PENNER & CONROY - [2020] FamCA 1128

FAMILY COURT OF AUSTRALIA

PENNER & CONROY

[2020] FamCA 1128

EVIDENCE – Where husband seeks to rely on an adversarial expert regarding potential capital gains tax liability – Where such liability only likely to accrue in 6 years’ time at the earliest – Where evidence of limited probative value – Where report served seven days prior to trial – Where no satisfactory explanation of late service – Where documents and instructions relied upon by expert not adequately disclosed – Where case management considerations weigh in favour of rejecting the evidence – Evidence rejected - Application dismissed

Family Law Act 1975 (Cth) ss 75, 79
Family Law Rules 2004 (Cth) rr 15.5, 15.42, 15.49, 15.51

Britt & Britt (2017) FLC 93-764
Dasreef Pty Limited v Hawchar (2011) 243 CLR 588
Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705
Prince and Prince (1984) FLC 91-501
Re Bailey and Bailey (Executrix of the Estate of Bailey) (1990) FLC 92-117
Rogers & Rogers (No 2) (2016) FLC 93-712
Rosati & Rosati (1998) FLC 92-804
Stanford v Stanford (2012) 247 CLR 108

APPLICANT:

Ms Penner

RESPONDENT:

Mr Conroy

FILE NUMBER:

SYC

8355

2017

DATE DELIVERED:

3 December 2020

PLACE DELIVERED:

Sydney

PLACE HEARD:

Sydney

JUDGMENT OF:

Harper J

HEARING DATE:

3 December 2020

REPRESENTATION

COUNSEL FOR THE APPLICANT:

Mr Campton SC

SOLICITOR FOR THE APPLICANT:

Sommerville Legal

COUNSEL FOR THE RESPONDENT:

Mr Lloyd SC

SOLICITOR FOR THE RESPONDENT:

Blanchfield Nicholls

Orders

1. The Application in a Case filed by the Respondent husband on 24 November 2020 be dismissed.

Note: The form of the order is subject to the entry of the order in the Court’s records.

IT IS NOTED that publication of this judgment by this Court under the pseudonym Penner & Conroy has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).

Note: This copy of the Court’s Reasons for Judgment may be subject to review to remedy minor typographical or grammatical errors (r 17.02A(b) of the Family Law Rules 2004 (Cth)), or to record a variation to the order pursuant to r 17.02 Family Law Rules 2004 (Cth).

FAMILY COURT OF AUSTRALIA AT SYDNEY

FILE NUMBER: SYC 8355 of 2017

MS PENNER

Applicant

And

MS CONROY

Respondent

EX TEMPORE REASONS FOR JUDGMENT

These are property adjustment proceedings between the Applicant Wife, Ms Penner, and the Respondent Husband, Mr Conroy. The final hearing commenced on 30 November 2020.
This judgment determines the Respondent Husband’s Application in a Case, filed on 24 November 2020, seeking leave to rely upon the expert opinion evidence of Mr B. The wife opposes the receipt of this evidence.
The report of Mr B was served on 18 November 2020, some seven working days prior to the commencement of the final hearing. It purports to provide expert opinion as to the capital gains tax payable by a company called C Pty Limited (“C Company”), as at 30 June 2020, upon the sale of its assets, which all take the form of share investments, together with a calculation of the tax payable by the husband upon the winding up of C Company.
The husband is the only director and shareholder of C Company. C Company is a company which is the corporate entity at the centre of an investment structure established by the husband in about 1997 through which the husband seeks to provide for his retirement. Described summarily, the structure involves C Company holding slightly in excess of $6 million worth of equities, some in its own right and some as trustee of C Superannuation Fund. The husband gave evidence that this structure is intended to remain in place until he reaches the age of 65, which will happen on … March 2026.
The constitution of C Company, together with resolutions passed on 8 April 1997, clearly provide that C Company is to hold growth stocks in a large investment portfolio and income stocks in the superannuation fund, until the husband’s 65^th birthday. The resolutions of the company provide that 42 days prior to … March 2026 a process is to commence, so as to cause the C Company stock holdings to be sold and for C Company to be wound up. According to the report of Mr B, the net tax impost to C Company and the husband in total would be $3,358,350.
The husband contends that, in accordance with the decision of the Full Court in Rosati & Rosati (1998) FLC 92-804, the evidence of Mr B’s calculation of the net tax impost is relevant because it is the only calculation indicating the magnitude of the likely tax impost as at … March 2026. The husband appeared to contend, initially, that in giving a value to the assets of C Company for the purpose of settling a balance sheet in these proceedings, the future capital gains tax liability must be taken into account, in respect of the assets of C Company.
However, it was made clear in argument that the husband does not put forward the evidence of Mr B to establish a net value of the shares of C Company, that is, he does not argue that the value of C Company’s assets should simply be reduced on the balance sheet by $3,358,350. Rather, his contention is that the calculation of Mr B will be the only guide available to the Court of the likely size of any tax impost in the future, that is, at the point of disposal of the C Company shares. He pointed out that if Mr B’s evidence was not received, the Court would have no evidence of the likely magnitude of any such capital gains tax liability.
I note here that it was common ground between the parties that upon C Company disposing of its shareholding, there would be the accrual of a capital gains tax liability, although there was no common ground as to its likely size.
Part 15.5 of the Family Law Rules (“the Rules”) deals with expert evidence. Rule 15.42 provides – and I set out the text of rule 15.42 here, stating that:
The purpose of Part 15.5 is to ensure that, if practicable and without compromising the interests of justice, expert evidence is given on an issue by a single expert witness.
Rule 15.49(1) also provides:
If a single expert witness has been appointed to prepare a report or give evidence in relation to an issue, a party must not tender a report or adduce evidence from another expert witness on the same issue without the Court’s permission.
Rule 15.51 requires a party seeking to tender a report or adduce evidence at a hearing or trial from an expert witness, except the single expert witness, to obtain the permission of the Court. Single expert witnesses are thus the preferred way, as enshrined in the Rules, for this Court to receive expert evidence. Mr B was not appointed a single expert and did not produce a report as a single expert appointed pursuant to the Rules.
Nonetheless, the husband seeks permission to tender the report of Mr B. He argues he is entitled to adduce his evidence because on 5 March 2020 Orders 6, 7 and 8 made by the Deputy Chief Justice by consent provided for the husband to supply an estimate of capital gains tax liabilities of C Company as at 30 June 2020, on the assumption that its shareholdings were to be realised in full as at that date. In particular, Order 8 provided that in the event the parties did not agree in respect of any such estimates there, they were to instruct an appropriately qualified single expert for the purpose of providing such estimates.
It appears that the husband did provide an estimate under cover of letter dated 29 May 2020. But by letter dated 12 June 2020, the wife disputed these estimates on the basis that the husband does not have the expertise to undertake a reliable assessment of prospective CGT liabilities. The final two paragraphs of this letter state:
If your client insists on asserting a reduced value for C Pty Limited and C Superannuation Fund for the purpose of the final hearing due to future unknown taxation liabilities, your client will need to produce expert evidence as to the quantum of those liabilities.
In this regard, we propose that you make enquiries with appropriate single experts with the capacity to provide such expert evidence in sufficient time prior to the final hearing, noting that your client will provide the required disclosure by 31 August 2020. Further, the cost of any such single expert evidence would need to be borne by your client.
Senior counsel for the husband characterised the final paragraph of this letter as an invitation from the wife for the husband to obtain his own expert report at his own cost.
The proceedings were listed for callover on 10 July 2020. For the purpose of callover, the parties produced a document entitled Joint Document of Outstanding Issues for Judicial Determination. Attached to that document was a Proposed Minute of Order by the wife. This proposed minute included an order that:
Order 8 of the orders dated 5 March 2020 be discharged.
On 10 July that order was made, as well as the following notation:
The husband proposes to engage an expert witness to provide a report on C Pty Limited, and proposes to rely upon such report at the final hearing.
Consequently, after 10 July there was no order for a single expert to address the issue of C Company’s future CGT liability. However, the husband clearly flagged obtaining his own expert for that purpose.
The wife opposes the receipt of Mr B’s report as evidence on a number of grounds. First, the report was served only seven working days prior to the commencement of the final hearing on 30 November 2020. The wife contends that this denied her the opportunity to consider the report properly, and to take any procedural step by way of asking questions of Mr B or otherwise making her own enquiries. The wife submits that no explanation for the late service of Mr B’s report is put forward by the husband, other than a general reference to the pressures of preparing for final hearing.
Secondly, the wife argues Mr B’s report does not comply with the Rules. In particular, the wife argues that the report does not comply with Rule 15.54, in that the instructions provided to Mr B are not all in writing, and there has not been full and frank disclosure of information and documents upon which his opinion is based. The wife pointed, as examples, to a number of documents, referred to by Mr B in the body of his report, and apparently relied upon by him, such as an investment summary report for the period ending 30 June 2020, and a detailed asset movement report, as at 30 June 2020. These documents, although referred to in the report, did not otherwise form part of the report, and are not otherwise in evidence in the proceedings.
Senior counsel for the wife contended therefore, that the report lacks a proper evidentiary foundation for the opinions expressed in it, referring to the decision of Makita & Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705; (2001) 25 NSWCCR 218. On that basis alone, senior counsel contended the report should be rejected.
Thirdly, senior counsel for the wife also argued that the report did not disclose its reasoning properly. He referred to the High Court decision in Dasreef Pty Limited v Hawchar [2011] HCA 21, where Heydon J said:
The opposing party is not to be left to find out about the expert’s thinking for the first time in cross-examination.
And:
The witness must explain the basis of theory or experience because the Court is not limited to examining the conclusion or expertise of the expert witness: it must look to the “substance of the opinion expressed.”
It is necessary to point out here that neither party proposes that the Court make any order by way of property adjustment pursuant to section 79 of the Act, for the sale or other disposition of the assets of C Company. As already noted, it is common ground between the parties that there will be a capital gain tax liability in the future upon C Company selling its assets. In my view, this is self-evident in relation to a retirement structure established in 1997, which has consequently held a portfolio of shares for several decades.
But it is also important to emphasise that, according to the husband’s own case, the sale of C Company’s assets will not, indeed, must not happen until he turns 65 in March 2026. So no CGT liability can accrue until then. The wife argued that because the husband has full control of C Company, he may change by resolution its constitution and cause its assets to be sold either before or after March 2026. While this is theoretically correct, on the evidence given by the husband, I consider this to be unlikely. The whole purpose of the C Company structure is to provide for the husband’s retirement at age 65. The overall matrimonial pool in these proceedings, on any view, is something in excess of $14 million, so there is no obvious reason in the evidence why the husband would begin disposing of C Company assets before he turns 65.
But for the same reasons, the relevance of a capital gains tax calculation as at 30 June 2020 is limited. The husband conceded that the calculation of Mr B could not be used in a mathematical way but, as noted, argued that it had some probative value as a guide to the likely magnitude of a future tax impost. It is certainly clear that the capital gains tax liability of C Company in March 2026 cannot now be known. It will be contingent upon a range of factors, including the movement of share markets, which are inherently volatile.
The decision of the High Court in Stanford v Stanford [2012] HCA 52 makes clear that in property adjustment proceedings pursuant to Part VIII of the Family Law Act, the Court must identify existing legal and equitable interests in property, together with their liabilities at the date of hearing. An unknown future CGT liability, while certain or likely to accrue six years in the future at the earliest, raises the question of how it is to be dealt with appropriately, where it clearly cannot be treated as an existing liability for the purpose of settling an asset value at final hearing. As I understood the submissions of senior counsel for the husband, he accepted this as correct.
The decision of Rosati & Rosati (supra) to which the husband referred, at paragraph 6.36, the Full Court set out the following principles for how future capital gains tax liability may be taken into account. The Full Court considered four situations as follows:
(1)Whether the incidence of capital gains tax should be taken into account in valuing a particular asset varies according to the circumstances of the case, including the method of valuation applied to the particular asset, the likelihood or otherwise of that asset being realised in the foreseeable future, the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to that asset.
(2)If the Court orders the sale of an asset, or is satisfied that a sale of it is inevitable, or would probably occur in the near future, or if the asset is one which was acquired solely as an investment and with a view to its ultimate sale for profit, then, generally, allowance should be made for any capital gains tax payable upon a sale in determining the value of that asset for the purpose of the proceedings.
In subparagraph (3) the Full Court said as follows:
(3) If none of the circumstances referred to in (b) applies to a particular asset, but the Court is satisfied that there is a significant risk that the asset will have to be sold in the short to mid term, then the Court, while not making allowance for the capital gains tax payable on such a sale in determining the value of the asset, may take that risk into account as a relevant section 75(2) factor, the weight to be attributed to that factor varying according to the degree of the risk and the length of the period within which the sale may occur.
The Court said further, in subparagraph (4):
There may be special circumstances in a particular case which, despite the absence of any certainty or even likelihood of a sale of an asset in the foreseeable future, make it appropriate to take the capital gains tax into account in valuing the assets. In such a case, it may be appropriate to take the capital gains tax into account at its full rate, or some discounted rate, having regard to the degree of risk of a sale occurring and/or the length of time which is likely to elapse before that occurs.
More recently, the Full Court, in the decision of Rogers & Rogers (No 2) [2016] FamCAFC 104, undertook a further consideration of issues of capital gains tax and how they are to be taken into account. The Full Court engaged in a thorough consideration of earlier authorities, at [34] to [42].
At [36], the Full Court said
“…no statement by [the Full Court in Re Bailey and Bailey (Executrix of the Estate of Bailey) (1990) FLC 92-117 at 77,774] suggests that liabilities must be taken into account so as to arrive at the net property in the manner suggested by the appellant here, rather the Court held that it is not proper for the Court to proceed in a property application without due regard to liabilities of a party, which are either established or in a process of being determined.”
The Full Court continued at [40], [41]:
40. It is, in our view, important to reiterate and emphasise what was said in Biltoft and Biltoft [[1995] FamCA 45; (1995) FLC 92-614 at 82-129], there is no statutory prescription which suggests that any such treatment of the liability is mandatory. Despite the frequency with which the rule is applied, we have not been taken to any authority, nor are we aware of any authority, which suggests such rule has the effect of a binding rule of law. What emerges from the authorities is that while there might be a rule, the application of which is appropriate in the vast majority of cases, the manner in which a particular liability should be treated is ultimately dependent upon the nature of the liability, the circumstances surrounding the liability and the dictates of justice and equity shaped by each.
41. The usual practice or rules sits comfortably and conformably within that rubric – in many cases, perhaps almost all liabilities will be deducted from the gross value of a property because it will be clear and, even if not expressly stated, determined that the justice and equity of the case demands that the liabilities should be met by the parties in the proportions in which the Court determines the property is to be divided. Liabilities that are vague, uncertain, unlikely to be enforced and the like might be treated differently because those circumstances might, in the circumstances of a particular case, render it unjust and inequitable for liabilities to be deducted in that manner. Those so-called exceptional cases are but instances of the broader considerations of the justice and equity of a particular case.
Having regard to those statements of principle from authorities which are binding upon me, in circumstances where the evidence is clear that any liability for capital gains tax will only accrue, at the earliest, some six years hence, on share values which can only be known at that point in time, in my view, the justice and equity of the situation presented to the Court in this case favours the conclusion that the liability is more appropriately brought into consideration under section 75(2), which is an approach favoured in a number of decisions. It is in this context that the husband submits that the purpose of Mr B’s evidence, and whether permission should be given for it to be relied upon, should be determined.
On that basis, I am satisfied that the relevance of the evidence of Mr B would be limited in that way. I cannot be satisfied, for the purpose of this Application in a Case, that his evidence would have no probative value, because it is clear that, at present, at least, the report of Mr B would be the only evidence, if allowed, to give some guide to the future CGT liability attaching to the assets of C Company.

Limited relevance, of course, does not render evidence inadmissible. As the Full Court has made clear in the decision of Britt & Britt (2017) FLC 93-764, even evidence of slight relevance is admissible. However, where evidence is of slight or limited relevance, other factors, such as late service and a denial of procedural fairness to the other side, may take on greater significance in determining whether the Court should give permission under the rules for the tender of expert evidence by a non-single expert.
I accept the submission of the wife that the husband has not provided a satisfactory explanation for the late service of Mr B’s report. As already pointed out, a notation was made on 10 July 2020 that the husband proposed to procure and rely upon his own expert. According to the body of Mr B’s report, the first received correspondence from the husband’s solicitors was, at the earliest, on 3 September 2020, and an initial letter of instruction from those solicitors was received by Mr B on 8 October 2020.
Why no correspondence was issued before 3 September, when the issue of C Company’s future capital gains tax liability had been raised as early as March 2020 and the husband was clearly proposing to obtain his own expert as at 10 July 2020, has not been explained.
I also accept that the husband’s failure to disclose and provide copies of documents upon which Mr B’s expert opinion was clearly based appears to constitute a breach of the Rules, but it is also an aspect of denying the wife procedural fairness. While it is open to the Court to dispense with the requirements of the Rules, it is not open to the Court to dispense with procedural fairness to all parties.
In my view, the failure of the husband to provide Mr B’s report at an earlier date, coupled with the nondisclosure of important documents upon which his opinion was clearly based, in my view, has created a situation in which it cannot fairly be said that the wife is in a position to challenge the opinions of Mr B effectively in cross-examination if she wishes to do so. This deficit is not simply cured by the offer of the husband to provide copies of documents identified by senior counsel for the wife during the course of submissions.
This conclusion then raises problems of case management and questions of overarching policy. In other circumstances, the problem of procedural fairness being afforded to the wife may be addressed by allowing an adjournment during which the wife can takes such steps as she sees fit to put herself in the position to challenge the evidence of Mr B effectively in cross-examination after making her own enquiries, or, indeed, considering the step of obtaining her own adversarial expert if she chose to do so.
If an adjournment was granted, it would have a significant impact, not only on the parties to these proceedings, but also to other litigants in the Court. It is beyond argument that the pressures upon judicial time in this Court are very great. If the matter was adjourned to cure any prejudice to the wife from the receipt of Mr B’s report, it would necessarily result in further hearing time being allocated to this matter, which would have the consequence of denying potential judicial time to other litigants in the Court.
It is necessary, therefore, for me to balance these considerations against the fact that if Mr B’s report is not received into evidence, there would be a deficit in the sense that there would be very little upon which the Court could base any evaluation, for the purposes of section 75(2), of the likely magnitude of future capital gains tax liability accruing upon the sale of C Company’s shareholdings.
In those circumstances, I have reluctantly come to the conclusion that, in light of all the circumstances disclosed and considered in these reasons that I will reject the report of Mr B. Accordingly, I dismiss the Application in a Case filed by the husband on 24 November 2020.

I certify that the preceding forty-one (41) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Harper delivered on 3 December 2020

Associate:

Date: 12 January 2021