Rendon and West and Ors
[2018] FCCA 3678
•12 December 2018
FEDERAL CIRCUIT COURT OF AUSTRALIA
| RENDON & WEST & ORS | [2018] FCCA 3678 |
| Catchwords: FAMILY LAW – s.79A application to vary final order – applicable principles – where parties agreed upon 52.5% / 47.5% allocation of net asset pool – parties negotiate extensive terms of settlement – adjustment of significant property interests – where parties proceed to complete settlement of multiple transactions pursuant to s.79 order – parties request advice from bank as to costs on repayment of Bank Bills – bank requires payment of substantial break costs on early repayment of Bank Bills – parties’ discovery of substantial break costs not made until shortly before settlement – Bank Bills secured over property which is subject of settlement – when order made, parties unaware that bank would demand payment of break costs before release of securities – whether parties’ gave false evidence as to scope of liability on Bank Bills – evidence need not be wilfully false – obligation to make full financial disclosure – parties ignorance of break costs – mutual mistake – settlement occurs – respondent refuses to accept liability for share of break costs – whether discovery of break costs constitutes any other circumstances which would render it just and equitable to make new order – whether default by respondent a ground of relief – whether acquiescence – whether reservation of rights – whether principles of acquiescence or reservation of rights a complete barrier to relief under s.79A – liability for break costs would have altered quantum of Asset Pool – whether relief available – s.79A relief cannot alter substantive rights – whether machinery or consequential relief available – relief granted. |
| Legislation: Family Law Act 1975 (Cth), ss.78, 79, 79A, 80, 81, 117, 117B, Federal Circuit Court Rules 2001 (Cth), rr.24.03, 25B.07, 25B.10 Income Tax Assessment Act 1997 (Cth), s.4.10 |
| Cases cited: AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173 Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 Anderson & Anderson (2000) FLC 93-016 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 Attwells v Jackson Lalic Lawyers Pty Ltd (2017) 259 CLR 1 Bale-Sutch & Bale-Sutch (No 5) [2010] FamCA 825 Bennison & Bennison [2015] FamCA 243 Bigg v Suzi (1998) FLC 92-799 Blackwell v Scott (2017) 56 Fam LR 474 Brookton Co-operative Society Ltd v FCT (1981) 147 CLR 441 Bulleen & Bulleen (No 3) [2010] FamCA 859 Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 Connor & Oswald [2012] FamCa 857 Cole & Abati [2016] FamCAFC 78 Commissioner of Taxation v Greenhatch (2012) 203 FC 134 DCT v Chamberlain (1990) 26 FCR 221 Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 DJL v Central Authority [2000] HCA 17; 201 CLR 226 Ebner v Pappas (2014) FLC 93-618 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 Elliot & Willcox (1996) FLC 92-687 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 Faden & Faden [2014] FamCA 1182 Fire & All Risks Insurance Pty Ltd v Rousianos (1989) 19 NSWLR 57 Fickling v Fickling (1995) FLC 92-576 Gilbert v Estate of Gilbert (1990) FLC 92-125 Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112 Hancock Prosecting Pty Ltd v Rinehart [2017] FCAFC 170 Harris v Caladine (1991) 172 CLR 84 Hickey & Hickey; Attorney General (2003) FLC 93-143 IABH & HRBH [2008] FamCa 817 Immer (No 145) Pty Ltd v The Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 In the Marriage of Bray (1988) 93 FLR 183 In the Marriage of Kowaliski (1993) FLC 92-342 In the Marriage of Ravasini (1983) FLC 91-312 Johnson v American Home Assurance (1998) 192 CLR 266 Kelly & Kelly [2011] FamCA 388 this citation is not correct in every footnote Korsky & Bright [2007] FamCA 245 L Shuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 Lane & Lane [2016] FamCAFC 53 Langford & Coleman (1993) FLC 92-346 Ledarn & Ledarn (No.2) [2015] FamCA 895 Lindsay Petroleum Co. v. Hurd (1874) L.R. 5 P.C. 221 Lowe v Harrington (No 2) (1997) FLC 92-747 McDonald & McDonald (1976) FLC 90-047 McIntyre & McIntyre (1994) FLC 92-468 Mullane v Mullane(1983) 158 CLR 436 Myrtle & Myrtle [2012] FamCA 460 Owners of ‘Shin Kobe Maru’ v Empire Shipping Co Inc (1994) 181 CLR 404 Parsin & Parsin [2007] FamCA 1458 Pearce & Pearce [2016] FamCAFC 14 Pelerman & Pelerman (2000) FLC 93-037 Pera & Pera (2008) FLC 93-372 Sargent v ASL Developments Ltd (1974) 131 CLR 634 Singh v Minister for Immigration and Border Protection [2018] FCAFC 52 Slapp & Slapp (1989) FLC 92-022 Stanford v Stanford (2012) 247 CLR 108 Stephens & Stephens (2009) 42 Fam LR 423 Taylor v Johnson (1983) 151 CLR 422 Taylor v Taylor (1979) 143 CLR 1 Thompson v. Goold & Co. [1910] AC 409 Trivedi v Minister of Immigration and Border Protection (2014) 220 FCR 169 Trustees of the Bankrupt Estate of Sresbodan & Sresbodan [2017] FamCA 268 UBS AG v Tyne [2018] HCA 45 The Commonwealth v Verwayen (1990) 170 CLR 394 Waterman & Waterman [2017] FamCAFC 23 |
| Other texts cited: McMeel, The Construction of Contracts, 2n Ed (2010) |
| Applicant: | MR RENDON |
| First Respondent: | MS WEST (nee RENDON) |
| Second Respondent: | MS BLAKE |
| Third Respondent: | [COMPANY A] PTY LTD |
| File Number: | MLC 6802 of 2014 |
| Judgment of: | Judge A Kelly |
| Hearing date: | 13 December 2017 |
| Date of Last Submission: | 31 January 2018 |
| Delivered at: | Melbourne |
| Delivered on: | 12 December 2018 |
REPRESENTATION
| Counsel for the Applicant: | Mr P Testart |
| Solicitors for the Applicant: | Scammell Black Mileo |
| Counsel for the First Respondent: | Mr P Crofts |
| Solicitors for the First Respondent: Second Respondent did not appear Third Respondent did not appear | McKean Park Lawyers |
ORDERS
Subject to paragraphs (2) and (3) of this Order, the applicant indemnify the first respondent in the sum of $27,349 for her liability to income tax in respect of the financial year ended 30 June 2016.
Pursuant to s 79A of the Family Law Act 1975 (Cth), the Order made by consent on 10 February 2016 be varied by:
A. Inserting after paragraph 4 of that Order:
4A.The first respondent pay to the applicant the sum of $28,242 being 25% of the break costs imposed by [Bank 1] in respect of the early repayment of a Bank Bill in the sum of $2M.
B. Inserting after paragraph 15 of that Order:
15A.The sum payable by the first respondent to the applicant pursuant to paragraph 4A of this Order as varied, be set-off in extinguishment of the applicant’s liability to the first respondent upon the amount of any indemnity in respect of the first respondent’s future assessments of income tax.
Pursuant to s.117B(2) of the Family Law Act 1975 (Cth), order that interest is not payable on the money found to be payable pursuant to paragraphs 1 or 2 of this Order.
By 4.00pm on 18 December 2018, the parties file and serve any submissions as to costs (not exceeding 3 pages).
Any application for costs be listed for hearing on 20 December 2018.
IT IS NOTED that publication of this judgment under the pseudonym Rendon & West & Ors is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLC 6802 of 2014
| MR RENDON |
Applicant
And
| MS WEST (nee RENDON) |
First Respondent
And
| MS BLAKE |
Second Respondent
And
| [COMPANY A] PTY LTD |
Third Respondent
REASONS FOR JUDGMENT
Introduction
By application in a case filed on 29 August 2017, the first respondent (Ms West) seeks an order for payment by the applicant (Mr Rendon) of a sum of $56,575.40 that is said to be due and payable upon a final order made pursuant to s 79 of the Family Law Act 1975 (Cth) (Act). By way of response, Mr Rendon seeks orders that are said to give effect to the parties’ Terms of Settlement which, when executed, were embodied in a minute of order that was approved as the final order which was made pursuant to s 79 on 10 February 2016 (Order).
The present application arises in relation to: (1) Ms West’s claim that Mr Rendon is liable to indemnify her for a sum of $56,575.40 as to part of her liability for income tax assessed in respect of her income derived in the financial year 30 June 2016; (2) Mr Rendon’s claim that the Order adjusting property interests ought be varied pursuant to s 79A of the Act by reason of: (a) liabilities which were not disclosed by Ms West or known by the parties before the Order was made: (b) monies which Ms West has drawn on joint accounts.
For the reasons which follow, I have concluded that Ms West is entitled to an order to secure enforcement of the indemnity. On the proper construction of the Terms of Settlement and Order, I do not accept that Ms West is entitled to indemnity for the sum claimed. Rather, the scope of the indemnity, properly construed, should be in respect of her liability for income tax on the income which she derived from certain partnerships calculated at the average rate of marginal tax of her entire income and so calculated by disregarding her liability for tax on capital gains derived during the relevant financial year. I do not accept that the tax on the partnership income should be characterised as being additional income to that which she otherwise earned. The Order does not provide that her partnership income should be characterised as income which is additional her other income. Her income fell for assessment as an indivisible sum, the whole of which was subject to taxation upon the respective marginal rates as prescribed. Ms West had no entitlement to unilaterally allocate the partnership income to a position where it was subject to the highest marginal rate of tax. As a result, Mr Rendon is not liable to indemnify her for the sum claimed. Further, the scope of the indemnity is reduced on account of a sum which Ms West has already withdrawn from a partnership account and applied in reduction of her liability for PAYG tax.
I am also satisfied that Mr Rendon is entitled to relief pursuant to s 79A so as to vary the Order to make explicit that Ms West and Mr Rendon are each liable for $28,242 representing 25% of certain break costs imposed by [Bank 1] for the early repayment of a $2M Bank Bill facility which was secured by mortgage over a property situate in Property A. This property was to be transferred by the third respondent to the second respondent. Mr Rendon and Ms West were directors of the third respondent and agreed that they would jointly and severally do all that was necessary to transfer that property to the second respondent. The bank held a mortgage over the property. Payment of the break costs was necessary to discharge that mortgage.
Background
Following a marriage of some 32 years, the parties who married on [date] 1981, were separated on 10 December 2013 and divorced on 26 September 2015. There were seven children of the marriage.
On 4 August 2014, Mr Rendon commenced proceedings in this court by filing an initiating application seeking orders by way of adjustment of property interests pursuant to s 79 and an equal division of property.
On 12 September 2014, Ms West filed a Response seeking a just and equitable property settlement. The interim relief claimed in her Response sought an array of orders directed at securing financial disclosure, interim property settlement and spousal maintenance.
A series of interim orders were made in the proceeding which included the joinder of the second and third respondents. Joinder of those parties was explained by the parties’ business activities. Mr Rendon, his brother in law and their spouses conducted a [omitted] business. The business was conducted from commercial properties registered in the names of Ms West and her sister in law, Ms Blake (the second respondent), or in the name of [Company A] Pty Ltd, the third respondent, the trustee of a discretionary trust.
On 16 September 2014, orders were made restraining the parties from disposing of, encumbering or diminishing the value of any property.
On 29 January 2015, orders were made for mediation.
On 3 August 2015, extensive orders were made regulating means by which property, plant and equipment and certain businesses would be valued. Orders were made, by consent, pursuant to which the parties or their partners might exercise an option to acquire certain property. Orders were also made facilitating the sale of what were described as Commercial Properties. The parties agreed that they would join in doing all things as were reasonably necessary to enable a draw down to be made on a finance facility with [Bank 2]. Orders were also made permitting the parties to each secure a sum of $150,000 by way of partial property settlement.
On 11 December 2015, an application for urgent interim relief was filed by Mr Rendon so as to secure the valuation of property, plant and equipment. The Response filed by Ms West also sought orders regulating the conduct of valuations of property, plant and equipment.
On 15 December 2015, orders were made by consent which varied the interlocutory injunctions granted on 16 September 2014 so as to permit Ms West to dispose of her interest in three properties, for certain proceeds of sale to be held on trust and for the valuations sought.
In preparation for a final hearing of the parties’ claims to an adjustment of property interests, the parties exchanged outlines of their respective cases. An understanding of the parties’ respective outlines of case provides some context to the present application and indeed, to the Terms of Settlement and the final orders in which they were agreed.
Mr Rendon’s outline detailed a series of sizeable sums which had been drawn down by Ms West in the period April 2014 – August 2015. Mr Rendon contended for an equal division of property, the achievement of which required that account be taken of:
a)the monies which had been drawn down by Ms West;
b)substantial capital gains tax (CGT) liabilities which were anticipated to be incurred by each party and related entities;
c)the spousal maintenance paid to Ms West;
d)the present uncertainty of the parties’ asset pool pending the sale of two properties situate in Property B and Property C respectively;
e)the proposed transfer of properties in Property D, Property E and Property A;
f)the application of the proceeds of sale of the Property B and Property C properties in discharge of liabilities and the payment of residue to the parties or to be held in trust for the parties by the solicitor for Ms West;
g)the application of the proceeds of sale of the Property A property in discharge of liabilities and the payment of one half of the residue to Ms West and the balance to be held in trust for the parties by the solicitor for Ms West;
h)the transfer of two properties situate in Property B and Property F by the second respondent and Ms West respectively, together with the contemporaneous payment by Mr Rendon to Ms West of a stipulated sum upon the settlement of the transfer of those properties;
i)the transfer of three properties comprising a farm situate in Property G by Ms West to Mr Rendon;
j)the refinancing of any loans and the discharge of any securities over the properties referred to above;
k)Ms West retaining her interest in a property situate in Property H;
l)the sale of other properties situate in Property C and Property B, with the net proceeds of sale being paid either as to one half to the second respondent and the balance (or the whole) to be held in trust for the parties by the solicitor for Ms West;
m)default provision to be made for the sale of certain properties if the transfer or payment of monies as proposed by Mr Rendon did not occur;
n)the sale of all properties with vacant possession;
o)Mr Rendon to retain his interest in any business owned and/or operated by him whether personally or by a corporate vehicle;
p)Mr Rendon and Ms West respectively to:
. . . indemnify the other with respect to any [CGT] liability . . .
q)an allocation of all monies paid to the trust account of the solicitor for Ms West upon completion of the sale of the properties as proposed above so as to effect an equal distribution of the parties’ net assets and superannuation interests;
r)ancillary orders including that the parties indemnify the other against any liability encumbering any item of property to which that party may be entitled pursuant to final orders.
Ms West’s outline addressed each of the properties referred to above and identified the known liabilities over the real property. Her outline contended that the asset pool was subject to pending valuations “as well as broadly agreed but uncompleted sales of commercial properties which would see rearrangement of commercial property held by the [respondents] so as to substantially separate the Blake and Rendon family interests in commercial property.” Ms West’s outline stated that there was doubt whether a trial could proceed unless the parties were able to agree on the valuations of property, plant and equipment together with the businesses operated by the parties and their entities. For that reason, Ms West proposed that interim orders be made, seeking that there be a 60/40 division of property in her favour.
The other joined parties did not file outlines of their case.
Final property orders
On 10 February 2016, the parties executed what I have described as Terms of Settlement (and which were entitled Consent Orders), that contained detailed provision for an adjustment of property interests, comprised 41 paragraphs and included certain notations. Each page of the Terms of Settlement had been initialled by the parties.
Mr Rendon deposed that the Terms of Settlement had been drafted by Ms West’s lawyer. As executed, the document contained a number of hand written annotations. It is evident from Ms West’s outline of case and the Terms of Settlement that the parties had negotiated the compromise embodied in those terms in particular detail.
On 10 February 2016, the parties agreed to final property orders. The consent order was made upon the application of the parties’ counsel. The application for approval entailed submission of the Terms of Settlement and acceptance of the submission that its terms reflected an adjustment of property interests which was just and equitable.
The court directed that the executed Terms of Settlement remain on the court file and that the minute of order be engrossed by Ms West’s lawyer. The court made those orders which have been sealed.
By way of overview, the orders which embody the Terms of Settlement provided that Mr Rendon would pay Ms West $5,775M. Extensive provision was made respecting the Commercial Properties, the Residential Properties, the Business, Plant and Equipment and a series of miscellaneous matters and procedural matters. The parties were agreed that they each intended that their Orders “shall as far as practicable finally determine the financial (and other) relationship between them and avoid further proceedings between them.”
Of central relevance to the dispute is para 15 of the Order (Order 15) which contains an indemnity in favour of Ms West in respect of, relevantly, any liability incurred arising in any way from her connection to any of the parties’ business and other entities (Indemnity). The Indemnity is expressly confined to income tax and provided that Ms West would bear any CGT liability. The proper construction of the Indemnity is addressed below.
Against that background the parties are again in dispute.
Present application
On 13 July 2017, Ms West filed an application in a case by which she sought that payment of $56,575.40 by Mr Rendon said to be payable pursuant to Order 15 as made on 10 February 2016.
On 29 August 2017, Mr Rendon filed a response to the application and sought, pursuant to s 79A, variation to the Orders together with two payments to be made to him by Ms West. The claim for these sums was treated by the parties as amounts which might be ‘offset’ against the sum of any indemnity to which Ms West was entitled.
On 29 August 2017, orders were made in a Duty List setting the application down for hearing on a one day estimate and providing for an exchange of outlines of the parties’ respective submissions.
On 13 December 2017, submissions were made upon the applications. Further submissions were filed in January 2018.
Evidence
The parties tendered four affidavits together with a raft of exhibits. I have examined each of those affidavits and the exhibits.
Neither party sought to cross-examine the other upon the affidavits which had been filed in support of their respective applications. Having regard to the issues raised by Ms West, a notice to admit was filed by Mr Rendon to which Ms West made certain admissions and put certain issues in contest.
Ms West deposed to the making of the Order on 10 February 2016 and her interpretation of Order 15. Other matters in her affidavit are set out below, as are matters addressed by Mr Rendon and his lawyer.
In substance, the affidavits and exhibits reveal that the following are in issue arising from events which post-date the final Order:
a)Ms West’s demand for payment of $56,575.40 which is said to represent her liability to income tax on income derived from certain partnerships and comprises part of an assessed liability for income tax for the financial year ended 30 June 2016;
b)Mr Rendon’s demand for payment of $28,900 representing what he contends to be Ms West’s liability for:
i)$28,000 being 25% of ‘break costs’ on a $2M commercial bill obtained from [Bank 1], the repayment of which was secured over a property owned by the third respondent, a company which Mr Rendon claims was controlled by Ms West and the second respondent;
ii)$900 being a sum which Ms West admits to having withdrawn from a joint account.
On 29 June 2017, Ms West’s lawyers made a final demand for payment of $56,575.40 which demand was rejected by Mr Rendon. Ms West’s demand contended that the tax liability of $56,575.40 was ‘not disputed’ and rejected the claims amounting to $28,900.
Consideration
The Terms of Settlement were struck on the basis of an agreed Asset Pool of $11M. Ms West correctly maintains that agreement on the Asset Pool represented a compromise as to the value of that pool.
The parties agreed that their property interests be adjusted such that Ms West would receive 52.5% or $5,775M. As stated, a notice to admit had been filed in relation to this application and Ms West agreed in the fact that she would receive 52.5% but contended that the parties’ agreement on the Asset Pool was the product of negotiation.
The principal sum due to Ms West ($5,775M) has been paid to her. Further, it was put in the course of oral argument, Ms West has received ~$7.8M pursuant to the Order.
In the context of the payment to Ms West of $5,775M, the present application entails a sum equal to less than 1% of that amount:
a)Ms West seeks she be paid $56,575.40 for her tax.
b)Mr Rendon seeks a variation of his obligation to pay Ms West such as to reduce that payment by $28,242.50.
One could reflect on the factors which motivated this application.
Although neither party was cross-examined upon their affidavits, by one email Ms West stated that she would rather pay lawyers than resolve the matter. Mr Rendon feels that he has been pushed too far.
Nature of application
While the application did not identify any specific head of power pursuant to which the order sought could be made, the application should be treated as an application for enforcement.
Chapter 2 of the Federal Circuit Court Rules 2001 (Cth) concerns the subject Family law and child support proceedings, is arranged in seven Parts and is comprised of Parts 22-25B. Part 25B concerns the subject, Enforcement. Within Pt 25B, Div 25B.2 governs the determination of applications for enforcement of orders.
In substance, the application seeks an Order that Mr Rendon pay, by way of indemnity, that sum which Ms West contends to be the amount for which she is liable in respect of her allocated share of income from certain partnerships. The obligation which she seeks to enforce is the obligation created by Order 15. The present application is an application for enforcement. Order 15 created an obligation that was an enforceable obligation for the purposes of Div 25B and that Ms West is entitled to enforce: r 25B.07(1)(a); r 25B.10(a).
I address the relief that is sought by Mr Rendon’s Response below.
Issue 1 – tax liability $56,575.40
The question arises as to the scope and extent of the liability to indemnify Ms West pursuant to the obligation created by Order 15.
Order 15 reads:
Save that the wife shall bear any tax arising by reason of capital gain on the transactions at Orders 1, 3, 4, 5 & 10 hereof, the husband shall pay and hereby does indemnify the wife in respect of any liability (including but not limited to taxation and taxation penalties) she has now incurred or may in the future incur arising in any way out of or because of her connection with, any of the entities.
Order 15 must accordingly be read with para’s 1, 3, 4, 5 and 10 of the Order and requires reference also to para 14(d) in which the term ‘entities’ is defined to mean 24 companies, trusts or partnerships.
The Order provided, in substance, by para’s 1, 3, 4, 5 and 10 that:
a)Mr Rendon would pay Ms West $5,775M: (Order 1);
b)Ms West and the second respondent respectively would transfer certain properties in Property E and Property B, coupled with a payment to Ms West of $390,000: (Order 3);
c)Ms West would transfer to the second respondent certain properties in Property D coupled with that payment to Ms West of $1,375M less the balance of any monies due to [Bank 1] (and secured over properties in Property D, Property E, Property B and Property A): (Order 4);
d)relevantly, the parties would do all things and sign all documents as necessary to discharge (and provide evidence to Ms West of the discharge) of:
i)“two [Bank 1] Bills in the approximate combined sum of $4.3 million” : (Order 5(b)(i));
ii)“any [Bank 1] Bank loan in the approximate cumulative sum of not more than $4.75 million inclusive of the amount referred to in Order 5 b. (i)”: (Order 5(b)(ii));
e)contemporaneously with the ‘final payment’ (as defined), by Order 10 the parties assumed mutual obligations to:
i)do all acts and things and sign all documents necessary to discharge, at Mr Rendon’s expense, a loan of ~$174,290 made by [Bank 2] which was secured over certain land in Property C; and
ii)transfer to Ms West at her expense, the interest in the Property C property, unencumbered, together with the benefit of any lease thereon, with Ms West to be solely liable for outgoings upon the property from the date of transfer.
The term ‘final payment’ was defined in Order 1(d) as meaning the balance of the sum of $5.775M which was payable within 60 days of completion of the transactions provided for by Orders 3, 4 and 5.
Ms West deposed that with her accountant’s assistance she had lodged her tax return for the financial year ended 30 June 2016, exhibiting an assessment upon that return for a sum of $221,060.85 payable by 15 June 2017.
In the period 24 April to 1 May 2017, the parties’ accountants exchanged a series of emails in which:
a)Ms West’s accountant consistently asserted that Mr Rendon was liable to indemnify his client for CGT liability pursuant to the Terms of Settlement and Order. For example, they stated that:
Ms West’s lawyers have advised that Mr Rendon is to pay the capital gains tax on the disposal of Property D.
b)Mr Rendon’s accountant contested that the Order operated in the way suggested, particularly as concerned any CGT liability;
c)Ms West’s accountant was repeatedly asked to disclose the amount of the GST liability and declined to do so.
In May 2017, Mr Rendon’s lawyer pressed Ms West’s accountant for the supply of any advice he held which was said to support an opinion that his client bore a liability under the Order for her CGT tax. In the end result, it emerged that it was Ms West who had been the author of this assertion. The contention that Mr Rendon was liable to indemnify Ms West for her assessed CGT liability was untenable.
Despite this, and the refusal to disclose the assessment for any CGT liability, Ms West’s accountant stated that the tax liability would be a six figure sum and that Mr Rendon was obliged to indemnify his client for that liability. Undeterred, Ms West’s accountant also pressed for Mr Rendon to reimbursement of land tax and council rates.
Ms West deposed that her taxation liability of $221,060.85 included an assessment on income derived from two partnerships, being the 23rd and 24th entities as defined by para 14(d) of the Order. It was common ground that the taxation returns for those partnerships had been prepared by Mr Rendon’s accountant and that the income which she derived from the activities of those partnerships had been apportioned to her by those returns. She further deposed that the income from those partnerships was not income by way of capital gain.
Ms West contended that Mr Rendon was liable to indemnify her for part of her assessed tax liability of $221,060.85. Her evidence does not allow me to identify the basis on which she, or her accountant, had calculated the sum for which she claimed an indemnity from him. As now appears, they had arbitrarily allocated the liability to income tax on the partnership income on the basis that that income is to be located in that part of her total income and capital gains so that it falls to be assessed at 49 cents in the dollar, the highest marginal rate of taxation.
During May 2017, the parties’ advisors communicated in relation to payment of the sum which Ms West sought from Mr Rendon in relation to her 2016 tax assessment. Matters escalated thereafter.
A demand made by Ms West’s lawyers on 13 June 2017 provided a copy of her 2016 Assessment and asserted that:
The sum of $221,060.85 includes tax relating to:
1. [Partnership 1] on which our client was assessed for $8,819.51 in tax; and
2. [Partnership 2] on which our client was assessed for $47,755.89 in tax to our client.
Thus, the total income tax liability ascribed to Ms West’s income from her membership of these partnerships was $56,575.40.
The response from Mr Rendon’s lawyers on 15 June 2017 advised that their client’s accountant was overseas, posed questions as to one of the partnerships and raised a number of issues concerning the withdrawal of further monies by Ms West following the making of Orders. Further, Mr Rendon’s lawyer requested a copy of Ms West’s tax return for the 2016 financial year.
On 16 June 2017, Ms West’s lawyers replied to that response, providing a copy of Ms West’s 2016 tax return. The 2016 tax return included the following:
Item 10
Interest:
$ 7,819
Item 11
Dividends:
$ 424
Item 13
Partnerships and trusts:
$ 17,999
Item 18
Capital gains (total):
Capital gains (net):
$795,961
$397,981
Item 21
Rent:
$115,174
Total income:
$539,397
Broadly then, Ms West’s total income was comprised of income of $141,416 and net capital gains of $397,981, a total of $539,397. Ms West’s liability for tax fell for assessment on that basis.
Attached to Ms West’s tax return were a number of worksheets, rental property schedules and a capital gains tax schedule. Also attached to the tax return was an Income Tax Return Tax Estimate which contained an estimate of her tax liability of $220,768.50.
Ms West contends that her liability for income tax arising from her membership of the two partnerships is $56,575. Given that the sum attributed to income from partnerships and trusts in her 2016 income tax return was $17,999, it is wholly unclear how this could be so. Yet, in consequence of her response[1] to a notice to admit, it is common ground[2] that the allocation of income which had been made to Ms West from the two partnerships was a total of $115,460. Upon that basis I will treat this sum as the amount of her partnership income.
[1]See Ms West’s Notice disputing facts filed 8 November 2017, p.3 which admits Items 1, 3, 4, 7, 8, 15 – 24 and Items 10, 11, 12(a), 25 and 29.
[2] The admission of this partnership income arises from the admission of Item 15 of the Notice.
Ms West’s claim to indemnity is put on the basis that that partnership income should attract tax at the highest marginal rate. Ms West admits that it is upon this basis that she has sought to recover $56,575 from Mr Rendon upon the indemnity. The direct consequence of her decision is that she reserves to herself the benefit of all lower marginal rates of tax in respect of the remainder of her income and, it would seem, all of her significant capital gains.
On 22 June 2017, Mr Rendon’s lawyer wrote to Ms West’s lawyer, accepting the calculation of the sum of $56,575.40 including that the calculation was based upon underlying amounts referrable to the income apportioned to her as a member of the relevant partnerships. However, in an affidavit sworn by Mr Rendon’s lawyer on 23 August 2017, he deposed at [23]:
My letter of 22 June 2017 simply states that the husband’s accountant . . . accepts the calculation of the figure of $56,575.40. The letter goes on to state that [he] accepts that the figures underlying the calculation is that $115,460 was allocated to the wife and that 49% of that figure is $56,575.40. To accept those calculations is very different proposition to stating that the husband accepts that he is liable to pay $56,575.40. The husband has not accepted that he has a liability to pay that sum to the wife.
As concerned the tax liability dispute, and subject to the matters addressed below, Ms West responded to a notice to admit and has admitted, in whole or subject to qualification, the following matters:
a)income was attributed to Ms West in the financial year ended 30 June 2016 from:
(a)the [No 1 Partnership] in sum of $97,461; and
(b)the [No 2 Partnership] of $17,999;
being a total of $115,460.
Ms West’s response to the notice to admit asserted that Mr Rendon was “responsible for paying tax on these sums pursuant to [Order 15].” Her assertion was not evidence.
b)Ms West’s assessable income for the financial year ended 30 June 2016 was $526,570.
c)Ms West had asserted that Mr Rendon was liable to pay her tax on the said sum of $115,460 at the rate of 49 cents in the dollar (being the top marginal rate of 45 cents in the dollar plus the 2% Medicare levy plus the 2% budget deficit repair levy[3]);
[3]Mr Rendon deposed that the only tax calculation of this figure was drawn from Ms West’s affidavit at R6. Otherwise he deposes that Ms West has not set out elsewhere how the calculation is made.
d)the marginal rates of income tax payable by an Australian resident for 2015/2016 was as set out in the following table:
Taxable income Tax on this income 0 – $18,200
Nil
$18,201 – $37,000
19c for each $1 over $18,200
$37,001 – $80,000
$3,572 plus 32.5c for each $1 over $37,000
$80,001 – $180,000
$17,547 plus 37c for each $1 over $80,000
$180,001 and over
$54,547 plus 45c for each $1 over $180,000
e)Ms West’s capital gain for the year ended 30 June 2016 was $397,981.
f)the liability to pay tax on Ms West’s capital gain for the year 2016 was Ms West’s and Ms West’s alone. Mr Rendon also deposed that this fact was evident from Order 15.
g)in the financial year ended 30 June 2016, Ms West earned $7,814 in interest, $424 in dividends and other rent of $17,713 none of which income “[arose] out of or because of her connection with any of the entities” (as defined);
Ms West deposed that there had been numerous disputes between the parties as to the legitimacy of the withdrawals made by each of them since separation and deposed that she had never received any of the monies from the entities save to the extent that these monies may have been represented by payments of spousal maintenance.
Incidence of taxation on income
Following oral argument and pursuant to leave granted, a written submission was filed on behalf of Ms West which addressed the question whether particular types of income were to be accorded priority for concessional rates of tax under applicable legislation.
I was assisted by and act upon those submissions which Mr Rendon did not seek to contest or add to. On the basis of those submissions, I accept that for the purposes of assessment, all income is to be combined as an indivisible whole and that the prescribed rates of marginal tax are to be applied to the combined total income. Once this is recognised, it is not possible to say that income derived from a particular source falls for assessment distinctly from the whole.
The submissions for Ms West establish that assessable income is made up of those parts of ordinary income and statutory income (which relevantly includes capital gains[4]), which is not exempt income: see Part 1.3, Div 6, Income Tax Assessment Act 1997 (Cth) (ITAA). The income tax assessed for payment in any tax period falls to be assessed by multiplying Taxable Income by the applicable tax rates. Those tax rates operate on a progressive scale: see [60(d)] above; ITAA, s 4.10.
[4]Commissioner of Taxation v Greenhatch (2012) 203 FC 134, [28]-[29], [37]-[38] (Edmonds, Griffiths and Robertson JJ).
Ms West identified her assessable income as being the sum of her capital gains, rental income, dividend income and profit distribution for the two partnerships, less deductions.
Ms West made much of having ‘not received’ so much of her income as was derived from the partnerships, submitting that this income was allocated to her ‘on paper’. It was not immediately apparent that Mr Rendon was not a member of one of those partnerships.
Ms West sought to disclaim the receipt of income from the partnerships. Her submissions included that Mr Rendon was free to allocate income within the bounds of the law as it suited him but that if he allocated income to her from a named entity then Order 15 required him to pay any tax assessed on that income. This evidence and that submission may be understood as meaning, and Mr Croft’s submission was, that Ms West’s allocation of income from the partnerships was treated by way of book entry. I infer that this had been the position for a significant part of the parties’ 31 year marriage. I reject Ms West’s evidence and submission set out above.
It was not put and I decline to conclude that the distributions of partnership income made by way of book entry were a sham: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd.[5] Ms West had enjoyed the benefit of those book entries and has accepted the burden of the liability to income tax on capital gains. It was not submitted that the book entries of partnership distributions had been made without her assent[6] and her submissions and evidence indicate the contrary. In particular, Ms West has declared such income for the duration of the partnerships of which she agreed she was a member. In truth, this submission served only to distract attention from the proper construction of the indemnity, the quantification of Mr Rendon’s indemnity and whether Ms West was entitled to partition the partnership income within that part of her income which was assessed at the highest marginal rates of tax.
[5] (2004) 218 CLR 471, [43]-[47] (Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ).
[6]Brookton Co-operative Society Ltd v Federal Commission for Taxation (1981) 147 CLR 441, 455 (Mason J, Gibbs CJ and Wilson J agreeing).
Consent orders
The entitlement to relief by way of enforcement of the claim for indemnity in a sum of $56,575.40 for the 2016 financial year turns upon: (1) the proper construction of Order 15 which is set out above at [44]; (2) the measure of indemnity to which Ms West is entitled, and; (3) whether a sum which Ms West has applied in payment of a PAYG instalment of tax for the 2016 financial year should be applied in reduction of the quantum of Mr Rendon’s indemnity.
Power is conferred on the court to make orders by consent: s 80(1)(j). Although the Order was made in accordance with the Terms of Settlement, the rights and obligations contained in that contract are enforceable as an order of the court: Harris v Caladine.[7] In general, the approach to the construction of a consent order is the same as that which is taken to the construction of a contract of compromise.[8] This approach is to be applied here in circumstances where the Terms of Settlement and Order are in identical terms.
[7] (1991) 172 CLR 84, 104 (Brennan J), 124 (Dawson J).
[8] Foskett on Compromise, 8th Ed (2015) (Foskett), [5-36]ff.
The Terms of Settlement as embodied in the Order should be construed against the matrix of mutually known facts which gave rise to the parties’ compromise and as two honest business persons would understand their terms.[9] In Electricity Generation Corporation v Woodside Energy Ltd,[10] French CJ, Hayne, Crennan and Kiefel JJ said:
. . . this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties . . . intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”. (footnotes omitted)
[9]Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 at 300 (Isaacs J); AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173, [80] (Nettle JA, Maxwell P and Bongiorno AJA agreeing).
[10] (2014) 251 CLR 640, [35].
The genesis of the Terms of Settlement was the parties’ 31 year marriage, the substantial property which they amassed during that period and the failure of that marriage. Upon settled principles the failure of the marriage entitled the parties to claim for a just and equitable adjustment of their property interests.[11] The purpose and object of their Terms of Settlement was to secure a final adjustment of those interests. Concerning objectively known facts, the parties are taken to have known that assessable income derived from the business activities of the entities (as defined), including the partnerships, was subject to income tax at the prevailing marginal rates of tax and further, that in the case of the partnerships, the assessable income was income in the hands of the partners in accordance with their partnership interests. Ms West was one of those partners.
[11] Stanford v Stanford (2012) 247 CLR 108.
Nature of indemnity
Of critical importance to the proper construction of Order 15 is that the order confers an obligation of indemnity. The settled principles of construction of contracts are to be applied to contracts of indemnity.[12] As in a release, the general words of an indemnity as embodied in the Terms of Settlement should be limited to those things which were specifically in contemplation at the time when their compromise was made.[13] Moreover, both at law and in equity, an indemnifier’s liability is strictissimo juris such that a doubt as to the meaning of an indemnity will be resolved in favour of the indemnifier.[14]
[12] Johnson v American Home Assurance (1998) 192 CLR 266, [19] (Kirby J).
[13]Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112, 123-124 (Dixon CJ, Fullagar, Kitto and Taylor JJ); Cole & Abati [2016] FamCAFC 78, [41] (Thackray, Strickland and Murphy JJ); Hancock Prosecting Pty Ltd v Rinehart [2017] FCAFC 170, [60] (Allsop CJ, Besanko and O’Callaghan JJ).
[14]Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549, 561 (Mason ACJ, Wilson, Brennan and Dawson JJ).
The question is how should the obligation of indemnity be construed? Once Mr Rendon had agreed to indemnify Ms West for any tax arising from the subject partnerships, the central issue in the claim involved determination of the measure of his obligation of indemnity.
Ms West submitted that the issue as presented was whether the income allocated to Ms West in respect of her partnership interests should be calculated on the basis that that income was the only income received by her in the relevant financial year or as income additional to her income from other sources. Ms West’s submission sought to characterise her liability to tax on partnership income on a premise that this income was additional to all other income which she received. Framed in that way, the submission seemed to suggest that, because it was additional to all other income, it should thereby be regarded as necessarily falling for assessment at the highest marginal rate of tax. The submission also obscured that Ms West’s liability to tax was upon both income and capital gains. To frame the submission in that way paid insufficient attention to the express terms of Order 15.
Mr Rendon does not disclaim an obligation of indemnity but contests the claim made on the basis that Ms West remains liable for tax on all capital gains, that the partnership income should not be assessed for tax at the top marginal rate on the unilateral decision of Ms West and that the calculation of the claim of $56,575.40 is erroneous.
The broad scope of Order 15 is to impose on Mr Rendon an obligation of indemnity in respect of any taxation liability which may be incurred by Ms West – save as to capital gains – arising in any way out of or because of her connection with any of the entities. The text of Order 15 does not express the obligation of indemnity in terms of any additional liability for tax. To the contrary, it provides that the obligation is in respect of any [taxation] liability she has now incurred or may in the future incur arising in any way out of or because of her connection with, any of the entities. The construction which Ms West would place on Order 15 necessitates that the term ‘additional’ is read into that Order. Such a process of construction is unwarranted.[15]
[15] Thompson v. Goold & Co. [1910] AC 409, 420.
Liability for tax
The total of Ms West’s income and capital gains was $539,397.
Ms West’s taxation liability of $221,060.85 in respect of the 2016 financial year was a liability for both income and CGT tax.
Order 15 made express that Ms West was not to be entitled to indemnity for any CGT liability. That this exclusion from Order 15 was constituted as the introduction of that Order serves to underline the prominence of the meaning properly to be given to that exclusion from the scope of the obligation of indemnity. It reinforces a conclusion that, properly construed, the obligation of indemnity was confined to income tax and limited to such income tax as was properly attributable to Ms West’s membership of the two partnerships.
The total income attributable to those partnerships was $115,460. The application for enforcement seeks that Mr Rendon indemnify her for a postulated tax liability of $56,575.40. As Ms West now admits, she asserts that Mr Rendon is liable to pay her tax on the said sum of $115,460 at the top marginal rate of, in sum, 49 cents in the dollar.[16] As I have said, the corollary of that assertion is that Ms West seeks to reserve to herself the benefit of the lower marginal rates of taxation for the remainder of her income.
[16] Ie 45c in the dollar plus a 2% Medicare levy plus a 2% budget deficit repair levy.
Two honest business persons would not construe the obligation of indemnity in relation to the partnership income as conferring an entitlement to allocate the whole of that income to the highest marginal rate of taxation in the manner which Ms West now asserts. The Terms of Settlement operated as a contract between the parties which were then embodied in a consent order. It would be wholly unreasonable for one party to a contract to unilaterally act in a way which would deprive the other of the benefit of the contract. The fact that the construction for which Ms West contends would lead to an unreasonable result is a very relevant consideration.[17]
[17]L Shuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235, 251 (HL); McMeel, The Construction of Contracts, 2n Ed (2010), [1.58], [1.161], [21.64].
In a reply submission filed on behalf of Ms West it was put that in a number of cases it had been assumed that an indemnity would apply at the highest marginal rate on which the income the subject of the indemnity was taxed and upon that footing the same assumption should be applied here. The authorities to which reference was made were: Parsin & Parsin;[18] IABH & HRBH;[19] Kelly & Kelly;[20] Myrtle & Myrtle;[21] Faden & Faden;[22] Bennison & Bennison.[23] It was accepted that those decisions did not provide authoritative guidance. Although I was not provided pinpoint references to a specific passage in any of those matters, I have considered each of those decisions.
[18] [2007] FamCA 1458.
[19] [2008] FamCa 817.
[20] [2011] FamCA 388.
[21] [2012] FamCA 460.
[22] [2014] FamCA 1182.
[23] [2015] FamCA 243.
In Parsin & Parsin,[24] Judicial Registrar Loughnan made an extensive series of orders pursuant to s 79 including provision for the parties to bear equally the CGT on the sale of various properties. In addition, an order was made that the husband indemnify the wife in respect of any taxation liability of his businesses. The orders made provision for a large number of cross-indemnities. From my examination of the revised amended judgment, the Registrar did not consider principles of indemnity or taxation in making the orders sought. The parties were represented by Mr D Grieve QC and Mr Lethbridge QC. Had those questions presented as significant issues, I cannot accept that they would not have be the subject of submission by those senior counsel.
[24] [2007] FamCA 1458.
In IABH & HRBH,[25] an order was made by Faulks DCJ that the husband indemnify the wife in respect of all past, present and future liabilities including income tax, goods and services tax, fringe benefits tax, capital gains tax and any other tax and/or penalties howsoever incurred by the Wife as a result of her previous interest in, and/or her involvement in, any company and/or trust entity which is to be retained by the husband. Again, the subject of indemnity does not appear to have been the subject of detailed consideration.
[25] [2008] FamCa 817.
In Kelly & Kelly,[26] Cleary J considered the appropriate treatment of a valuable parcel of shares for the purposes of determining an application for an adjustment of property interests. The approach taken by his Honour, which was based in part upon the expert evidence of a chartered accountant, was to exclude the likely CGT on a sale of those shares from the Asset Pool. His Honour reasoned[27] that this was the safest course to be adopted in the determination of that pool. The decision did not address the question of indemnity in respect of contingent liabilities for future assessment of tax on the parties’ business activities or the parties’ past or future share of that income.
[26] [2011] FamCA 388.
[27] [2011] FamCA 388, [82]-[85].
In Myrtle & Myrtle,[28] Kent J made orders for the sale of a large number of properties and provided machinery orders which dealt with the treatment of the gross proceeds of sale, including the priority in which the proceeds be applied. Third in priority was satisfaction of the parties’ CGT liability with the wife being directed to obtain an accountant’s assessment of the likely quantum of the liability and an order that that sum be set aside in a controlled account for release to the ATO of such CGT liability as assessed. In particular, his Honour ordered[29] that each party “indemnify and keep indemnified the other in respect of such share of the capital gains tax liability (including shortfall) in the proportions of 50% to the Wife and 50% to the Husband and each will share in any excess amount after payment of the liability in such said proportions.” Notably, Kent J also ordered that the husband provide a qualified indemnity to hold the wife harmless from liability arising from the conduct of his company’s operations.[30] Kent J recognised[31] that the liability for CGT would crystallise at the moment of sale of the respective properties and that allowance must be made for the potential substantial CGT so as to secure the result that the orders to be made were just and equitable. His Honour considered that the husband should bear his own tax liabilities.[32] The detailed reasons for the orders made did not address the issue at hand.
[28] [2012] FamCA 460.
[29] [2012] FamCA 460; Order 6(i)(iii)D.
[30] [2012] FamCA 460; Order 22(b).
[31] [2012] FamCA 460, [255], [294].
[32] [2012] FamCA 460, [313(a)].
In Faden & Faden,[33] Le Poer Trench J made orders that the husband transfer a property to the wife on terms that she indemnify him from any liability pursuant to the mortgages over that property together with any other liability arising from his prior ownership of that property. Further orders were made for the sale of shares in a company with machinery orders for the priority in which the proceeds of sale were to be applied, including the tax payable upon the sale of those shares. An order for division of the proceeds of the sale of those shares was made upon a just and equitable division of property interests on the basis[34] that that tax had been paid in the priority prescribed by that order. His Honour proceeded on the basis that some tax issues had been agreed, including that each of the parties’ CGT liabilities would be removed from the balance sheet.[35] So too, the father’s tax liability was excluded as it had been created post separation.[36] Again, there was no discussion of the issues raised by Ms West’s claim to enforce the indemnity.
[33] [2014] FamCA 1182.
[34] [2014] FamCA 1182, Orders 48-49.
[35] [2014] FamCA 1182, [919], [930], [1120].
[36] [2014] FamCA 1182, [1122].
In Bennison & Bennison,[37] Kent J made orders for the husband to transfer, unencumbered, his interest in the matrimonial home and for the wife to relinquish all of her interest in a family trust and a group of family companies. Those orders were made on terms that the husband would indemnify the wife in relation to the trust and companies.[38] The only references to indemnity are located in the orders and there appears to be no consideration of the question of indemnity.
[37] [2015] FamCA 243.
[38]Order 7 provided that “the Husband shall indemnify the Wife and keep her indemnified in respect of any claims, demands, liabilities or debts of whatsoever nature as may exist or arise in respect of the Wife’s involvement as a Director, shareholder, borrower or otherwise in the Bennison Group, including any tax which might be assessed (of an income, capital or penalty nature) on dividends, distributions or other benefits of whatsoever nature purporting to come from any of the Bennison Group which have not been paid directly to the Wife . . .”
In deference to Mr Croft’s careful submission, I consider that the scope of an obligation of indemnity should be construed upon settled principles of construction, the express terms of the indemnity, the context in which it was agreed including the matrix of mutually known facts, and the circumstances in which it had been agreed.
In my opinion, once it is accepted that income is combined as an indivisible mass and that the prescribed rates of marginal tax are applied to the combined total, it cannot be open to Ms West to unilaterally determine that the partnership income fell for assessment distinctly from the whole. It was not open to partition the partnership income as though it was to be characterised as additional income and so to be taxed at the top marginal tax rate. Those conclusions are determinative against Ms West’s contention that the partnership income of $115,460 was liable to tax of $56,575.40 and accordingly determinative of the claim for indemnity for such an amount.
Measure of indemnity
For the reasons above at [80], in determining the scope of the liability to indemnify it is necessary to exclude the sum of $397,981 from Ms West’s total income of $539,174. For the purposes of establishing the indemnity, the scope of the obligation should be determined by reference to an income of $141,416. As the table in [60(d)] above shows, the marginal rate of tax on sums from $80,001 to $180,000 was $17,547 plus 37c in the dollar thereafter. Ms West has been insistent that the tax payable is payable at the top marginal rate.
The total income tax on net income of $141,416 was $43,099. It can be seen at once that Ms West’s claim to indemnity for a sum of $56,575.40 seriously distorts the extent of the liability to indemnify her by the inclusion of her liability for tax on her substantial capital gains and the assertion that the whole of the partnership was taxable at the top marginal rate of tax on assessable income.
Mr Rendon submitted that the tax payable on partnership income of $115,460 was $32,976.40 and that this represented the scope of his liability as none of Ms West’s other income was income “arising out of or because of her connection with, any of the entities” with the result, it was said, that his liability to indemnify should disregard all other income. The difficulty in that approach was that it effectively mirrored the approach taken by Ms West. While Ms West would have it that liability on partnership income was to be located in that part of her total income and total capital gains which attracted tax at the top marginal rate, the approach taken by Mr Rendon sought to secure for himself the lowest and intermediate marginal rates of tax.
Neither approach is objectively reasonable. To adapt the analysis in Woodside Energy, the court is entitled to approach the task of construing Order 15 on an assumption that the parties intended it should produce a commercial result and avoid commercial nonsense. The average rate of tax on Ms West’s total income of $141,416 was 30.49%. Applying that rate to the partnership income of $115,460, the tax payable on that income was $35,204. I consider that, objectively, this measure of indemnity accords with the parties’ intentions at the time that the Terms of Settlement were executed and the Order made.
Having regard to the construction of Order 15 which I prefer, it is unnecessary to consider a subsidiary contention raised by Mr Rendon’s counsel that the 2% budget repair levy applied only to income above the sum of $180,000.
No submission was made that any prejudice would be suffered by the making of orders in the absence of the second or third respondents. No question was raised whether they had been served with the application. As I have found, the grounds for the exercise of discretion under paras 79A(1)(a) and (c) are satisfied. In considering whether any order should be made by way of property settlement, the court takes into account the principles established in Stanford v Stanford.[105]
[105] (2012) 247 CLR 108.
I am also satisfied that, in the circumstances of this case, it is appropriate that the discretion to vary the Order be exercised. There has been a miscarriage of justice in the circumstances addressed above and by reason of Ms West’s default, it is just and equitable that an order be made which varies the Order so as to provide expressly that Mr Rendon and Ms West are each liable for $28,242 representing 25% of the break costs of $112,970 that were demanded by [Bank 1] and which were paid to secure the release of the securities over the Property A property. The variation to the Order does little more than express that which it already provides so as to put beyond doubt that the liability for break costs should be borne by each party.
The ancillary relief sought by Mr Rendon is that this sum be set-off against his indemnity in relation to the partnership income tax. It is just and equitable that the amount of Ms West’s share of the break costs should be set-off against the amount of his liability to indemnify her for the tax on her partnership income. I am satisfied that power is conferred by paras 80(1)(i) and (k) of the Act to do so.
By s 81, the court is subject to an imperative obligation to finally determine the parties’ financial relationships. With the terms of s 81 in mind, I agree that such an order should be made.
Issue 3 – withdrawal $900
Order 38(e) provided for the joint accounts to be divided equally.
Concerning the disputed claim for $900, Mr Rendon’s lawyer wrote, by letter dated 12 February 2016, stating that Ms West had withdrawn $900 from a joint account and sought that it be refunded. The withdrawal was made the day following the making of the Order.
In an email dated 15 February 2016, the lawyers for Ms West: (a) accepted Ms West had withdrawn $900 from a joint account; (b) contended that $450 of that sum was owned by Mr Rendon; (c) claimed for reimbursement of another sum of $1,378.
Mr Rendon submits that the sum of $1,378 was not withdrawn from a joint account. He accepted that there was no evidence to support this.
Following Ms West’s demand for indemnity, Mr Rendon’s lawyers wrote, by letter dated 15 June 2017, referring to Ms West’s withdrawal of funds from a joint account.
Ms West responded, adopting the position that her request to be reimbursed said sum of $1,378 had not been answered and that her position as to the $900 had never been rebutted.
Mr Rendon complains that by making the withdrawal of $900 Ms West has been paid $900 more than the sum stipulated by the Order. In turn she complains that she was entitled to be given credit for 50% of the $1,378.
The resolution of this dispute should be resolved on the basis that Order 38(e) was applied according to its terms. Had that occurred, Mr Rendon would have given Ms West credit for $450 in respect of the $900 withdrawal while Ms West would have given Mr Rendon credit for $689 of the $1,378 which he withdrew.
An adjustment of $239 should be made in Ms West’s favour.
Interest
No application for interest was made by Ms West’s application.
On instructions, Mr Crofts made oral application for interest on any monies found to be payable pursuant to the indemnity. The court may order that interest be payable: s 117B. The scope of the power is confined to making an order for interest in proceedings under the Act.[106] The court may, however, order that interest not be payable on the money found to be payable pursuant to an order: s 117B(2).
[106] Ebner v Pappas (2014) FLC 93-618 (FC).
The power conferred by s 117B(1) to make an order for interest is, accordingly, expressly subject to the power conferred by sub-s 117B(2) to make an order that interest be not payable: Stephens & Stephens.[107] As the Full Court confirmed in Stephens, the discretion conferred by the section is extremely wide. The court may conclude that it is inequitable and unfair that an award of interest be made.[108]
[107] (2009) 42 Fam LR 423, [430]-[431], [482]-[483] (FC).
[108] Trustees of the Bankrupt Estate of Sresbodan & Sresbodan [2017] FamCA 268, (Aldridge J).
I consider that it is in the interests of justice to make an order that interest is not payable on the money found to be payable pursuant to the indemnity. I reach that conclusion having regard to the result of the totality of the issues that were presented for determination. In particular, I take account of the manner in which untenable demands were made for indemnity respecting, variously, capital gains tax, council rates and land tax. I also factor in that an offer which has proven to be more than reasonable was made in advance of these applications. Evidence of that offer was adduced without objection. Finally, I take account of the matters in [219]-[220] below.
Costs
Each party seeks costs and dismissal of the others’ application in a case and response to that application respectively.
In an email transmitted on 24 September 2017, Ms West stated that she would rather pay her lawyers than pay Mr Rendon anything. Additionally, the circumstance that Mr Crofts was instructed to make application for interest indicated the stance that was being taken.
Contrastingly, the evidence indicates that Mr Rendon made an early proposal to resolve the matter on terms which took account of the parties’ competing claims.
The findings I have made in the matter inform the approach which has been taken to this litigation. Conscious of ss 117(1), 117(2), 117(2A), I will direct the parties to file submissions as to costs and list the matter for determination of that issue. It will be a matter for them whether they seek to press any such application. Should costs be sought it will be necessary to identify, by reference to each of the applicable items provided by the rules, each item and amount of costs that is sought.
Conclusion
For the reasons above, I have concluded that Mr Rendon is obliged to indemnify Ms West for her tax liability according to its terms. The measure of that liability is based upon the determination of her liability to tax based upon the whole of her income, excluding tax on any capital gains, less the amount of PAYG tax which has already been applied in reduction of her liability to income tax. An adjustment in Ms West’s favour may have been made on account of the need to equalise the parties’ withdrawals from accounts.[109] I am also satisfied that Mr Rendon is entitled to relief pursuant to s 79A in relation to the break costs imposed by [Bank 1]. The overall result is as follows:
[109] Ms West made no application for recovery of this amount.
Item
Amount
Indemnity for 2016 income tax:
$35,204
Less PAYG:
$7,855
Subtotal
$27,329
Add adjustment for withdrawals from joint account:
$239
Total due to Ms West
$27,558
Deduct break costs (25%)
$28,242
Total due to Mr Rendon:
$654
Thus, parties having had a net Asset Pool of $11M, have pressed competing claims which have resulted in a net adjustment equal to an amount of less than .001% of that estate. For the avoidance of doubt, Mr Rendon was clear that, while overall, Ms West owed him a sum of money, he disclaimed any claim to relief, simply wishing not to be engaged in further conflict. Having regard to the history and circumstances of the case, I accept his submission. Any question of costs is left to the parties.
I certify that the preceding two hundred and twenty (220) paragraphs are a true copy of the reasons for judgment of Judge A Kelly
Date: 12 December 2018
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