Rodgers & Rodgers
[2016] FamCAFC 68
•4 May 2016
FAMILY COURT OF AUSTRALIA
| RODGERS & RODGERS | [2016] FamCAFC 68 |
| FAMILY LAW – APPEAL – PROPERTY SETTLEMENT – whether the trial judge erred in refusing to deduct a calculation of the total future taxation payable by the parties’ corporation – where the treatment of the liability should be governed by what is just and equitable as between the parties – where the failure of the trial judge to include the calculated taxation liability is not, of itself, an error – where it was within discretion for the trial judge to treat the liability as a matter to be considered by reference to s 79(4)(e) – where the s 79(4)(e) assessment was not “plainly unjust” or “plainly wrong” – where the trial judge failed to consider relevant considerations in the s 79(4)(e) assessment – where error in the exercise of trial judge’s discretion established – appeal allowed – matter to be re-determined by the Full Court. |
| Family Law Act 1975 (Cth) ss 75(2), 79, 79(2), 79(4), 117(1) |
Af Petersens and Af Petersens (1981) FLC 91-095
Allesch v Maunz (2000) 203 CLR 172
Ascot Investments v Harper (1981) 148 CLR 337
Baldwin & Baldwin [2010] FamCAFC 227
Biltoft and Biltoft (1995) FLC 92-614
Campbell v Kuskey (1998) FLC 92-795
CDJ v VAJ (1998) 197 CLR 172
Chorn and Hopkins (2004) FLC 93-204
Clauson and Clauson (1995) FLC 92-595
DJM v JLM (1998) FLC 92-816
Ferraro & Ferraro (1993) FLC 92-335
Gronow v Gronow (1979) 144 CLR 513
Hoffman & Hoffman (2014) 51 Fam LR 568
House v The King (1936) 55 CLR 499
Lovell v Lovell (1950) 81 CLR 513
Mallet v Mallet (1984) 156 CLR 605
Noetel and Quealey (2005) FLC 93-230
Norbis and Norbis (1984) FLC 91-543
Prince and Prince (1984) FLC 91-501
Re Bailey and Bailey (Executrix of the Estate of Bailey) (1990) FLC 92-117
Rosati v Rosati (1998) FLC 92-804
Rowell and Rowell (1989) FLC 92-026
Sharman v Evans (1977) 138 CLR 563
| APPELLANT: | Mr Rodgers |
| RESPONDENT/CROSS-APPELLANT: | Ms Rodgers |
| FILE NUMBER: | PTW | 2314 | of | 2011 |
| APPEAL NUMBER: | WA | 6 | of | 2015 |
| DATE DELIVERED: | 4 May 2016 |
| PLACE DELIVERED: | Brisbane |
| PLACE HEARD: | Perth |
| JUDGMENT OF: | Thackray, Ainslie-Wallace and Murphy JJ |
| HEARING DATE: | 26 October 2015 |
| LOWER COURT JURISDICTION: | Family Court of Western Australia |
| LOWER COURT JUDGMENT DATE: | 22 January 2015 |
| LOWER COURT MNC: | [2015] FCWA 5 |
REPRESENTATION
| COUNSEL FOR THE APPELLANT: | Mr Dowding SC with Ms Wellings |
| SOLICITOR FOR THE APPELLANT: | Carr & Co |
| COUNSEL FOR THE RESPONDENT: | Mr Hooper SC with Mr Fahey |
| SOLICITOR FOR THE RESPONDENT: | Paterson & Dowding |
Orders
The appeal be allowed.
The appeal be adjourned to not before 11.30 am EST on Wednesday 25 May 2016 (9.30 am WST) in Sydney, with the parties appearing by videolink from Perth, for the hearing of all such further submissions as the parties might wish to make in respect of this Court’s re-determination of the appropriate orders to be made pursuant to s 79(4) of the Family Law Act 1974 (Cth) (“the Act”) and the costs of the appeal.
By not later than 4.00 pm on Wednesday 18 May 2016, the parties shall each file with the Appeals Registrar via email, and serve upon the other party, a written outline of any such submissions, not greater than three (3) pages in length.
NOTATION
The parties are agreed that the Full Court should determine for itself the orders appropriate to be made pursuant to s 79(4) of the Act consequent upon the findings in these reasons for judgment and to that end are agreed that the facts and circumstances pertaining to the exercise of that discretion are those contained within the appeal record and, specifically agree that:
(a)The interests and property of the parties or either of them and their value are as set out at [32] of the trial judge’s reasons for judgment; and
(b)Neither of them seek to adduce any further or other evidence in respect of this Court’s re-determination.
IT IS NOTED that publication of this judgment by this Court under the pseudonym Rodgers & Rodgers has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
| THE FULL COURT OF THE FAMILY COURT OF AUSTRALIA AT PERTH |
Appeal Number: WA 6 of 2015
File Number: PTW 2314 of 2011
| Mr Rodgers |
Appellant
And
| Ms Rodgers |
Respondent/Cross-appellant
REASONS FOR JUDGMENT
The husband appeals orders for settlement of property made by Crisford J on 22 January 2015.
Her Honour found that the “property of the parties or either of them” and their respective superannuation interests together had a “net value” of $4,922,309. The property consists of three broad groupings: real property and chattels; an investment trust; and a successful tourism business run by the parties through a corporate/trust structure. The parties’ cohabitation and subsequent marriage spanned some 25 years.
Her Honour arrived at the net value just referred to having deducted from the value of the property a number of liabilities. The central issues on this appeal derive from her Honour’s refusal to deduct a calculation of the total future taxation payable by a corporation which the parties controlled so as to arrive at a net value of the parties’ property.
The husband’s three grounds of appeal and their various sub-grounds require this Court to answer three questions:
(a) Did her Honour err in law by refusing to deduct the calculated taxation liability together with other liabilities so as to arrive at a “net” value of the parties’ interests in property and, conversely, did her Honour err in law in taking that calculated liability into account pursuant to s 79(4)(e) of the Family Law Act 1975 (Cth) (“the Act”);
(b) If it was within discretion for her Honour to deal with the calculated taxation liability pursuant to s 79(4)(e), did her Honour err in the exercise of that discretion including, specifically, in failing to have any, or any sufficient, regard to the calculated future taxation liability; and
(c) Did her Honour err otherwise in respect of the s 79(4)(e) adjustment?
The wife has filed a cross-appeal, but the submissions by her counsel Mr Hooper SC make it clear that the arguments sought to be raised by the wife in respect of her Honour’s assessment of the respective contributions of the parties arise only in the event that we find error by her Honour and seek to thereafter decide for ourselves whether an order for settlement of property should be made and, if so, its terms.
The Calculated Taxation Liability
The Calculations And How They Arise
At all relevant times, the parties were the directors and shareholders of two corporations, M Pty Ltd and B Pty Ltd. M Pty Ltd had two roles. Its first role was as trustee of the Rodgers Family Trust (“the trust”). The trust was the vehicle through which the parties ran the tourism business. M Pty Ltd’s second role was as trustee of the Rodgers Investment Trust. Although the assets of that trust were included within “the property of the parties or either of them”, neither that fact nor M Pty Ltd’s role with respect to that trust plays any part in this appeal.
B Pty Ltd was referred to before us (and in the proceedings before her Honour) as a “bucket company”. The term is used to connote its purpose as a repository of funds earned by M Pty Ltd, as trustee of the trust, in running the tourism business. Funds paid to B Pty Ltd were subsequently drawn and used by the parties. The arrangements just described gave rise to an issue before her Honour which she described as “the treatment and quantification of a loan incurred pursuant to Div 7A of the Income Tax Assessment Act 1936 (Cth) (“ITA Act”)”.
Despite earlier different positions, each of the parties sought orders from her Honour ultimately that assumed the husband would retain the business and as a consequence, the wife would be removed from the corporations and would be indemnified for any future liabilities of the husband or the corporate/trust structure, including in respect of taxation. The schedule of assets and liabilities handed to her Honour at the trial and relied upon by both parties to show what was agreed and what remained in issue contained, at Item 84, the contention by the husband that there was a liability in these terms: “Tax liability if loan between from [sic] [the tourism business] is forgiven $517,137”. That entry is attended in the schedule by the comment: “Range of $438,552 to $718,401”.
Those entries and figures emerge from calculations contained in an exhibit before her Honour which will shortly be set out. The calculations from which the figures emerge were performed by the companies’ accountant, Ms L. Ms L was cross-examined briefly before her Honour. Ms L’s calculations were accepted as correct by the single expert accountant in the case, Ms J. Ms J did not give oral evidence but her report was in evidence before her Honour.
Ms J’s report contended, uncontroversially, that the trust “is complying with its obligations under Division 7A in respect of the unpaid company entitlements to trust income that arise from December 2009”. Undistributed funds resulting from the movement of money between the trust and B Pty Ltd as earlier described attract the attention of Division 7A of the ITA Act which deems those funds to be dividends and taxable accordingly. That is, amounts paid to the parties in the manner earlier described reflected as loans in the books of account cannot by that designation avoid taxation. The ITA Act permits the loans to be treated as such, but only if they are put on a commercial footing including by reference to a prescribed interest rate and maximum term. That term, if the loans are unsecured, is seven years. For convenience, loans of this type are referred to within these reasons as “Division 7A loans”.
As Ms J’s report indicates, the relevant corporations here entered into Division 7A loans in respect of each of the relevant taxation years. As will shortly be seen, the aggregation of those loans at the time of trial amounted to more than $1.5 million. Ms L and Ms J were each strongly of the view that crystallising a taxation liability by the forgiveness of the relevant inter-company loans, with the consequence that the tax would be immediately payable, was not advisable. Again, despite initial different positions, both parties were agreed that this advice should be followed. They each sought orders based on that premise.
The consequence is that, in practical effect, the husband, through his control of the company and trust, takes on the Division 7A loans and the taxation consequences flowing from them. In that respect, it should be noted that, despite their inherent (statutory) commerciality, the loans are, again in terms of their practical effect, between the husband and himself. Further, money is moved by him through the trust and company so as to service the loans in a manner consistent with their inherent obligations and, as the wife contends, in a manner that will best reduce the taxation burden.
Ms L performed three sets of calculations of the tax payable by reference to the Division 7A loans using differing assumptions. Each set contained a calculation if the loans were forgiven and if the loans were not. Given their importance to the issues and arguments before us, we reproduce those calculations in the following table:[1]
[1] The calculations are summarised at [23] of her Honour’s reasons.
2014 rates; - If loans deemed forgiven in 2014 tax year given court order of settlement
Total Div 7A loans subject to tax
$ 1,864,587
balance as at 30.6.13 as per accounts now plus 2014 loan less repayments made during 2014
Total Div 7A loan interest accured [sic]
$ -
doesn’t include any future interest liability as balance paid out 30.6.14
Total Franking credits attached
$ 528,285
estimate balance of franking credit account as at 30.6.14 prior to FF div paid out and no interest income
Total taxable income
$ 2,392,872
Tax on taxable income 2014 rates
$ 1,050,339.31
Medicare levy at 1.5% (no surcharge)
$ 35,893
Less Franking credit offsetts [sic]
-$ 528,285
TOTAL TAX LIABILITY
$ 557,947
2015 rates [loans not forgiven]
Total Div 7A loans subject to tax
$ 1,762,921
Balance of loans as at 30.6.14 as per accounts now
Total Div 7A loan interest accured [sic]
$ 378,507
Balance of interest owing on all loans as per loan schedules
Total Franking credits attached
$ 447,082
Balance of franking account as at 30.6.14 as per accounts now
Total taxable income
$ 2,588,510
Tax on taxable income 2015 rates
$ 1,186,547
*Top rate now 47% includes budget repairs levy applicable for three years
Medicare levy at 2% (no surcharge)
$ 51,770.20
Less Franking credit offsetts [sic]
-$ 447,082
TOTAL TAX LIABILITY
$ 791,235
Estimated tax liability over the remaining life of the loans based on 2015 rates only
2014 rates; - if loans deemed forgiven in 2014 tax year given court order of settlement and three year amendment occurs
Total Div 7A loans subject to tax
$1,565,872
balance as at 30.6.13 as per accounts now plus 2014 loan less repayments made during 2014
Total Div 7A loan interest accured [sic]
$ -
doesn’t include any future interest liability as balance paid out 30.6.14
Total Franking credits attached
$ 491,824
estimate balance of franking credit account as at 30.6.14 prior to FF div paid out and no interest income
Total taxable income
$ 2,057,696
Tax on taxable income 2014 rates
$ 899,510.41
Medicare levy at 1.5% (no surcharge)
$ 30,865
Less Franking credit offsetts [sic]
-$ 491,824
TOTAL TAX LIABILITY
$ 438,552
2015 rates; with three years of ammendments [sic] occur [loans not forgiven]
Total Div 7A loans subject to tax
$ 1,486,458
Balance of loans as at 30.6.14 as per accounts now
Total Div 7A loan interest accured [sic]
$ 308,711
Balance of interest owing on all loans as per loan schedules – ammending [sic] 2012 & 2013 & 2014 loan shedules [sic]
Total Franking credits attached
$ 338,968
Balance of franking account as at 30.6.14 estimated after amendments over three years
Total taxable income
$ 2,134,136
Tax on taxable income 2015 rates
$ 972,991
*Top rate now 47% includes budget repairs levy applicable for three years
Medicare levy at 2% (no surcharge)
$ 42,682.73
Less Franking credit offsetts [sic]
-$ 338,968
TOTAL TAX LIABILITY
$ 676,706
Estimated tax liability over the remaining life of the loans based on 2015 rates only
2014 rates; - If loans deemed forgiven in 2014 tax year given court order of settlement and claiming 2014 interest in trust
Total Div 7A loans subject to tax
$ 1,730,561
balance as at 30.6.13 as per accounts now plus 2014 loan less repayments made during 2014
Total Div 7A loan interest accured [sic]
$ -
doesn’t include any future interest liability as balance paid out 30.6.14
Total Franking credits attached
$ 488,077
estimate balance of franking credit account as at 30.6.14 prior to FF div paid out and no interest income
Total taxable income
$ 2,218,638
Tax on taxable income 2014 rates
$ 971,934.27
Medicare levy at 1.5% (no surcharge)
$ 33,280
Less Franking credit offsetts [sic]
-$ 488,077
TOTAL TAX LIABILITY
$ 517,137
2015 rates; with claiming 2014 interest in trust
Total Div 7A loans subject to tax
$ 1,628,896
Balance of loans as at 30.6.14 as per accounts now
Total Div 7A loan interest accured [sic]
$ 343,275
Balance of interest owing on all loans as per loan schedules
Total Franking credits attached
$ 427,275
Balance of franking account as at 30.6.14 as per accounts now
Total taxable income
$ 2,399,446
Tax on taxable income 2015 rates
$ 1,097,686
*Top rate now 47% includes budget repairs levy applicable for three years
Medicare levy at 2% (no surcharge)
$ 47,988.91
Less Franking credit offsetts [sic]
-$ 427,275
TOTAL TAX LIABILITY
$ 718,401
Estimated liability over the remaining life of the loans based on 2015 rates only
Corresponding tax savings over 7yrs via Trust interest deductions:
$ 161,339.44
Net tax liability over remaining 7 yrs
$ 557,061
As can be seen, each set of calculations postulates the possibility of the relevant loans being forgiven or, as an alternative, the husband taking them on within an altered structure absent the wife consequent upon the court’s orders. Each set of calculations also embrace additional assumptions. In particular, it was common ground before her Honour that, having taken additional advice, Ms L should include calculations that assumed that the trust might claim the interest paid on the Division 7A loans as a deduction. As can also be seen, the calculations assume that the tax liability derives from the declaring of dividends so as to repay the relevant loans with those dividends receiving the benefit of franking credits.
The Parameters of the Parties’ Arguments
Before her Honour the husband contended that the figure of $517,000 should be adopted as the liability.[2] He contended similarly before this Court. In doing so, in apparent recognition of the fact that the postulated figures contained differing assumptions, Mr Dowding SC submitted on his behalf that the $517,000 figure “is less than the number that will probably be the number that will be paid”.[3] The submission contains the implicit concession that, if the liability was to be taken up by her Honour as the husband contends, the quantum of that liability could not have been precisely ascertained, even if the calculated amounts of the potential liability were confined by the assumption that the inter-company loans would not be forgiven and the tax consequently crystallised.
[2] Trial transcript, 2 December 2014, p 86.
[3] Appeal transcript, 26 October 2015, p 12; more generally, see pp 12-15.
The imprecision in the amounts arose because Ms L did not know whether the Commissioner would allow interest on the Division 7A loans as a deduction for the trust and/or whether past assessments might be amended as a result. While those uncertainties were the subject of differing calculations using differing assumptions, it was accepted by Mr Dowding that none of the calculations included a discount to take account of the present value of a future sum. Neither did her Honour have any other evidence to that effect. Relevant to matters shortly to be discussed, it should also be observed that neither did her Honour have evidence as to whether the calculations should be discounted for other contingencies including, in particular, the possibility that repayment of Division 7A loans might be met other than by the declaring of dividends in the manner or amount that they had been historically.
Notwithstanding those uncertainties and evidentiary omissions as to the quantum of the amount that should be deducted by way of taxation liability, Mr Dowding sought to argue that the figure of $517,000 could and should have been used by her Honour and a liability in that amount should have been deducted from the “gross” value of the parties’ property and superannuation interests so as to arrive at the “net” property of the parties for division. In effect, Mr Dowding argued that deducting that liability in that way is entirely consistent with long-standing authorities in this Court as to the approach to be adopted in first assessing the “property of the parties or either of them” within the meaning of s 79 preliminary to making orders considered to be just and equitable as s 79(4) requires.
It is conceded by Mr Hooper that Mr Dowding is correct in asserting that her Honour is wrong in attributing to both parties a concession that it is “appropriate to apply” the principles emerging from the decision of this Court in Rosati v Rosati.[4] The husband made no such concession. Mr Dowding contended before her Honour (and contends before us) that the taxation liability is not “contingent” or subject to any of the uncertainties to which Rosati refers:
…[The company is] fortunate in that [it] can either pay it or defer the payment on terms. There isn’t an argument that it’s to be paid, and whether we borrow the money from the Tax Department, effectively, or whether we pay it now, it is to be paid and we say, therefore, it is to be taken into account. If we don’t pay it now but defer it, each year we have to make payments and the total amount we pay is $718,401 – page 4 of Ms [L] [sic].
…So you have to pay the principal back over seven years and you have to pay interest every year and you have to pay tax on the interest received. That’s a given.[5]
[4] Reasons, at [27]; Rosati v Rosati (1998) FLC 92-804, at [6.36].
[5] Trial transcript, 2 December 2014, p 86.
Mr Hooper’s argument before her Honour and before us is, in effect, premised on the assertion that deducting a total amount of calculated tax as at the date of trial (in any of the calculated amounts which assume the inter-company loans will not be forgiven) makes assumptions not justified by reference to the evidence as to the nature of the calculated liability and doing so is not just and equitable to the wife. He contends centrally that it is not the Division 7A loans that create the taxation liability but the manner in which the loans are met, or not met that creates that liability. He submits that “it’s not a loan structure arrangement that causes a problem”. The calculations assume that “the company will declare dividends so that there’s an internal and circular movement of money to repay the loans”. It is contended, however, that while the relevant loans must be repaid within seven years, it is by no means certain or necessary that the declaration of dividends (thereby creating the relevant taxation liability) will be the means by which that occurs. For example, the husband might decide to transfer real property retained under the orders as between the trust and the company so as to clear or markedly reduce the loans without needing to declare a dividend. It is in that sense that the calculations of taxation liability should be seen as “contingent”.[6]
[6]Transcript of trial proceedings, 2 December 2014, pp 91-92. The example emerges from the husband retaining two geared pieces of real property (within the Rodgers Investment Trust) valued at $710,000 and $1,350,000 as part of his property settlement.
It was also argued before her Honour, and before this Court, on behalf of the wife that there is no principle that dictates that the taxation liability – described as “contingent” – must be deducted so as to arrive at a “net” value of property to be divided between the parties. Doing so affects, axiomatically, each of the parties sharing in that liability in their ordered proportionate share of the property. It is contended the treatment of this liability is or should be governed by what is just and equitable as between the parties.
The Trial Judge’s Findings
Having referred to Rosati and accepted the principles expressed there as relevant to the present case, her Honour found:
28.The business here is an asset that both parties have historically run together. It has been their livelihood. It is a source of income that has sustained them and their family over many years. There was no evidence to suggest a sale of this asset in the short to medium term. The husband will have a debt to the wife but I am not satisfied that he runs the risk of having to sell the business to achieve this. I am unsure of how the Div 7A loan would be dealt with in the future and at what amount.
29.I accept the unchallenged evidence of Ms [J] that it would be undesirable in a financial sense for the loan to be forgiven. This was a proposition agreed to by Ms [L]. The Court is reluctant to adopt any value which is based on the loans being forgiven at the present time. This leaves the Court with a variety of possible values that although certain today are attended with much uncertainty about quantification in the future.
30.What I do know is that the husband will retain the business and ultimately he will be responsible for the management of this Div 7A issue. It is likely to be an impost on him although the amount of the future impost is something that is presently hard to predict. There is no useful evidence about how that liability will be managed. It is hoped that there will be legislative relief such that the present prediction of payments will be ameliorated.
31.I am not satisfied that it is appropriate to quantify the amount at this stage. However I will take into account, pursuant to s 75(2) of the Act, that the husband is likely to bear the payments, over time, of the Div 7A loan.
Error of Law? - Liabilities And “Net Value”
There is no doubt that senior counsel for the husband is correct in asserting that the practice of the court – derived through a large number of Full Court authorities over the life of the Act – is to apply the provisions of s 79(4)[7] to “the property of the parties or either of them” arrived at by identifying that property (and superannuation interests), valuing it (and the “amount” of any superannuation interests) and deducting from the total “value” arrived at, the liabilities of the parties or either of them.[8]
[7] Assuming, as was the case here, that the requirements of s 79(2) have been met.
[8]See, for example, Prince and Prince (1984) FLC 91-501 at 79,076, where it was described per Evatt CJ as “the usual practice” and the citations thereof.
That practice (or “rule”) has been criticised by at least one respected commentator, Dr Dickey, as being without a legislative basis; indeed, it is argued that the terms of s 79 can be read “as inimical to this rule”.[9] Dr Dickey contends that:
…the proper rule concerning the treatment of liabilities in property proceedings is quite different from the current rule, notwithstanding its similarities. On this interpretation, in proceedings for an alteration of property interests there is no rule that the court must deduct liabilities unless these fall into one of the exceptional categories. Instead, in property cases it is simply a matter of discretion how the court treats liabilities.[10]
[9]Anthony Dickey QC, ‘A Question of Priorities: Wives or Unsecured Creditors?’ (1992) 6 AJFL 229. The rule is justified in respect of secured liabilities because the court must take the property of the parties as it finds it – see Ascot Investments v Harper (1981) 148 CLR 337; Dickey (above), p 231.
[10] Dickey (above), at p 232, (emphasis in original).
The reference to “exceptional categories” is a reference to the authorities establishing the well-settled proposition that:
…the court may properly decide not to take into account – or alternatively discount the value of – a liability in certain circumstances. It may decide to ignore or discount a liability if it is vague or uncertain, or if it is unlikely to be enforced, or if it was unreasonably incurred [noting that] [t]here may perhaps be other exceptional cases as well.[11]
[11]Dickey (above), at p 230, citing Af Petersens and Af Petersens (1981) FLC 91-095 at 76,669; Prince (above) at 79,076-7 and Reynolds and Reynolds (1985) FLC 91-632, at 80,110.
Mr Hooper’s reference to the liability as “contingent” and the argument that the husband can, ultimately, control the manner in which dividends are declared and thus the tax incurred, has echoes of an argument as to the liability being “vague or uncertain”. So, too, does Mr Hooper’s specific reliance upon Rosati before her Honour.
Mr Dowding’s contention that her Honour erred in law by failing to deduct the calculated tax liability so as to arrive at a value of the “net property”, and the specific terms of grounds 1(a) and (f), necessitate answering a question narrower than, but related to, the question raised by Dr Dickey earlier referred to; both the ground and the argument suggest that a trial judge must deduct a liability of the type under discussion and the failure to do so and, in lieu, having regard to that liability by reference to s 79(4)(e), is each an error of law.
In his written outline of argument before this Court, Mr Dowding argues that the principles emerging from cases where liabilities are vague, uncertain, unlikely to be enforced and the like, have no application to the present case: “the debtor is related not to the parties but rather [is] the Taxation Commissioner and consistent with cases such as Baldwin v Baldwin (2010) FCAFC [sic] such liabilities ought to be allowed.”[12] With all respect to counsel, we do not consider that case assists the argument. The issue in that case was whether the trial judge was correct to ignore altogether an amount of tax already crystallised and owing by the husband.
[12]Appellant’s written outline of argument, 29 September 2015, at paragraph 19; Baldwin & Baldwin [2010] FamCAFC 227.
Of more potential assistance to Mr Dowding’s argument is the decision of the Full Court in Campbell v Kuskey,[13] a decision not referred to by either counsel. In that case, the Court was invited to find error by reason, relevantly, of the trial judge’s failure to reduce the net assets otherwise determined by an amount of about $86,000 “related to and arising out of a proposal by their accountants to avoid a potential assessment by the Income Tax Commissioner of a far larger liability, under s 108 of [the ITA Act]”. The trial judge found there “was no guarantee that the Taxation Commissioner will actually make the assessment and his Honour therefore took the matter into account under s 75(2) rather than adjusting the net assets of the parties”.[14]
[13] (1998) FLC 92-795, per Baker, Lindenmayer, Maxwell JJ.
[14] Campbell (above), at 84,912.
Noting that Campbell involves provisions of the ITA Act different to those which pertained before her Honour, it nevertheless has factual similarities with the present case as can be seen in the following passage from the reasons of the Full Court:
There are a number of difficulties with the above passage in his Honour’s reasons for judgment. The first is that it was the case of both parties at trial that the parties be ordered to implement the substance of the scheme suggested by [the two reporting accountants]. As such, had his Honour adopted what was in effect the joint submissions of the parties and made the requisite orders, this uncertainty [as to the amount of taxation owing] would have been removed.
Secondly, it is somewhat difficult to apprehend exactly what adjustment the trial Judge actually made in respect of the husband's potential s 108 liability pursuant to s 75(2). His Honour refers to the adjustment as being both a “minor adjustment” and a “significant allowance” in the husband’s favour. Furthermore, the evidence before the trial Judge was that, taking into account the husband's indemnity of the wife, the husband faced a maximum possible taxation liability of $193,724 if the Commissioner of Taxation invoked s 108 in respect of their loan accounts and not the $86,000 to which his Honour referred. The $86,000 would represent the reduced taxation liability if, and only if, the parties adopted the course proposed by their accountants.[15]
[15] Campbell (above), at 84,924.
In light of those factual similarities, what was said by the Full Court in respect of the questions which the Court there confronted has some importance for the present case. The Court said for example:
In addition, it is inappropriate in most cases to use s 75(2) as a means of bringing to account in a general way a liability, or potential liability, which has not otherwise been brought to account as a liability when determining the overall net pool of assets. The reason for this is that by so doing, a trial Judge may produce a result that works an injustice as against one party or the other. For example, in the circumstances of this case, his Honour gave the husband the benefit of an adjustment pursuant to s 75(2) of somewhat less than $86,328. If the husband had then entered into the scheme suggested by the accountants he would have accrued a taxation liability of $86,328 and would therefore be at a disadvantage. If however, the Commissioner of Taxation failed to deem the loan accounts to be dividends under s 108 the husband will receive the s 75(2) adjustment in his favour as a windfall benefit. This would work an injustice to the wife.[16]
[16] Campbell (above), at 84,924 (emphasis added).
Earlier, the Court said:
In our opinion, in most cases it would not be appropriate for trial judges to treat a contingent taxation liability in this fashion. As a general rule trial Judges should make a finding, on the balance of probabilities, as to whether or not such a liability exists, and if so in what amount. If it be found that such a liability exists, the Court should take it into account when calculating the net amount available for distribution between the parties, but in an appropriate case discounting the amount of such liability if circumstances warrant, for example, through uncertainty as to the time for payment.
…
Although it was conceded by Mr Mater that it may, in an appropriate case, be proper for any problem which litigants face under the provisions of s 108 of the [ITA Act] to be considered by reference to s 75(2), in most cases, any such probable difficulty must be faced at the same time as the assets and liabilities of the parties are identified and evaluated, and prior to any division thereof.
It has been said many times in the authorities, see for example Pastrikos and Pastrikos (1980) FLC 90-897 and Ferraro and Ferraro (1993) FLC 92-335, that a trial Judge has the clear obligation and responsibility to identify the assets and liabilities of the parties before considering and making the necessary findings as to the respective contributions which the parties have made to them. Once that exercise has been carried out, a trial Judge may then give consideration to such of the s 75(2) factors as are relevant to the facts of a particular case.[17]
[17] Campbell (above), at 84,917–8 (emphasis added).
As can be seen, some of the statements in that case might perhaps suggest that there is indeed a “rule” that the court must deduct liabilities unless the case falls into “one of the exceptional categories”. However, while the Court in Campbell expressed itself in terms of there being a “general rule” as to the manner in which a relevant liability might be treated, it is qualified in each case by reference to its application in “most cases”.
In our view, nothing said by the Full Court suggests that the rule has the force of a binding rule of law the failure to comply with which constitutes, of itself, error. Nor do we consider that any such binding rule of law emerges from any other authority as the following authorities spanning more than 20 years illustrate.
In Prince,[18] while it was said that “[i]n accordance with the usual practice” the valuation of the property to be divided between the parties “would be done by deducting the value of outstanding mortgages, debts and other liabilities”, the Chief Justice went on to say:
The assessment of debts and liabilities is not necessarily arrived at by a strictly mathematical or accountancy approach in all cases. While some liabilities are charges upon the property which can be accurately assessed at a certain date, others are at large, or have not been precisely determined, e.g. tax liabilities (Kelly and Kelly (No. 2) (1981) FLC 91-108 p. 76,801). In some cases the amount of the liability can only be estimated generally (Albany (supra), p. 75,717). The Court can make an allowance for a particular liability if appropriate to do so. In some cases there are sufficient uncertainties as to the alleged liability to lead the Court to disregard it entirely or partly (e.g. a loan from a parent of the party not likely to be enforced; Af Petersens (supra); Quirk (1983) unreported). In other cases, the Court may take the view that because of the circumstances surrounding the incurring of the liability it ought in justice and equity to be wholly or partly disregarded in determining the appropriate order to make under sec. 79 as between the parties to the marriage. Such a result could be reached where a spouse had incurred a liability in deliberate or reckless disregard of the other party’s potential entitlement under sec. 79 (Kimber and Kimber (1981) FLC 91-085 ; Kowaliw and Kowaliw (1981) FLC 91-092 ; Antmann and Antmann (1980) FLC 90-908; Af Petersens (supra)). Complex issues can arise in regard to liabilities to third parties (see, e.g. Pockran and Crewes; Pockran (1983) FLC 91-311).
Of course, the Court cannot ignore the fact that there is or may be a liability; the effect is simply that it does not consider that the other spouse should be called upon to in effect “contribute” to the liability by having that spouse’s fair share in the parties’ property reduced by virtue of its existence. The effect may be that the party who has incurred the liability will be left to meet it out of whatever funds remain to that party after satisfying the property order made under sec. 79 (Af Petersens (supra)).[19]
[18]Prince (above), at 79,076.
[19] Prince (above), per Evatt CJ at 79,076–7.
In Rowell and Rowell,[20] McCall J said that “[t]he Family Court has always taken into account liabilities, not only liabilities which are certain or reasonably established but even those liabilities which are contingent and which have to be established”[21] before deciding that the trial judge erred in disregarding the relevant liability.
[20] (1989) FLC 92-026.
[21] Rowell (above), at 77,392 (emphasis added), with Barblett DCJ and Baker J agreeing.
The first of the passages earlier quoted from Prince was referred to by the Full Court in Re Bailey and Bailey (Executrix of the Estate of Bailey).[22] No statement by that Court 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 the process of being determined”.[23]
[22] (1990) FLC 92-117, per Barblett DCJ, Baker & McCall JJ.
[23] Bailey (above), at 77,774 (emphasis added).
In Biltoft and Biltoft,[24] the Full Court recognised the “general rule” and its longstanding applicability and referred to the “well recognised exceptions” to which we have earlier referred in quoting from Dr Dickey. The Court recognised, in addition, that the general rule “is not absolute” and “is not prescribed by statute” and that the circumstances of the particular case can permissibly lead to the conclusion that “the trial judge was not obliged … to determine the quantum of [the relevant] debt and thus the net value of the property of the parties”.[25]
[24] (1995) FLC 92-614.
[25] Biltoft (above), at 82-129.
In Chorn and Hopkins,[26] the Full Court recognised that a decision as to whether “both parties should bear responsibility” for taxation debts of one party to the marriage was to be decided by reference to what was just and equitable.
[26] (2004) FLC 93-204, at [71].
In Noetel and Quealey,[27] (a case dealing with potential capital gains tax) the husband had, on advice, deliberately not declared dividends in a company controlled by him (in lieu receiving a salary). Tax would be payable when a dividend was declared but it could not be predicted when that would be, the evidence only going so far as to say that it would happen “at some point”. The Full Court held:
We are satisfied that the course adopted by the trial Judge of disregarding the potential future tax liability of the husband was open to his Honour in the circumstances of this case particularly as there was no certainty such tax would be incurred by the husband withdrawing funds by way of dividend ... The trial Judge was, on the evidence before him, entitled to accept the submissions made on behalf of the wife that this potential or contingent liability of the husband should be disregarded as a liability for the purposes of establishing the pool of assets to be divided between the parties…[28]
[27] (2005) FLC 93-230.
[28] Noetel (above), at [122].
It is in our view important to reiterate and emphasise what was said in Biltoft above: 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 that any such “rule” has the effect of a binding rule of law.[29] 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.
[29]As to which see, Norbis and Norbis (1984) FLC 91-543 and the discussion in Hoffman & Hoffman (2014) 51 Fam LR 568, at [21]-[31].
The usual practice or “rule” sits comfortably and conformably within that rubric – in many cases, perhaps almost all, liabilities will be deducted from the “gross” value of the 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.[30] Liabilities that are vague, uncertain, unlikely to be enforced and the like might be treated differently because those circumstances might, in the circumstances of the 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 consideration of the justice and equity of the particular case.
[30]As “a debt to be shared” between the parties “as part of the vicissitudes of the economic life of the parties”: DJM v JLM (1998) FLC 92-816, at 85,261 per Baker, Kay, Morgan JJ.
We conclude, therefore, that:
· the failure of the trial judge to include the calculated taxation liability as a liability to be deducted so as to arrive at the value of the parties’ property is not, of itself, an error of law; and
· it was within discretion for her Honour to treat the liability as a matter to be considered by reference to s 79(4)(e).
The next question is whether her Honour’s discretion miscarried in treating the calculated taxation liability in the manner in which she did.
Error In the Exercise of Discretion?
The Treatment of the Calculated Tax Liability
A broad overview of the manner in which the calculated taxation liability arises has been given earlier in these reasons.
Given the uncontroversial fact that neither party suggests that the relevant loans should be forgiven immediately, a consequential fact of great significance emerges: the calculated taxation (whatever be the correct quantum) is not, and will not be, payable in that sum either immediately or in the future. None of the sums represents that which fixes, and renders due, a taxation liability, namely an assessment. Each, albeit with their differing assumptions, calculate an aggregate amount of tax based on the aggregated totals of the Division 7A loans outstanding at the date of trial and assume that each of the loans will be repaid within their seven-year terms by the declaration of dividends to effect repayment/s.
We accept as correct the submission on behalf of the wife that, while the ITA Act demands repayment of Division 7A loans within, relevantly, seven years, it is not the loans which create the taxation liability. That liability arises when the corporation declares dividends so as to make repayments upon the loans. Although the three relevant “non-forgiven” calculations of the taxation liability involve different assumptions, common to all three is an assumption that dividends will be declared in the seven taxation years relevant to each loan so as to repay the loan within that period. It is the declaration of dividends in those years so as to repay the loan that gives rise to the taxation liability which, in turn, gives rise to each of the calculations forming the aggregate.
Mr Hooper submits, again in our view correctly, that while the loan must be repaid within seven years, it does not necessarily follow that dividends will be declared in order to do so as is assumed within the relevant calculations. No evidence of the husband (or otherwise) suggests that this will necessarily occur when, as the orders contemplate, he assumes control of the relevant corporations. The evidence of Ms L given in cross-examination was to the effect that, when account is taken of the manner in which transactions between the trust and B Pty Ltd have been conducted since 2009, the tax paid is about $100,000 per year when repayments are made entirely by the declaration of dividends:
HOOPER, MR: … is it fair to say that the cost of deferral of repaying these loans or deferring it over a period is approximately $40,000? - - -Correct. Yes.
Thank you. And at the – in a – for the past few years has the business carried an annual cost in respect of these division 7A loans? - - - Yes. So since 2009 the business has been meeting its obligations under division 7A and paying those loans accordingly.
And at what cost? - - - At 47 cents in the dollar.
But in terms of the expense for the business. Is it around the 100,000 a year or 80,000 a year or - - - ? - - - Yes. Sure. Look. The repayments currently in the last financial year to the division 7A pool was over 400,000.
But some of that goes around in a bit of a circle, doesn’t it? - - - It does. Yes.
So how much goes out of the circle? - - - 235,000 in the last financial year being the difference between the repayments that, on book entry, should have been made to these loans in that year versus what the trust actually paid on its behalf. The difference is what the shareholders receive as deem dividend and pay 47 cents in the dollar on.
…
… So you’ve said 237,000-odd but the parties then pay tax on that of 47 cents in the dollar? - - - They have a – they frank dividend and they pay the top-up tax to 47 cents in the dollar.
And the company pays the frank? - - - Yes.
So collectively the group … has an external cost of about $100,000 a year that they’ve been meeting for the past few years? - - - Yes.
And they will have to meet in the future? - - - Yes.
To pay this loan off? - - - Yes.[31]
[31] Trial transcript, 2 December 2014, p 9-10.
Mr Hooper’s submissions on behalf of the wife both to her Honour and to this Court, make the point that this cost pertains in that manner only for so long as dividends are used to pay the loans thereby incurring the consequent taxation liability. Both before her Honour and before this Court, Mr Hooper gave examples of alternatives to the declaring of dividends so as to meet loan obligations. Each of those examples derives from the evidence or the provisions of the ITA Act. None are fanciful, inherently unlikely, or contrary to any evidence before her Honour as to what will or might occur in respect of the control or activities of the corporations. The cross-examination of Ms L concluded with this exchange:
HOOPER, MR: … Ma’am, the tax liability, that arises, does it not, not because the parties have a loan account between company and trust but because there’s an undistributed profit in the company? Is that it? - - - Yes. The – sort of. The undistributed profit in the company is the difference between what should have been paid against those loans and what actually was. So in an ordinary sense, if you had a loan in a company and a trust was physically making repayments those loans would be reducing. If you have a loan in a company where it’s a book entry, there is [sic] no payments being made, you have a gap. That gap is then distributed to the shareholders where they pay top-up tax.
And essentially, these figures we’re talking about is the top-up tax? - - - Yes. Because they are franked dividends that they receive so they pay.
So if the loans were repaid, we have a company sitting there with undistributed profit that tax is payable on as and when it distributes? - - - Yes. The difference - - -
As it – when it includes a dividend? - - - Yes. It could be.[32]
[32] Trial transcript, 2 December 2014, p 13.
It should be accepted, as the Court in Campbell points out in the passage quoted earlier, that dealing with a liability by reference to s 79(4)(e) has the potential to effect injustice. Equally however, requiring the wife here to share in a liability calculated in an amount certain (which is the effect of deducting it in the manner contended for by the husband) when no such liability is incurred immediately in any calculated sum, nor will be in any such sum, also creates the significant potential for injustice to the wife. As Nygh J once remarked, “a debt due does not diminish the property of the parties until it is paid or execution is levied”.[33]
[33] Af Petersens (above), at 76,669.
Furthermore, as Mr Dowding conceded before us, the postulated calculations of the tax payable take no account of the discount that should be applied to the present value of a future sum. Further, none of the calculations contain any discount for any contingencies whether because loans may be repaid by other means such as the transfer of real property or by reason of other such decisions that might be taken to reduce future taxation in respect of the repayment of the loans.
There are uncertainties and the potential for injustice if any of the calculated sums are deducted from the total value of the property just as there are uncertainties and the potential for injustice if the calculated liabilities (with the characteristics just described) are taken up as a matter relevant to s 79(4)(e). Her Honour decided that the latter course was the more just and equitable means of dealing with those uncertainties. In doing so, her Honour:
·was cognizant of the fact that the party who takes control of the trust (i.e. the husband) “will take on historical Div 7A compliance issues” (at [19]);
·correctly appreciated that the relevant inter-company loans would not be forgiven and, thus, an amount of Division 7A tax would neither crystallise or become immediately payable (at [22]);
·found that no other factor such as the sale of the business or the risk of the husband being unable to meet any award to the wife was likely to provoke the crystallisation of the taxation debt and consequent need for immediate payment (at [28]);
·was “unsure … how the Div 7A loan would be dealt with in the future and at what amount” (at [28]);
·was aware that given that the loans should not be forgiven, the court was left “with a variety of possible values that although certain today are attended with much uncertainty about quantification in the future” (at [29]);
·found that the husband will “retain the business and ultimately he will be responsible for the management of this Div 7A issue” (at [30]);
·found that the Division 7A taxation liability is ultimately “likely to be an impost on [the husband] although the amount of the future impost is something that is presently hard to predict” (at [30]);
·stated “There is no useful evidence about how that liability will be managed” (at [30]);
·stated “I am not satisfied that it is appropriate to quantify the amount at this stage” (at [31]); and
·“[took] into account” the fact that the husband “is likely to bear the payments, over time, of the Div 7A loan” was “take[n] into account” by her Honour “pursuant to s 75(2) of the Act” (at [31]).
While expressed in different terms, it is plain that her Honour accepted the arguments on behalf of the wife earlier outlined.
In our view it has not been shown that, in deciding to treat the calculated taxation liability as a matter to be considered pursuant to s 79(4)(e), her Honour failed to take account of any relevant consideration, took account of irrelevant considerations or otherwise erred in the exercise of her discretion.
Nor do we consider that her Honour made any material error of fact, although in that respect we should refer to what her Honour said at [31] of the reasons. In the context of the findings just enumerated, her Honour said at [30], “[i]t is hoped that there will be legislative relief such that the present prediction of payments will be ameliorated”. When earlier setting out (at [23]) the amounts of the calculated taxation liability, her Honour also used the expression “legislative amendment”. Senior counsel for the husband contended before us, correctly, that there was no evidence of any mooted legislative amendment. However, as we said to counsel at the time, upon a reading of the reasons as a whole and the record more broadly, it seems to us plain that, despite the, with respect, infelicitous language, her Honour was referring in a shorthand way to the fact that the assumptions upon which some of Ms L’s calculations were based took account of the possibility of the Commissioner permitting retrospective amendment of assessments so as to permit paid interest on the Division 7A loan to be claimed as a deduction.[34] Her Honour did not err in referring to that evidence and, otherwise, nothing relevant to the substance of the appeal arises from her Honour’s use of that term.
[34] Mr Dowding effectively almost concedes as much – Appeal transcript, 26 October 2015, p 19.
We can see no error in the exercise of her Honour’s discretion to treat the calculated taxation liability as a matter to be taken up in the s 79(4)(e) assessment.
The Trial Judge’s s 79(4)(e) Assessment Including the Potential Taxation Liability
Having refused to deduct the calculated potential taxation impost as a liability in order to arrive at a net value of the parties’ property, that matter fell to be considered among a number of other matters enumerated within s 75(2) relevant to the determination of property orders assessed as just and equitable.
Her Honour assessed contributions to the determined “total net assets and superannuation” of $4,922,309 in the proportions 57.5 per cent to the husband and 42.5 per cent to the wife. Thus, in approximate dollar terms the disparity between the parties by reference to contributions was assessed to be about three-quarters of a million dollars.
In dealing with the relevant s 75(2) factors, her Honour found:
·“[T]he wife’s longevity in the workforce is less than that of the husband. He will have the ability to purchase the wife’s share and continue to work thereafter to solidify his own financial position” (at [61]);
·“The husband[’s] … qualifications and experience … will equip him to continue to operate the business in to the future” (at [62]);
·The husband is “54 years old and in reasonable health” (at [62]);
·“The [tourism] business has been a family owned and operated business. It will not be as easy for the wife to find a like niche in another business” (at [65]);
·“It was suggested by Mr Dowding SC that something along the lines of operating a bed and breakfast enterprise may suit her. She is adept at dealing with customers and marketing the present [tourism] business. Even if this is the case, her income earning capacity into the future will be far less than that of the husband given her age of 67 years. She does not have experience in the open market” (at [65]);
·The wife “will have some money to invest and accommodation which exceeds her needs” (at [65]); and
·“The husband will have to work to repay the wife who at least initially will have considerable capital. Although Mr Dowding SC suggested he would have difficulty in accessing money to pay the wife I am not as pessimistic about his position. He has the ability to rearrange his finances to maximise his available credit. I also accept that he paid an outstanding debt to his father of his own volition when it was not required” (at [66]).
However, to be balanced with those matters, her Honour also found:
· “I accept that [the husband], over time, will be responsible for the taxation impost of Div 7A of the ITA Act. However, the business has been able to manage this payment to date. It is a matter I take into account in assessing any adjustment that may otherwise be made in the wife’s favour” (at [67]); and
· “…that the husband was of assistance in the upbringing of the wife’s three children from her earlier marriage. Their father did not pay child support and the husband made both financial and non-financial contributions to their welfare. In accordance with Robb and Robb (1995) FLC 92-555, I take into account the assistance he gave. The husband had no legal obligation to support the children but he took on this role. It is common ground that he was of assistance both financially and practically for the very long period of their relationship” (at [68]).
Her Honour concluded:
69.Given the length of this marriage and the manner in which the parties have operated their finances I consider there should be some adjustment in the wife’s favour. This takes into account, in particular, her age and income earning capacity.
70.The adjustment to the wife will be 5 per cent
Expressed in dollar terms, her Honour’s “adjustment” equates to about $250,000 and sees the $750,000 disparity between the parties arising from her Honour’s assessment of contributions reduced by half a million dollars.
Is There Error in the Trial Judge’s s 79(4)(e) Assessment?
The Husband’s Arguments as to Income Disparity and Capacity to Earn
Her Honour found that the husband is 54 years of age and is “in reasonable health”[35] and, later, that the 67-year-old wife’s “income earning capacity into the future will be far less than that of the husband given her age”.[36] The husband’s written outline of argument contends that “the finding that ‘it will not be easy for the wife to find a like niche in another business’ [at [65]] is against the extensive evidence of the Wife as to her skills and experience”.[37] That argument pertains to a separate ground of appeal.[38] We reject that contention. When regard is had to the wife’s age, the length of the relationship and the wife’s role within the business during the relationship, we consider that finding was well open to her Honour.
[35] Reasons, [62].
[36] Reasons, [65].
[37] Husband’s written outline of argument, 29 September 2015, at paragraph 24.
[38] Ground 2(b).
The husband’s written outline additionally contends, again in respect of a separate ground of appeal,[39] that:
30.Critically, with respect to the findings of income disparity, [her Honour] failed to account for the inclusion in the pool of a goodwill component for the business of $810,000 which is calculated on the future maintainable earnings … of the business …
31.Thus, the Wife as part of her property settlement retains part of the future earnings of the business retained by the husband. The husband contends that [her Honour] erred by making an adjustment in favour of the wife for income disparity, without accounting for the retention by the husband of $810,000 of ‘future income’ and in doing so, effectively ‘double counted’ the income.
[39] Ground 2(c).
It is of course correct that the value of the tourism business was assessed on the basis of “future maintainable earnings”. That assessment is based on projections and estimates deriving from past earnings/profits for the purpose of arriving at a present value of an asset in which both parties will share in the determined proportions. Because the wife is sharing in goodwill based on future maintainable earnings, it can be said that she is, to that extent, sharing in the future earnings of the business, noting of course that the actual future earnings are, when earned, retained by the husband or as he might direct. Consequently, there is, to an extent, some danger that a comparison of the parties’ likely future income, and capacity to earn income, as part of the s 79(4)(e) assessment might contain an element of “double counting”.
However, in our view, any potential for double counting is more than met by other factors and considerations inherent in the calculation of future maintainable earnings from which, ultimately, the calculation of goodwill derives. For example, Ms J notes that “the trust also pays certain items of expenditure on behalf of the parties, which are included as expenses of the business. This includes food, donations, non-business repairs and maintenance, rent, travel and accommodation and superannuation”.[40] The total amounts of the expenses paid on behalf of both parties were $143,912 in 2013 and $107,034 in 2014.[41] In order to arrive at the assessment of future maintainable earnings, Ms J added back expenses of $86,436 “as they are not business related”[42] and then added in a “commercial salary package” for each of the husband and the wife. The latter is based upon calculations which assume the husband is employed as “a [tradesman] working approximately 70 days (2 days per week for 8 months of the year) per annum, and [that] the Wife undertook a full time marketing and administrative role”. Those assumptions produce salary packages (i.e. salary plus superannuation) of $23,000 pa for the husband and $80,000 for the wife.[43]
[40] Report Ms J, Appendix E, [E.16].
[41] Ibid.
[42]Report Ms J, Appendix G [4]. The $107,034 figure was used less $35,000 presumably because, unlike the other expenses, it was a business expense.
[43]Report Ms J, Appendix G [5]. The calculation of future maintainable earnings is also found at Appendix G.
As a result of the orders for settlement of property, the wife will no longer receive any expenses, drawings or salary contained within the calculation of future maintainable earnings. The husband will have the capacity to direct the payment of any expenses, drawings or salary for himself in the future. The amount taken up in the calculation of future maintainable earnings (a net expense of the business of about $17,000) by Ms J is not reflective of the sums actually received by the husband (and the wife) from the business historically. Those historical sums received into the hands of the parties are significantly greater than the amount forming part of the assumptions and figures upon which the assessment of future maintainable earnings is based. The husband will have sole effective control over what the actual future sums paid to him will be.
No argument advanced on behalf of the wife persuades us of any material impact of the notional asserted double counting which, we note, is the subject neither of any submitted calculation, nor submitted amount. In addition, s 75(2) requires, relevantly, not merely a comparison of the parties’ likely future respective incomes but also the respective capacity for future gainful employment and a comparison of the parties’ current and prospective “financial resources”. The latter expression might embrace financial benefits other than what might, strictly, be “income” (for example for taxation purposes).
Her Honour was, in our view, correct to view the parties’ respective positions in respect of income, capacity to earn income and potential future financial resources in the manner in which she did. The husband’s argument should be rejected.
Is the Trial Judge’s Assessment “Plainly Unjust” or “Plainly Wrong”?
We are unanimous in our disquiet as to her Honour’s adjustment in favour of the wife by reference to s 79(4)(e), and its quantum. However, whether that disquiet sounds in discretionary error is a different question and depends upon a conclusion other than a shared view that a different result was more just and equitable.
Eighty years ago, in a passage consistently referred to and applied ever since, the High Court outlined succinctly the principles which govern an appellate court’s interference with discretionary judgments. After setting out specific instances of discretionary error, Dixon, Evatt and McTiernan JJ said:
…It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the course of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.[44]
[44] House v The King (1936) 55 CLR 499, at 505.
However, that statement was earlier qualified by their Honours. The qualification is important:
…It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion.[45]
[45] Ibid, at 504–5.
The exercise of discretion is central to many decisions made by courts exercising power pursuant to the Act and, in respect of actions for settlement of property, the discretion is, as the High Court has said, “very wide”. In such cases, the caveat referred to in House has been emphasised constantly. Familiar examples from later High Court decisions include:
·“an appellate court must be well satisfied that the primary judge was plainly wrong, his decision being no proper exercise of his judicial discretion”;[46]
·“an appellate court should be slow to overturn a primary judge's discretionary decision on grounds which only involve conflicting assessments of matters of weight”;[47]
·the “mere fact” that an appellate court would themselves “have made a more liberal provision for the wife was no justification for substituting their own exercise of discretion for that of the primary judge”;[48]
·“It cannot be too strongly said that a mere difference of opinion ... does not indicate error on the part of the trial judge”;[49]
·An appellate court does not have “authority to disturb a decision under appeal simply because the appellate judges, faced with the same material, would have reached a conclusion different from that under appeal”;[50]
·“what is ‘plainly wrong’ will vary in the eyes of different beholders … [t]he reference to “plainly wrong” is designed to remind the appellate court of the need to approach an appeal with much caution in a case where an error of principle cannot be clearly identified”;[51] and
·“In the absence of exclusion of relevant considerations or the admission of irrelevant considerations an appellate tribunal should not set aside an order made in the exercise of a judicial discretion ... unless the failure to give adequate weight to relevant considerations really amounts to a failure to exercise the discretion actually entrusted to the court”.[52]
[46]Gronow v Gronow (1979) 144 CLR 513, at 519 per Stephen J – see also, Aickin J’s statement to similar effect, at 538.
[47] Ibid, at 520.
[48] Mallet v Mallet (1984) 156 CLR 605, at 615
[49] Sharman v Evans (1977) 138 CLR 563, per Barwick CJ at 565.
[50] CDJ v VAJ (1998) 197 CLR 172, at [186].
[51] Ibid.
[52] Lovell v Lovell (1950) 81 CLR 513, at 519 (cited by Gibbs CJ in Mallett, above).
The relevant question to be asked and answered is, can we, without more, conclude that her Honour’s s 79(4)(e) adjustment is “plainly unjust” or “plainly wrong” or that there has been a “failure to exercise the discretion actually entrusted” to her Honour.
If we are to conclude that her Honour’s decision is “plainly wrong” or “falling beyond the bounds of a reasonable exercise of discretion” because of something other than a shared “second opinion”, we should be able to answer an additional question: “plainly wrong or unjust by reference to what?”. That additional question is difficult enough in any discretionary environment. It is made all the more difficult in respect of the s 79(4) discretion (and the satisfaction of the relevant criterion made more onerous) because here, as is almost always the case, the contention does not have a reference point. It is not contended that her Honour’s result offends any “guidelines” (as that expression in used in Norbis) and, as is ubiquitous, neither is a range of results said to be comparable to this case’s circumstances offered as a reference point.
We are unable to persuade ourselves that, without more, her Honour’s assessment is “plainly unjust” or “plainly wrong”. Our disquiet is, then, without more, insufficient to justify interference with her Honour’s assessment.
Is There Error Otherwise in the Trial Judge’s s 79(4)(e) Assessment?
The Full Court said in Clauson and Clauson[53] that “in many of these cases reference only to percentages can be misleading; the reality is to be found in the actual figures”.[54] In examining those figures – that is, the dollar value of any assessment – the relevant s 75(2) matters must be taken into account so as to consider “what alteration, if any, should be made to the conclusions already reached on the basis of the parties’ contributions to their property”.[55] Nowhere in her reasons can her Honour be seen to assess s 79(4)(e) by reference to the conclusions already reached by her Honour with respect to the parties’ contributions.
[53] (1995) FLC 92-595.
[54] Clauson (above), at 81,909.
[55]Clauson (above), at 81,907. The latter point is also made in Ferraro & Ferraro (1993) FLC 92-335, at 79,579.
The parties’ orders each contemplated (and her Honour ordered) that the assessed settlement of property would be met by the wife receiving unencumbered real estate in Town P, modest assets in her own name and her superannuation interest, together with a cash sum and superannuation split. Obviously enough, the latter was dependent upon the assessment of the wife’s entitlement as ultimately decided. Her Honour’s contributions assessment would see the wife obtaining property and superannuation totalling about $2.1 million, comprising real property (value $1.35 million) and personal assets (about $44,000 net of her credit card liability); her superannuation interest (about $144,500) and an additional sum comprising cash; and a superannuation split totalling about $550,000. (As was accepted before her Honour, given the wife’s age, she can take any superannuation now as cash).
We have, at [58] of these reasons, quoted what her Honour said in respect of the prospective taxation liability at [67] of the reasons as part of her s 79(4)(e) assessment. That paragraph of the reasons is her Honour’s only discussion of the prospective taxation liability. The husband’s future sole control of the corporations and trust and the balance of her Honour’s orders as to indemnity and the like, render any future taxation liability his responsibility alone.
Her Honour refers to the “impost” on the husband “over time” of the taxation liability and refers also to the fact that “the business has been able to manage this payment to date”. No dollar figures are attributed to either at that point (although earlier in the reasons, her Honour set out the calculations performed by Ms L). The nature and extent of the taxation “impost” was important.
The evidence before her Honour did not allow her to arrive at a present-day value of the future taxation. Conversely, it was clear that none of the calculated sums would be payable immediately or in the future in any such sum. But, her Honour did have figures, albeit qualified significantly, which posited the calculations of the future impost at dollar figures that represented between about nine per cent and 16 per cent of the total value of the property and superannuation interests. So, too, her Honour had evidence that, historically, the entities had been meeting their Division 7A obligations at an annual “cost” of approximately $100,000 per year. Taken together, the evidence is a long way short of providing the “actual figures” of which the Court spoke in Clauson but, equally, it nevertheless provided some indication of the potential dollar effect of this important consideration.
In light of her Honour’s determination to not take up the potential liabilities in the sum contended for, the consideration of those issues was a highly relevant matter in the s 79(4)(e) assessment, notwithstanding acceptance of the submissions on behalf of the wife that the management of this continuing “impost” will be within the husband’s sole control.
With respect, we cannot see that her Honour’s reasons pay due regard to these significant issues. Her Honour’s reasons do not reveal either a consideration of the impact in real terms of the mooted contributions assessment or any attempt to give numerical meaning either to the “impost” or the “management” of the taxation to which she refers at [67] of the reasons.
Taken together, we are persuaded that her Honour has failed to consider relevant considerations in her s 79(4)(e) assessment and that error in the exercise of her Honour’s discretion is established as a consequence.
Outcome of the Appeal
The appeal is allowed.
Remitter or Re-Determination?
The parties have each submitted that, in the event we found error, we should re-determine the application for settlement of property for ourselves rather than remit the matter for a new trial.
The submissions are made in an understandable attempt to save the parties the further very significant expense and emotional turmoil inherent in a new trial. As this Court has said on many occasions, and we repeat here, we too are anxious to avoid each if that is at all possible.
However, any decision in that respect must be guided, like all decisions, by principle. It has been authoritatively decided that if this Court is to re-determine for itself the substantive application, it must do so by reference to the facts and circumstances as they exist at the date of the hearing of the appeal.[56] That creates a number of difficulties. First, the inordinate pressure on resources in this Court frequently renders a significant time gap between the hearing of the trial and the hearing of the appeal. During that time, much might change; the factual foundations for the trial might differ from those at the time of the hearing of the appeal. Secondly, this Court of three cannot readily sit as a trial court so as to decide contests of fact and credibility.
[56] Allesch v Maunz (2000) 203 CLR 172.
With those issues in mind, counsel for each of the parties make it clear in their respective oral submissions that neither seeks to adduce further or other evidence of circumstances existing at the date of the hearing of the appeal. An important consequence is that we can treat the record as constituting the facts upon which our determination can be made including, again importantly, the interests of the parties or either of them in property and superannuation and the value and amount of those interests.
As has been seen, Mr Hooper did not pursue the wife’s cross-appeal but, in his written outline of argument, indicated that he sought to pursue the points raised in respect of it in the event that we found “merit in the husband’s Appeal and then [intend] to re-exercise discretion rather than remit to trial Judge”.[57] Brief arguments in respect of her Honour’s assessment of contributions then follow. In his written argument in reply, Mr Dowding says that, because the cross-appeal was not pursued as such, he “will likely make oral submissions when the position of the wife becomes clearer”.
[57] Wife’s written outline of argument, 21 October 2015, at paragraph 56 and ff.
The hearing before us focussed, understandably, on the “Division 7A issue” which was plainly the central issue in the appeal. At the conclusion of argument in respect of the appeal, neither party made submissions of any substance in respect of any re-determination by us. While we are, of course, concerned to bring finality to this litigation, we are unable to remove our concerns that each of the parties may not have been given a full or proper opportunity to make such submissions as are properly open on the record. The parties, of course, could have engaged fully with that issue in their respective written submissions ahead of the appeal, but we acknowledge readily that there are real difficulties in doing so in respect of a re-determination ahead of knowing the decision – and importantly the reasons for decision – of this Court and ahead of knowing whether there is agreement as to the factual parameters within which those arguments will be made.
We will, then, give each of the parties the opportunity to make further submissions in respect of our re-determination of the substantive application for property settlement.
It goes without saying that, in light of the matters emerging from Allesch earlier referred to, and the parties’ sensible agreement to not seek to adduce further or other evidence in that respect, the submissions must be confined to the evidence revealed by the record. Further, lest it not be clear from our reasons concluding that her Honour was correct in treating the prospective taxation as a matter referable to s 79(4)(e), we make it clear here that, on our re-determination, we will treat it in like manner.
The first available occasion on which it is possible for this Bench to sit subsequent to delivery of these reasons is in Sydney on 25 May 2016. We will adjourn the appeal for further submissions on the re-determination on that date. Other listings will be re-arranged so as to permit this matter to be listed to not before 11.30 am EST (9.30 am WST) with the parties and counsel to appear via videolink. In order to facilitate the most expeditious hearing of those submissions, we will require the parties to file a written outline of submissions ahead of the hearing. Absent persuasive argument to the contrary, we can see no reason why oral submissions should take any more than a maximum of 30 minutes for each party.
Orders will be made accordingly.
Costs
As is our custom, submissions were received from the parties in respect of the costs of the appeal at the end of the hearing.
In light of our prospective re-determination of the substantive application for property settlement and the further submissions in that respect, we consider it appropriate to receive in addition such further submissions as the parties might seek to make in respect of the costs of the appeal.
Our determination of costs will await any further submissions made contemporaneously with the further submissions on the re-determination.
I certify that the preceding ninety-seven (97) paragraphs are a true copy of the reasons for judgment of the Honourable Full Court (Thackray, Ainslie-Wallace & Murphy JJ) delivered on 4 May 2016.
Associate:
Date: 4 May 2016
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