a particular entity, in respect of which the Court previously noted its intention that the wife should retain such entity in the final division of property – Court’s power to make orders pursuant to s 79 neither exhausted, spent or indeed exercised with respect to that entity – Wife asserted that the liabilities attaching to the proposed distribution is disproportionate and the viability of the entities therefore unsustainable – The wife’s contention fails to recognise that the fate of the particular entities is but part of the overall division of a much greater pool of assets – Court will not revisit its earlier conclusion with respect to those entities FAMILY LAW – PRACTICE AND PROCEDURE – FURTHER EVIDENCE – Absent an application for leave to re-open the evidence, not reasonably open to the Court to revisit the issue of the allocation of the entities on the basis now asserted by the wife, as this was not the substance of the evidence or submissions of the wife at trial FAMILY LAW – PROPERTY – CGT – In view of the disparate debt levels attached to the two entities, and the reality that real estate would need to be liquidated to reduce to comparative debt burden of the wife, CGT on the realisation of investment properties taken into account “across the board” – Court to defer the making of final orders to allow for further submissions in relation to the approach to CGT. FAMILY LAW – PROPERTY – Treatment of loan accounts of the entities – loans to be paid out and not to be forgiven. |
| Family Law Act 1975 (Cth) s 79 Mullane v Mullane (1982) 158 CLR 436 |
| APPLICANT: | Ms Kruger |
| RESPONDENT: | Mr Kruger |
| FILE NUMBER: | PAC | 174 | of | 2007 |
| DATE DELIVERED: | 11 November 2008 |
| PLACE DELIVERED: | Parramatta |
| JUDGMENT OF: | COLEMAN J |
| HEARING DATE: | 20, 21 & 22 May 2008 and 24 October 2008 |
REPRESENTATION
| COUNSEL FOR THE APPLICANT: | Mr de Robillard |
| SOLICITOR FOR THE APPLICANT: | Kent Attorneys |
| COUNSEL FOR THE RESPONDENT: | Mr Dubler SC Mr Combe |
| SOLICITOR FOR THE RESPONDENT: | Macquarie Partnership |
Orders
That judgment be further reserved.
IT IS NOTED that publication of this judgment under the pseudonym Kruger & Kruger is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth)
| FAMILY COURT OF AUSTRALIA AT PARRAMATTA |
FILE NUMBER: PAC174 of 2007
| MS KRUGER |
Applicant
And
| MR KRUGER |
Respondent
SUPPLEMENTARY REASONS FOR JUDGMENT (NO. 3)
Introduction
On 27 June 2008 the Court published Reasons for Judgment in the proceedings for settlement of property between Ms Kruger (“the wife”) and Mr Kruger (“the husband”).
For reasons provided in such Reasons for Judgment, the Court did not then attempt to make orders finally disposing of the proceedings. Relevantly for present purposes, the Court ordered:
1.That pursuant to the provisions of s 79 of the Family Law Act the parties shall hold their property and superannuation interests having a net value of $8 927 984 as tenants in common in shares of 52 percent to the wife and 48 percent to the husband.
The Court noted:
2.Note the intention of the Court that the final Orders of the Court will vest title to [Residential Facility One] in the husband and enable the wife to retain [Residential Facility Two].
Costs were reserved and liberty reserved for the parties to make submissions as to the form of orders appropriate to give effect to the Court’s judgment.
Subsequent to the delivery of judgment there have been a number of developments, those relevant for present purposes being considered by the Court in the reasons which follow.
On 24 October 2008, for reasons then given, the Court made orders with respect to the superannuation interests of the parties in the following terms:
(1)That the trustees of the [parties’ self-managed] Superannuation Fund cause the wife’s entitlement in the said fund to be paid to her upon her entitlement to payment vesting or, at her election, transferred to a superannuation fund nominated by her, and cause to be paid to the husband his entitlement in the said fund, provided that there be retained from such entitlement a sum representing the book value of the plant and equipment of [Residential Facility One].
The effect of the order of 24 October 2008 was to enable the parties to receive their superannuation interests. Both parties are, or will be entitled, by the end of December this year at the latest, to receive their superannuation interests worth, in the case of the husband $463 492 and the wife of $546 639. Making orders to facilitate those payments was logical, provided that there be retained from the husband’s entitlement a sum representing the value of the plant and equipment of Residential Facility One. Such plant and equipment is an asset of the superannuation fund and not of the entity which owns Residential Facility One, Company One Pty Ltd. It is common ground that the party receiving Residential Facility One should also receive the plant and equipment used by it. Retaining funds equal to the value of the plant and equipment until the fate of Residential Facility One itself, and thus the plant and equipment used in and for its business, is resolved was logical. If the wife is to receive Residential Facility One, the husband would receive the balance of his superannuation entitlement in cash. If the husband receives Residential Facility One, he will receive the plant and equipment and no further cash from the superannuation fund.
The Fate of Residential Facility One
Pursuant to directions previously made, each of the parties has provided minutes of the orders sought to give effect to the Court’s judgment of June 2008. Whilst the Court, for reasons which it provided in the primary judgment, concluded that, in the exercise of its discretion, the husband should receive Residential Facility One and the wife Residential Facility Two, through her learned Counsel the wife has sought to revisit that issue and to persuade the Court that, contrary to the Court’s previously stated intention, Residential Facility One should in fact be awarded to the wife.
The Court perceives there to be no impediment to the making of an order with respect to Residential Facility One in the terms sought on behalf of the wife. There has clearly been no order made with respect to it. Thus no question of altering interest in the property and thereby precluding a further order in that regard arises (see Mullane v Mullane (1982) 158 CLR 436).
The Court’s power to make orders pursuant to Section 79 having neither been exhausted nor spent, or indeed exercised save with respect to the superannuation interests of the parties, no question of a lack of power to make an order in the terms sought by the wife with respect to Residential Facility One arises.
The recent decision of the Full Court in Gabel & Yardley [2008] FamCAFC 162 (delivered 30 October 2008) supports the assertion of learned Senior Counsel for the husband that, notwithstanding its previously concluded intention to the contrary, the Court has the power to make an order that Residential Facility One vest in the wife. Senior Counsel for the husband submitted however that the power would not in the circumstances be so exercised. Although it is unnecessary to express a concluded view, there is force in Senior Counsel’s submission that “exceptional circumstances” needed to be demonstrated.
It is unnecessary and unhelpful to re-state the reasons why the Court concluded that its discretion should be exercised to award Residential Facility One to the husband. To the extent that the wife now seeks that Residential Facility One be awarded to her in reliance upon matters which were, or could have been agitated at trial, difficult issues confront her. The Court however does not perceive that the wife’s application is based upon evidence of that kind, but rather, and substantially, upon expert evidence filed on behalf of the husband subsequent to the delivery of the Court’s primary judgment and/or what are submitted to be the implications of the intended distribution of the residential facilities revealed by the Court’s primary judgment.
Controversy initially surrounded the manner whereby the husband might acquire Residential Facility One if, contrary to the wife’s current stance, the Court concludes that he should do so. Without resiling from her primary position of opposing the husband being awarded Residential Facility One under any circumstances, the wife proposed that if the husband was to be awarded Residential Facility One, that should be on the basis that the husband transfer to the wife his shareholding in Company One Pty Ltd and the wife cause Company One Pty Ltd to transfer and assign to the husband all of its assets (excluding the wife’s loan account, the licenses, permits and approvals which relate to Residential Facility Two) to a corporate entity nominated by or on behalf of the husband.
On 24 October 2008 Senior Counsel for the husband advised the Court that, whereas the husband previously sought that he acquire Company One Pty Ltd in order to acquire Residential Facility One, the husband was not opposed to acquiring Residential Facility One in the manner proposed by the wife if the Court concluded that he should receive it.
It is necessary to consider the basis upon which the wife seeks that the Court reconsiders its previously disclosed intention that the husband receives Residential Facility One.
On 24 October 2008 an affidavit was filed on behalf of the wife in which, under the heading “Transfer of [Residential Facility One] to me”, the wife asserted the following:
4. [Residential Facility One] has a debt to St George Bank which, as at 30 September 2008, was $361,135.45 with a monthly interest charge for September 2008 of $2,808.84. Annexed hereto and marked “A” is a copy of the relevant bank statement issued by St George Bank relating to this debt.
5. [Residential Facility Two] comprises the [facility] and surrounding properties at [E]. As at 30 September 2008, [Residential Facility Two] was subject to the following loans:
| Entity | Account Detail | 30 Sept 08 Balance | Interest Rate | Monthly Repayment |
| [Company Two] P/L ATF [Unit Trust One] | […] | 1,297,762,87 | 10.95% | 11,575.14 |
| [Company One] P/L ATF [Kruger] Family Trust | […] | 150,000.00 | 10.15% | 1,187.01 |
| [Company One] P/L ATF [Kruger] Family Trust | […] | 200,000.00 | 10.95% | 1,800.00 |
| [Company Two] P/L ATF [Unit Trust Two] | […] | 369,536.10 | 8.77% | 3,514.00 |
| [Company Two] P/L ATF [Unit Trust Two] | […] | 400,173.38 | 6.94% | 2,323.33 |
| [Company Two] P/L ATF [Unit Trust Two] | […] | 386,238.47 | 8.77% | 3,649.00 |
| [Company Two] P/L ATF [Unit Trust Two] | […] | 415,205.48 | 8.77% | 2,427.38 |
| Total Principal | 3,218,916.30 | Total Interest | 26,475.86 | |
[Wife’s Affidavit sworn 24 October 2008, pars 4-5, pages 2-3].
The wife thus asserted that:
7.I understand that, if [Residential Facility One] is transferred to the Husband and [Residential Facility Two] is transferred to me, such transactions would result in my having to accept responsibility for and service of a debt totalling $3,218,916.30 with monthly repayments of $26,475.86. By contrast, the Husband would become responsible for a debt of $361,135.45, with monthly repayments of $2,808.84 per month. [Wife’s Affidavit sworn 24 October 2008, para 7, page 3].
The wife further deposed:
8. In recent times, I have made inquiries both with St George Bank and other potential lenders. I have also discussed with my accountant issues regarding the serviceability of the debt that would be secured by [Residential Facility Two]. Based on these discussions: -
(a)I have grave doubts that a debt of $3.2million can be serviced by [Residential Facility Two] without support from [Residential Facility One]. Such belief is particularly based upon my discussions with potential financiers. Annexed and marked “C” is a copy of a letter received form one of the potential financiers, Bankwest.
(b)If I were to receive both [facilities] and assume the combined debts, I would be able to service the existing debts or obtain re-financing of the existing debts.
9. I accept that the Husband will, in the event that I was to receive [Residential Facility One], receive other property of the marriage, or a monetary amount, or a combination of both.
10. I believe that, if a monetary amount is to be paid to the Husband, the amount will be $2,002,571.00 based upon Mr [PL’s] current calculations. Annexed hereto and marked “D” is a copy of the calculation of this amount prepared by my solicitors.
11. I am presently not in a position to pay the $2 million odd figure to the Husband. However, based on the abovementioned discussions, I am reasonably confident that, given a reasonable period of time, I could manage to achieve payment to the Husband of the sum of $2 million odd. [Wife’s Affidavit sworn 24 October 2008, pars 8-11, pages 3-4].
In comprehensive and helpful submissions filed on her behalf, learned Counsel for the wife further agitated this issue. In the course of so doing, Counsel addressed the topic under the heading “transfer of [Residential Facility One] to the wife”.
Learned Counsel for the wife, in reliance upon the affidavit evidence of the wife to which reference has been made, submitted that:
4.3In short, the practical result of the proposed ‘in specie’ distribution is that the Wife will accept responsibility for a total debt and monthly repayments ten times greater than the debt and monthly repayments for which the Husband will accept responsibility. [Wife’s Outline of Submissions 24 October 2008, par 4.3, page 6].
It was further submitted that the cash adjustment proposed by the husband of $143 278.97 would “make little difference” to that outcome. [Wife’s Outline of Submissions 24 October 2008, par 4.5, page 6].
Learned Counsel for the wife further submitted that:
4.6The total debt of both [residential facilities] is in the order of $3.6million. However, after the ‘in specie’ distribution;
(a)The [Residential Facility One] debt will be some $3.2million;
(b)The debt will be serviced by the business activities of only one [facility];
(c)The debt will be secured by a [facility] valued at $3.5million (a lending ratio of 91.4%).
(d)By reasons of the higher lending ratio, St George Bank are likely to require substantial additional security (which the Wife cannot offer), or will charge a much higher rate of interest commensurate with the increased risk, or both. [Wife’s Outline of Submissions 24 October 2008, par 4.6, page 6 & 7].
Having substantially reiterated by way of submissions the evidence of the wife in the affidavit, to which reference has been made, learned Counsel submitted that:
4.9 Of course, the Husband will, in such event, have to receive other property of the marriage, or a monetary amount, or both, to put him in the same position as he is now as far as money can.
4.10 Assuming there is to be a monetary amount paid to the Husband, the amount will be $2,002,571.00 based upon Mr [PL’s] calculations. [Wife’s Outline of Submissions 24 October 2008, pars 4.8 & 4.10, page 7].
It was thus submitted that:
4.11 Were the Wife to be able to write out a cheque to the Husband for this amount now, the matter could be concluded now. Clearly the Wife cannot do so now. However, with the benefit of a reasonable period of time, she may be able to:
(a)obtain financing; or
(b)secure an equity contribution from an investor;
to enable a payment of such magnitude to the Husband to be made.
4.12 Having regard to the Christmas vacation, the Wife submits that 4 months would be a reasonable period of time.
4.13 To compensate the Husband for the delay in payment, the Wife suggests that interest accrue at 10% per annum on the Husband’s “buy out” figure. [Wife’s Outline of Submissions 24 October 2008, pars 4.11, 4.12 & 4.13 page 8].
Recognising that the wife may not be able to finance the proposed buyout, her learned Counsel made submissions in support of a series of default provisions.
To the extent that the wife’s submissions may assert that only by one party receiving both facilities can either of them remain viable, with respect to learned Counsel for the wife, who was not her Counsel at trial, the evidence at trial, the way in which the wife’s case was agitated, and the submissions of Counsel then appearing for the wife at the conclusion of the trial, preclude the Court from accepting that such is or could be the case.
In reliance upon the evidence of the joint expert, the Court found with respect to the residential facilities:
45.So far as the values of the [residential facilities] are concerned, it was, sensibly in the Court’s view agreed by learned counsel for the wife after Mr [ON], the valuer who prepared very detailed valuations of each of the [facilities], was briefly cross-examined, that the figures of $2.75 million and $3.5 million for [Residential Facility One] and [Residential Facility Two] respectively were the appropriate figures to be taken into account for present purposes.
and
185. Objectively, given the Court’s findings with respect to the parties’ contributions, the expert valuer Mr [ON’s] evidence that he valued the [residential facilities] on a “stand alone” basis, and the impact upon the parties’ future earning capacities of the fate of the [facilities], it is difficult to see why each party ought not in fairness receive one [residential facility]. So doing would also avert triggering the sale of investment properties on a large scale, and incurring at sale, CGT and other costs. [Reasons for Judgment, 27 June 2008, paras 45 & 185].
Nothing to which the Court has been directed suggests that it was other than open to the Court to so conclude.
Whilst this is not an appeal, and Counsel now representing the wife is not bound in quite the same way as would be the case on appeal, the judgments of the High Court in a number of cases relied upon by Senior Counsel for the husband concerning appeals are instructive for present purposes.
In Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 the High Court at 438:
The circumstances in which an appellate court will entertain a point not raised in the court below are well established. Where a point is not taken in the court below and evidence could have been given there which by any possibility could have prevented the point from succeeding, it cannot be taken afterwards.
In Metwally (No 2) v University of Wollongong (1985) 60 ALR 68 the High Court said at 71:
It is elementary that a party is bound by the conduct of his case. Except in the most exceptional circumstances, it would be contrary to all principle to allow a party, after a case had been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an opportunity to do so.
In Coulton v Holcombe (1986) 162 CLR 1 Gibbs CJ, Wilson, Brennan and Dawson JJ said at 7:
It is fundamental to the due administration of justice that the substantial issues between the parties are ordinarily settled at the trial. If it were not so the main arena for the settlement of disputes would move from the court of first instance to the appellate court, tending to reduce the proceedings in the former court to little more than a preliminary skirmish.
In Banque Commerciale SA En Liquidation v Akhil Holdings Pty Ltd (1990) 169 CLR 279 Mason CJ and Gaudron J said at 284:
Some aspects of that rule appear to derive from public policy considerations directed to ensuring the finality of litigation. On the other hand, some aspects of the rule may have their genesis in estoppel by election in the conduct of litigation, although, if so, the relevant consideration is not that the other party is put in a worse position but that he or she may have been so placed. See, for example, Moustakas, where the refusal to allow the appellant to raise a new case was rested on "the possibility that the [other party] may, if it had been raised below, have wished to call evidence in response to it". So far as the rule may derive from public policy, the relevant consideration is that the case sought to be made on appeal is a new or different case from that which emerged at the trial. See Browne v Dunn, cited with approval in Rowe v Australian United Steam Navigation Co Ltd; Moustakas. (footnotes omitted).
Absent an application for leave to re-open the evidence, and there is none, it is not reasonably open to the Court to revisit the issue of whether or not the husband should receive Residential Facility One on the basis that only by maintaining the two facilities can either or both of them remain viable. In the circumstances of this case, any re-opening of the evidence would be at the wife’s cost. The figures upon which the present submissions are based were known, or able to be known at trial. As will be seen, there is however a logical flaw in the present submissions which re-opening the evidence would be unlikely to cure.
Ultimately it is less than clear that the wife in fact asserts that she needs to retain Residential Facility One in order for Residential Facility Two to remain financially viable. To the extent that her case expressly or impliedly asserts that to be the case, the Court does not accept that to be so.
The nub of the wife’s assertion that she should be awarded Residential Facility One and be obliged to generate a capital payment to the husband of some $2 000 000 seems to be that for her to be awarded Residential Facility Two subject to the debts attaching to it, and for the husband to receive Residential Facility One with the debts attaching to it would result in an unfair outcome, the wife becoming responsible for debts of $3 218 916.30, the husband for debts of only $361 135.45.
Quite apart from the fact that the analysis of debt advanced by the wife overlooks the reality that a considerable proportion of such debt (not less than $1 000 000) appears referrable to real estate holdings adjacent to Residential Facility Two, which the wife will receive, the fundamental flaw in the proposition advanced by the wife is that it ignores the fact that the fate of the residential facilities is but part of the overall division of a much greater pool of assets.
Objectively, to the extent that the debts attaching to Residential Facility Two exceed the debt attaching to Residential Facility One, and that the net value of the former is thereby disproportionately reduced by comparison with the latter, that is a matter which can and will be addressed by the allocation of non residential facility assets in order to preserve the integrity of the overall percentage division concluded by the Court in its primary judgment to be just and equitable.
With respect to the wife, in essence, the proposition involves looking at part of the picture rather than the whole of the picture. To the extent that the debts attaching to Residential Facility Two reduce the net value of the entity, the wife will have available to her more by way of real estate which she can liquidate in order to maintain the overall percentage division of the entirety of the parties’ assets and reduce her debt level should she wish to do so.
Realistically, it is not open to the wife in this case to dictate to the Court or to the husband what assets she will or will not liquidate given that, ultimately, the Court must make an order which provides a just and equitable distribution of the total property of the parties. The Court does not suggest that the wife is seeking to dictate what will happen, but in a practical sense that is the effect of the position she is adopting. Upon receipt of her overall entitlement, if she chooses to do so, the wife would have the capacity to liquidate property and extinguish the whole of the debts of Residential Facility Two. There may be very good tax and other reasons why she would not wish to do that but it is clear that her entitlement to receive net property exceeding $4 000 000 including a tax-free superannuation entitlement in cash of more than half a million dollars provides that capacity.
With respect to the wife, nothing to which reference has now been made persuades the Court that it should revisit its earlier conclusion that each party should receive a residential facility. It is not insignificant in this regard, as Senior Counsel for the husband reminded the Court, that Counsel appearing for the wife at trial referred to Residential Facility Two as the “jewel in the crown” or similarly positive terms.
Whilst the question of how Capital Gains Tax might be treated will be considered separately, it is appropriate to record at this point that, whilst the Court does not accept that it should revisit its earlier conclusion that the husband should receive Residential Facility One, the reality of the disparate debt levels attaching to the two facilities, and reality that, to reduce the comparative debt burden the wife would need to liquidate some real estate does lend support for concluding that Capital Gains Tax should be taken into account “across the board”. This is particularly so given that the wife has already, for reasons to which she has deposed in a recent affidavit, taken steps to liquidate three of the Queensland real estate assets.
Having resolved that the husband should acquire Residential Facility One, in the manner sought by the wife, and agreed to by the husband, it is appropriate to also order that the parties and trustees of the superannuation fund do all things and execute all documents necessary to cause the ‘in specie’ transfer to the husband, or a superannuation fund nominated by him, of the plant and equipment of Residential Facility One.
As the parties have contemplated, given that the superannuation fund is effectively selling plant and equipment to the husband at book value, the fund would be entitled to retain the monies subject of the Court’s order of 24 October 2008 as the purchase price for that plant and equipment.
Quite apart from the absence of opposition to this course, the Court perceives there to be no impediment to such order. The trustees of the fund have been afforded procedural fairness. The transaction is not at an undervalue or otherwise in breach of the trustee’s obligations to the members of the superannuation fund. Given the fate of Residential Facility One, the husband’s acquisition of plant and equipment belonging to the trust and located at the facility may also be commercially advantageous to the superannuation fund in that it is relieved of the obligation to having to find other uses for plant and equipment or liquidating it if it cannot.
The timeshare units
Although of small consequence relative to the totality of the assets of the parties, and the intensity of their respective desires in relation to the fate of Residential Facility One, it is necessary to direct how the timeshares shall be dealt with.
Learned Counsel for the husband confirmed that the husband would be prepared to accept Timeshare One and Timeshare Two ‘in specie’ as part of his overall entitlement but did not wish to have Timeshare Three or Timeshare Four.
Counsel for the wife advised the Court that his client did not wish to have any of the timeshares, a position made clear by the wife in her affidavit filed 24 October 2008. Fairly, the wife did not seek to deprive the husband of the timeshares which he wished to receive.
The Court concludes, it appears largely uncontroversially, that the appropriate course is for the husband to acquire Timeshares One and Two and that the wife be credited out of other assets with 52 percent of the value of those assets whilst Timeshares Three and Four, which neither party wants to receive be sold and the proceeds of sale divided as to 52 percent to the wife and 48 percent to the husband.
So doing preserves the overall 48 percent division of the total property of the parties in favour of the wife. To the extent that different figures appear to be suggested as the values of the timeshares which the husband will retain, there is no evidence before this Court justifying the Court departing from the figures which were presented, apparently uncontroversially, by Counsel for the wife at trial in the circumstances described in the Court’s primary judgment. To the extent that those figures may not accurately reflect the current values of the timeshares, the suggested difference is minimal. In the case of those which will be sold, any deviation in value, in whatever direction, will be shared by the parties in the proportions in which they will share the totality of their assets.
The treatment of loan accounts
Under the heading “Final separation of [Residential Facility One] from [Residential Facility Two]” learned Senior Counsel for the husband referred to the interaction of loan accounts involving the parties, the Kruger Group and the two residential facilities.
Learned Senior Counsel for the husband submitted that:
17.In order to effect a final division of the interests of the parties to the marriage and so as to avoid further litigation it is proposed that the husband’s loans to the [Kruger] Family Trust, [Unit Trust one] and [Unit Trust Two] shall be forgiven by the husband (order 11) and that the wife’s loans to [Company One] Pty Ltd shall be forgiven by the wife (order 12). [Submission of the Husband in Respect of Proposed Final Orders, page 5, para 17].
He also submitted:
18.Similarly, it is proposed that [Company One] Pty Ltd (or [Residential Facility One]) shall forgive its loan to the [Kruger] Family Trust ([Residential Facility Two]): see orders 20 and 21. [Submission of the Husband in Respect of Proposed Final Orders, pages 5-6, para 18].
Probably correctly, Senior Counsel ultimately submitted in this context:
19.The result of this will be that there will no longer be between [Residential Facility One] and [Residential Facility Two] and between the husband and wife any inter-related loan accounts. [Submission of the Husband in Respect of Proposed Final Orders, page 6, para 19].
Learned Counsel for the wife submitted that although the objective to which Senior Counsel for the husband referred was undoubtedly appropriate, that:
(a)there is no commercial or other reason for the loans to be written off or forgiven;
(b) to forgive the loans might result in the accounts of the various entities not presenting a true and fair picture of their financial position;
(c)[Mr PL’s] Report has attributed to each party receiving a business the benefit of a loan allocated to the business;
(d)as surplus funds become available to each business, the funds received can be applied to repayment of what are legitimate loans, which in [sic] ought not be taxable in the hands of the husband or wife, but might otherwise be in [sic]. [Wife’s Outline of Submissions 24 October 2008, para 3.11, page 5].
The wife thus contends that the form of the Order in relation to the loan owing by Residential Facility One to her be as follows:
Pursuant to sections 79 and 80 of the FLA, the Wife shall execute a transfer to the Husband of her interest in the loan of $156,480.00 owing by [Company One] Pty Ltd trading as [Residential Facility One] and shall deliver such transfer to the Husband. [Wife’s Outline of Submissions 24 October 2008, para 3.12, page 5].
The wife contends that the form of the Order in relation to the loan owing by Residential Facility Two to the Husband be as follows:
Pursuant to sections 79 and 80 of the FLA, the Husband shall execute a transfer to the Wife of her interest in the loan of $105,000.00 owing by [Company One] Pty Ltd as trustee of the [Kruger] Family Trust trading as [Residential Facility Two] and shall deliver such transfer to the wife. [Wife’s Outline of Submissions 24 October 2008, para 3.13, page 5].
The preferable and more technically correct approach to the loan accounts was submitted by learned Counsel for the wife to be that they be paid out, presumably by an exchange of cheques. Although there is no expert opinion evidence before the Court in relation to this issue, and the Court professes no independent expertise in taxation law, in the absence of consensus, the Court inclines to the view that it would be preferable that loans which have historically been represented as being, and no doubt are, genuine in nature should be so regarded when the question of their repayment or extinguishment arises.
The submission of learned Counsel for the wife that forgiveness of loans may have unintended revenue consequences for the parties, albeit not supported by expert opinion evidence, resonates with the Court. To the extent that there is opposition, and the Court does not understand that Senior Counsel for the husband necessarily strongly opposes such course, the preferable approach to the objective articulated by Senior Counsel for the husband is in the Court’s view via the methodology advocated on behalf of the wife.
Notional or actual CGT
As the Court’s primary judgment records, there has always been the potential for the implementation of the Court’s primary judgment to give rise to sales of real estate by either or both parties. Such sales will give rise to Capital Gains Tax (CGT) liabilities. There is evidence before the Court that the wife has in fact sold or is in the process of selling three properties of hers in circumstances which will generate Capital Gains Tax liabilities.
Having regard to the wife’s evidence in relation to the debt level attaching to Residential Facility Two, and the submissions of her learned Counsel, the Court having resolved to adhere to its previously expressed intention that the husband receive Residential Facility One, it is likely that the wife will sell other real estate in the future to reduce her debt level. So doing would not be unreasonable.
The husband’s position in that regard is less clear. Whilst, at least superficially, the position in relation to the three properties which the wife has sold or is selling seems clear, the authorities in relation to CGT suggest that the position is not otherwise necessarily clear cut or straight forward. Although not the subject of extensive submissions, Senior Counsel for the husband appeared to dispute the commercial necessity for the wife liquidating any of her investment properties.
Inherent in the notion of “investment property” is the expectation that it will at some time in the future be sold. In that regard, there is a clear division between investment properties and properties such as farms, factories, shops or offices which are essential or ancillary to the conduct of an ongoing business, which, though potentially liable to be sold at some time, do not logically readily meet the criteria for notional CGT allowances to be made.
The issue of notional CGT is further complicated in a case such as the present given that some potential sales could fall within the current income tax year whilst, understandably, the parties might, if faced with significant CGT liabilities in the current year, defer selling other investment properties until the 2009/2010 financial year in order to either defer generating a CGT liability or having a year in which to lawfully arrange their finances to be best able to absorb such liabilities.
As the evidence of Mr PL makes clear, the position is further complicated in that there may be some capital losses, which the Court understands are able to be offset against capital gains.
As is generally the case, there is no simple approach to potential CGT liabilities in this case which is necessarily just and equitable. On balance, the Court is comfortably satisfied that, having been investment properties, CGT with respect to the three properties which the wife has sold or is selling should be taken into account even if no other CGT is to be allowed.
Whilst, notwithstanding the logic underpinning them, the Court has rejected the submissions on behalf of the wife in support of her receiving Residential Facility One, as the Court’s earlier reasons in this Judgment reveal, influential in that decision was acceptance of the wife’s ability to liquidate further investment properties in order to reduce the debt level of Residential Facility Two. Whilst it is self-evident that so doing will increase the revenue liable to be received from Residential Facility Two, the essential attraction of the submission remains. So does the prospect of the parties’ respective facility debts being less disparate.
Mr PL provided affidavit evidence in relation to the likely impact of CGT on the realisation of the parties’ investment property. Mr PL’s evidence in relation to the husband’s estimated CGT in the event of his acquiring Residential Facility One by way of share acquisition in the facility is no longer relevant given that the husband or the corporation nominated by him will acquire the residential facility from Company One Pty Ltd. That presumably would best be achieved by Company one Pty Ltd selling the residential facility at the value determined by Mr ON to the corporate entity nominated by the husband. Whether Company One Pty Ltd would then incur CGT liability is unclear.
In his affidavit, Mr PL prepared a table in which he calculated the husband’s net estimated capital gains in the sum of $96 257. As Mr PL’s schedule reveals, that figure resulted from the reconciliation of five taxable capital gains and five taxable capital losses. If the tax rate of 46.5 percent which Mr PL applied generally throughout his calculations were applied after allowing for a 50 per cent discount for assets held more than 12 months, the figure of $22 380 would result.
Mr PL calculated the “notional” capital gains on the real estate properties of the wife in the sum of $1 241 948. That arose from the reconciliation of seven capital gains and one capital loss as the schedule in Mr PL’s affidavit reveals. Applying the 46.5 percent tax rate after allowing for a 50 per cent discount for assets held more than 12 months which Mr PL applied throughout his report, the wife’s total liability with respect to the realisation of those assets would be approximately $288 753.
Putting to one side for the moment the question of CGT arising from the transfer of Residential Facility One to the husband’s interests, it being apparent that the wife will, but for the realisation of investment property, shoulder a significantly greater debt burden with her residential facility than will the husband, there is an apparent fairness in allowing notional CGT on the realisation of investment properties “across the board”.
The balance sheet previously determined by the Court does not factor in those sums. It seems appropriate in implementing the Court’s orders that such sums be factored into the balance sheet given the realities to which reference has been made. To the extent that either party does not liquidate an investment property to which an allowance has been made, and thereby seemingly gains an unintended benefit, the reality that the debt level otherwise required to be serviced is not commensurately reduced offsets such benefit or allowance.
The division of properties
The parties do not appear to be in significant disagreement as to the ultimate fate of any piece of real estate. Learned Counsel for the wife prepared a helpful schedule in which he recorded his understanding of the positions of the parties with respect to the real estate owned by them jointly or severally. It is appropriate to record what emerges from that schedule.
There is no dispute that the former matrimonial home of the parties, Property D, should be vested in the wife. So doing generates no potential CGT liability as it has been a residential property.
There is agreement that the wife transfer to the husband her interest in the jointly owned Property A and Property B, both of which, having been acquired prior to 1985 are CGT exempt according to Mr PL’s expert opinion evidence.
The Court has earlier dealt with the question of the fate of the timeshare interests.
Implicit in the husband’s proposed orders is the retention by each of the parties of their individual real estate investments, provided that each party cause the other party to be released from personal covenants in securities in favour of St George Bank extending to those properties. As the husband will have to refinance his indebtedness, and the wife may also have to, it is appropriate simply to require each party to cause the other party to be released from any liability with respect to the property in which that party has no interest or ceases to have an interest.
The foregoing conclusions enable the Court to prepare a final balance sheet and make final orders. The Court does not perceive, hopefully accurately, that the submissions of Counsel on 24 October 2008, at which time a number of issues crystallised and some became comparatively uncontroversial, address the question of the CGT implications arising from the husband acquiring Residential Facility One from Company One Pty Ltd.
Mr PL’s evidence suggests that the implications of that acquisition are not insignificant. Prima facie, and consistent with the Court’s findings of fact and conclusions with respect to Section 79(4) and Section 75(2), the parties should bear any CGT liability attaching to the husband’s interests acquiring Residential Facility One as to 50 percent by the wife and as to 50 percent by the husband. Were the figures known, it would be deducted at the balance sheet stage and prior to the 52%-48% division of the net assets.
Without being critical of him, Mr PL did not calculate the CGT liability which would be likely to arise if, as will occur, the husband is to acquire Residential Facility One from Company One Pty Ltd, but the figures which he calculated based on other scenarios whereby that might result suggest not insignificant sums.
On balance, the fairest approach is to direct the parties to meet any CGT liability arising from Company One Pty Ltd’s transfer of Residential Facility One to the husband’s interests equally. So doing after amending the balance sheet in the light of the matters referred to earlier does not confer a liability on either party which ultimately may not crystallise, and is unable to be determined by the Court now in any event. It also replicates what would have occurred had the liability been certain and quantifiable to be included as a liability at the balance sheet stage, and has been done with known potential CGT liabilities.
The amended balance sheet
The net assets of the parties as found at trial and emerging from the primary judgment totalling $8 927 984 are notionally reduced by allowing the wife’s estimated CGT liability on the realisation of her investment properties (as per Mr PL’s report) in the sum of $288 753 and further reduced by $22 380 when the husband’s estimated CGT liability on the realisation of his investment properties (also as per Mr PL’s report) is taken into account.
The result of those notional allowances is a net asset pool of $8 616 851.
The figures themselves result from Mr PL’s calculation of notional capital gains on the wife’s investment property at $1 241 948 less the general discount of 50 per cent for assets held more than 12 months to produce $620 974 less tax payable of 46.5 per cent, $288 753.
On the part of the husband, the figure results from Mr PL’s calculation of notional capital gains on the husband’s investment property at $96 257 less the general discount of 50 per cent for assets held more than 12 months to produce $48 129 less tax payable of 46.5 per cent, $22 380.
The wife’s 52 per cent entitlement to the adjusted asset pool is approximately $4 480 763 and the husband’s 48 per cent entitlement to the adjusted asset pool is $4 136 088.
No adjustment has been made to the asset pool for the incidence of CGT on the transfer of Residential Facility One from Company One Pty Ltd to the corporation to be nominated by the husband for that purpose. Given however the Court’s conclusion that, as and when any such liability materialises, it should be borne equally between the parties, and an order in those terms can be made, that does not impede making final orders.
If the wife receives the real estate referred to in paragraph 199 of the primary judgment, she will have received real estate worth $3 292 500. Those properties are:
[Property Q]
$335 000.00
[Property R]
$305 000.00
[Property S]
$575 000.00
[Property T]
$340 000.00
[Property U]
$290 000.00
[Property V]
$462 500.00
[Property W]
$455 000.00
[Property AA]
$530 000.00
[Primary Judgment dated 27 June 2008, par 199, page 44].
After allowing for secured liabilities agreed at trial of $ 2 375 000 and the notional CGT liability referred to above totalling $288 753 those properties would produce net in the wife’s hands $628 747.
The wife would also receive her superannuation entitlement of $546 639. If the wife received Property D that would represent an asset in her hands of $795 000.
If the wife receives 52 per cent of the proceeds of sale of Timeshare Four she would receive a further $5 720.
If the wife receives Residential Facility Two she would have an asset worth $3.5m and, by receiving Properties E1, E2 and E3 a further $1.9m. The wife would thus have received approximately $7 376 106 or $2 895 343 more than her entitlement. These figures do not reflect any share of the St George Bank borrowings secured over the assets of the parties and agreed at trial to approximate $3 854 671.
If the husband received the real estate referred to in paragraph 202 of the Court’s primary judgment he would receive assets worth $2 543 000. Those properties are:
[Property H]
$255 000.00
[Property I]
$290 000.00
[Property J]
$190 000.00
[Property K]
$190 000.00
[Property L]
$153 000.00
[Property M]
$157 500.00
[Property G]
$147 500.00
[Property N]
$215 000.00
[Property O]
$195 000.00
[Property P]
$330 000.00
[Property F]
$420 000.00
[Primary Judgment 27 June 2008, par 202, page 45].
After payment of secured liabilities with respect to those properties agreed at trial to total $1 462 476 together with notional CGT of $22 380, the receipt of those properties would represent net funds to the husband worth $1 058 144.
If the husband received Properties A and B as the parties propose, he will receive an additional $810 000.
The husband will also receive his superannuation entitlement of $463 492.
If the husband received 48 percent of the proceeds of sale of Timeshares Three and Four he will receive a further $5 280 and, by the retention of Timeshares One and Two a further $8 500.
The acquisition of Residential Facility One will further increase the property received by the husband by $2 750 000. The husband would thus receive property totalling $5 095 416 or $959 328 more than his overall entitlement.
As with the figures indicated with respect to the wife, this analysis has no regard to the joint and corporate indebtedness to St George Bank of $3 854 671.
Unsurprisingly, the sum by which retention by the wife of $7 376 106 worth of assets exceeds her entitlement ($2 895 343), and the sum by which retention by the husband of assets totalling $5 095 416 exceeds his entitlement, ($959 328) the combined overpayments equate with the joint St George indebtedness ($3 854 671).
Mindful of the possibility that the St George Bank indebtedness may have altered, to preserve the 52/48 percent entitlements of the parties, rather than order that the husband indemnify the wife with respect to $959 328 of the St George debt, and that the wife indemnify the husband with respect to $2 895 343 of the St George debt, it is appropriate to reflect the respective obligations as a percentage of the total St George Bank debt at the only time when each of those figures was agreed and within the knowledge of the Court.
In the hope that the foregoing may be clearer if revealed in tabular form, set out below is the effect of these conclusions:
| Gross assets as per findings in primary judgment | $15 610 000 | |
| Superannuation entitlement as per primary judgment | $ 1 010 131 | |
| Less liabilities as per primary judgment | $ 7 692 147 | |
| Net Assets | $ 8 927 984 | |
| Less Wife’s estimated CGT on realisation of investment properties as per Mr PL’s Report (46.5 percent on 50 percent of $1 241 948) | $ 288 753 | |
| Less husband’s estimated CGT on realisation of investment properties as per Mr PL’s Report (46.5 percent on 50 percent of $96 257) | $ 22 380 | |
| Adjusted net assets | $ 8 616 851 | |
| Note: Includes no allowance made for CGT liability on transfer of Residential Facility One from Company One Pty Ltd to corporation nominated by husband for that purpose. | ||
| Wife’s 52 percent entitlement Husband’s 48 percent entitlement | $4 480 763 $4 136 088 | |
| Wife receives: Properties listed par 199 primary judgment | $3 292 500 | |
| Less secured liabilities as per primary judgment | $2 375 000 | |
| Less notional CGT | $ 288 753 | |
| Sub total | $ 628 747 | $ 628 747 |
| Superannuation interest | $ 546 639 | |
| Property D | $ 795 000 | |
| 52 percent proceeds of sale of Timeshares Three and Four | $ 5 720 | |
| Residential Facility Two | $3 500 000 | |
| Properties E1, E2 and E3 | $1 900 000 | |
| Total before consideration of Company One & Company Two St George Bank debts totalling $3 854 671 | $7 376 106 | |
| Exceeds entitlement by | $2 895 343 | |
| Husband receives: Properties listed para 202 primary judgment | $2 543 000 | |
| Less secured liabilities as per primary judgment | $1 462 476 | |
| Less notional CGT | $ 22 380 | |
| Sub total | $1 058 144 | $1 058 144 |
| Superannuation interest | $ 463 492 | |
| Property A and Property B | $ 810 000 | |
| 48 percent proceeds of sale of Timeshares Three and Four | $ 5 280 | |
| Timeshares One and Two | $ 8 500 | |
| Residential Facility One | $2 750 000 | |
| Total before consideration of Company One and Company Two St George Bank debts totalling $3 854 671 | $5 095 416 | |
| Exceeds entitlement by | $ 959 328 | |
| Wife is therefore responsible for $2 895 343 of St George Bank debt of $3 854 671 and husband for $959 328 of St George Bank debt. Wife’s share of St George Bank debt 75 per cent Husband’s share of St George Bank debt 25 per cent. | ||
But for one matter, the Court is thus in a position to make final orders. Hopefully the effect of the orders will be clear from these supplementary Reasons for Judgment. Albeit the Court considers so doing to be appropriate, the allowance of notional CGT could on one view be said to favour the wife given that her far greater potential liability is taken into account by reference to assets receivable by her, than is the much smaller potential liability of the husband with respect to assets receivable by him.
In the Court’s view, the analysis of the proposed outcome of the proceedings set out above reinforces both the fairness of awarding the husband Residential Facility One and allowing all the potential CGT liabilities of both parties in circumstances where the wife shoulders a significantly greater proportion of the St George Bank debt. Whilst the primary judgment foreshadowed the possible significance of CGT in the finalisation of the proceedings, the Court is less than comfortable that Counsel for the parties, and particularly Senior Counsel for the husband, had reason to anticipate, and thus address if he chose to, the approach to CGT which the Court has concluded to be appropriate. To that end, the Court proposes deferring the making of final orders for a period of 7 days in order to allow any further short written submissions limited to the proposed approach to Capital Gains Tax.
With all due respect to the persuasiveness of learned Senior Counsel for the husband, other than by the affording of natural justice, the Court does not anticipate that any further submissions would have a significant prospect of persuading the Court to a different view.
I certify that the preceding one hundred and five (105) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Coleman
Associate:
Date: 11 November 2008
Key Legal Topics
Areas of Law
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Family Law
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Civil Procedure
Legal Concepts
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Appeal
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Expert Evidence
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Procedural Fairness
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Res Judicata
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Statutory Construction
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Costs
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