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Financial loss during a relationship – case note

In the recent Family Court case of Anaya & Anaya [2019] FCCA 1048, the principle in the long established case of Kowaliw and Kowaliw was re-affirmed that:

As a statement of general principle, I am firmly of the view that financial losses incurred by parties or either of them in the course of a marriage whether such losses result from a joint or several liability, should be shared by them (although not necessarily equally) except in the following circumstances:

1. Where one of the parties has embarked upon a course of conduct designed to reduce or minimise the effective value or worth of matrimonial assets; or
2. Where one of the parties has acted recklessly, negligently or wantonly with matrimonial assets, the overall effect of which has reduced or minimise d their value.

In Anaya, the husband argued that investment funds (including an inheritance of $1,000,000) ‘lost’ by the wife should be ‘added back’ to the asset pool and treated as an advance on her property settlement. The wife argued that the losses were a matter to be taken into account generally and to have them ‘added back’ to the asset pool would likely result in hardship to her.

His Honour held that at the time the wife decided to enter into the high risk investment she was likely to have been depressed and angry at the husband about their separation but that her decision to do so was reckless and fell within the second category of Kowaliw. The wife’s awareness was exacerbated by the timing of her decisions – after Family Court proceedings had commenced and she had legal representation.

I often have clients ask me to seek redress for losses ‘caused’ by their former partner, for example, the reduced value of their share portfolio or investment in a now worthless time-share resort. For the majority, my answer is no, that these losses were incurred in the course of the marriage but for some however, the answer is ‘yes’, for example, money lost due to gambling.

It is important that each significant financial ‘win’ and ‘loss’ experienced during the marriage is objectively assessed in the context of its surrounding circumstances. An emotional assessment may be misguided and result in unrealistic expectations by the aggrieved client.

I am available to assist with this task – by offering an objective and realistic assessment of your client’s complex property settlements.

Please contact me on [email protected] or 9804 7991 if you would like to discuss your client’s situation.

Or have your client contact me to arrange a free initial 15 minute telephone consultation.

The four step process to family law property settlements

When you apply for a property settlement, the Court uses a ‘4-step’ process to determine the application as follows:

Step 1: Identification and valuation of assets

This step involves identifying and valuing the assets, liabilities and financial resources of the parties.

Property includes all possible interests of the parties whenever and however acquired. It includes both property presently possessed and property expected (for example an inheritance.)  It may also include assets and liabilities disposed of in the past.

Property and financial resources are recognised separately. Property can be sold or transferred today, whereas a financial resource (for example superannuation or a damages claim) cannot be separated from a person.

Property must be identified at the date of settlement, not at the date of separation. When identifying assets full and frank disclosure should be demonstrated.

This is a simple step in many cases, but for some cases, particularly those involving businesses, the valuation exercise can be quite complex and require the assistance of experts.

How are liabilities treated in a family law property settlement?

Liabilities are given similar importance to the property of both parties. The net asset pool is commonly determined by calculating total assets and then subtracting total liabilities as follows:

Net Asset Pool = Total Assets – Total Liabilities

Liabilities are deducted from assets regardless of which party is responsible for incurring or paying them. The net asset pool is then shared between the parties on the basis of the contribution of each party and consideration of the additional factors/‘future needs’.

Liabilities to deduct from the asset pool include:

• mortgages,
• credit card debts,
• tax liabilities,
• overdrafts and
• personal loans.

Debts are usually shared, unless one party has wasted assets of the marriage (for example, gambling or efforts to deliberately decrease the asset pool). These debts are not deducted from assets as liabilities normally would be.

Debt might not be included where a family member has lent money. The reason for excluding this type of debt is that there is often a possibility that this debt will not be collected. This type of debt may arise in various situations and may be owed to people other than family members.

Full and frank disclosure must be demonstrated when identifying and declaring assets. Otherwise, the Court has the option of favoring the other party due to dishonesty/lack of credibility on the part of the non-disclosing party.

Click here to calculate your asset pool using the Matthews Family Law Asset Pool Calculator.

Step 2: Contributions of each party

The contributions made by each party to a marriage fall into the following categories:

• financial contributions,
• non-financial contributions,
• contributions to the care and welfare of the family and
• contributions in the capacity of home-maker or parent.

In many cases, particularly where there has been a long relationship, the determination will be that the parties have contributed equally. The contribution of the parties may be viewed as something other than equal, where:–

• the relationship is short and there are no children, here the main concern will be about direct financial made by each of the parties;
• a partner has brought considerably more assets to the relationship than the other party;
• one of the parties contributed substantially via an inheritance, gift or personal injury settlement;
• a partner has special skills or has made outstanding efforts which have brought substantial wealth into the relationship; or
• a partner behaved in a deliberate or reckless manner resulting in a loss to the parties.

Assets are usually split half-half and then any necessary adjustments are made, taking into account all other factors including contributions.

If there has been violence in the relationship, this can affect the division of property. This is due to the possibility that the effects of violence may have limited the ability of a party to contribute.

Financial contributions

Financial contributions are any monetary contributions made to the marriage either:

• before the marriage,
• during the marriage or
• after separation.

The financial contributions made by each party make up the asset pool.

Career assets are also financial contributions. They include contributions such as income, long-service leave and redundancy payment.

Notional assets are included as financial contributions. Notional property can be items such as legal costs and money spent individual pursuits such as gambling.

Financial contributions made before the marriage

Sometimes a party brings property to the marriage. Deciding how this property is shared depends on how the property is used and how the other spouse contributes to the property. The interest of the spouse bringing the property may be eroded by the passage of time and by the other party’s contribution to it and the asset will then be added to the asset pool.

Financial contributions made during the marriage

Financial contributions can be made towards purchasing, maintaining and improving property. They can be made either directly by a spouse or on behalf of the spouse.

A lottery win would be a financial contribution made during the marriage if the ticket is purchased during the marriage using joint funds. The winnings would be a ‘joint contribution’ and would be shared as such.

The beneficiary spouse of an inheritance may be allocated the assets of the estate, in circumstances where there is a substantial quantity of assets in the asset pool. Otherwise the inheritance is divided. The timing of the inheritance will be an important consideration.

A compensation payout is usually seen to have had both spouses contributing. The entitlement of the injured spouse is based on suffering and the entitlement of the other spouse is based on the contribution of caring for the injured spouse.

Financial contributions after separation

There are two methods of considering entitlements to property acquired after separation.

The first method considers how the property is used and how the other spouse contributes to the property. The interest of the spouse owning the property may be balanced by the other party’s contribution to it and the asset will then be added to the asset pool.

The second method looks at contributions after separation made by the non-owner spouse towards all matters concerning both parties.

Case: Husband wins $5M in lottery after separation

In Farmer and Bramley, the husband acquired a winning lottery ticket 20 months after separation. The prize money was $5,000,000. Until the win, the parties had no property after a relationship of 12 years. There was one child of the marriage who lived with the mother. The wife was entitled to $750,000 as she cared for the child after the separation and also cared for the husband during the marriage, nursing him through a heroin addiction.

Career assets in a family law property settlement

Sometimes one spouse obtains a valuable qualification whilst accumulating minimal property, meanwhile the other spouse takes additional responsibility for financial and family support. In these circumstances, the career assets of the qualification earning spouse are brought into the asset pool as a financial resource. The spouse without the qualification can be awarded payments for the extra responsibilities accepted and carried out.

Career assets can be difficult to value, as different qualifications take different amounts of time and effort to complete and may or may not lead to employment.

A partnership interest in a business is property, however such interests are often considered to be personal and not transferable to a third party such as a spouse.

Prospective long service leave and redundancy payment entitlements will only be regarded as property if payments have been received.

If a spouse is a company director, shares owned by the director in this company will form part of the asset pool, however assets owned by the company will not. Any shares held in public or private companies can be included as property in the asset pool.

Notional assets in a family law property settlement

Financial resources may include legal costs paid, property disposed of for the benefit of only one of the parties, expected inheritances and gifts from parents. These financial resources are calculated and allocated by the court or according to agreement between the parties.

Income is usually not included as a financial asset and is not considered property for the purposes of a property settlement. However, it can be taken into account as an additional factor. A party with little in terms of financial assets may be awarded more property assets to compensate, this is in the interests of ensuring a just and equitable result.

Money earned after separation is usually not ‘added back’ into the asset pool. However there are some exceptions, for instance if the funds arise from selling a business asset after separation where the business operated during the course of the marriage, then the funds may be included in the asset pool.

Case: Taxi license sold after separation

Usually funds accumulated post-separation are not added back into the asset pool, however, in some cases they can be. In the case of Townsend and Townsend, the money earned from a selling a taxi licence was included in the asset pool. The reason for including the money was that the licence had value during the marriage and therefore the other party was entitled to a proportion of the proceeds from the sale.

Legal costs are usually considered notional property and are included in the asset pool. It is necessary though for these funds to have been earned prior to separation.

Certain types of expenditure are considered to be notional property and will be ‘added back’ into the asset pool. These types of expenditure include gambling, behavior contributing to addictions and extravagant gifts. If add back occurs then the reasonableness of the expenditure is taken into account and the assets added to the asset pool must be of a reasonable amount.

Non-financial contributions

Non-financial contributions to life as a couple are an important and significant consideration for a property settlement.

Non-financial contributions made to the marriage are contributions involving services where a professional or tradesman might have been employed had the party not performed the work.

Examples include maintenance and renovations of the family home, cars or any other asset owned by the couple.

Maintenance and renovations

Non-financial contributions may increase the value of property or save on maintenance costs. They are included as they effectively increase the value of the property or funds available. Factors considered are the quantity of work undertaken, the worth of the work and the party completing the work.

Contribution to the care and welfare of the family

Domestic and family welfare contributions have received increasing recognition and importance. Since 1983, these contributions have gained the status of a separately considered contribution.

Where one party works outside the home to support the family and the other takes care of the family contributions to the care and welfare of the family are an important consideration.

Examples of contributions to the care and welfare of the family are:

• caring for children,
• school drop-off and pick up,
• taking children to sport and other activities and
• responsibilities as a home-maker.

Case: Wife placed in domestic servitude granted 75% of assets

A man who married his sixth wife lost 75% of his assets, including his house and his business

Step 3: Assessment of additional factors (s 75(2) factors)

The third step involves assessing the future needs of each party. Factors to consider include:

• the age and state of health of each party,
• the income, property and financial resources of each party and their physical and mental capacity for achieving gainful employment,
• responsibility for a child of the marriage who is less than18 years old,
• commitments necessary for a party to support themselves or to support any other person that the party has a duty towards,
• eligibility for a pension, allowance or benefit,
• the standard of living which is reasonable in the circumstances,
• whether the relationship has affected the earning capacity of a party and to what extent,
• if either party is living with someone else, the financial circumstances arising from cohabitating with another person,
• the terms of any Orders made in relation to the property of the parties and
• the terms of any binding financial agreement.

Re-partnering is a commonly assessed factor. The financial situation resulting from the new relationship may influence the property settlement.

If a property settlement application proceeds to Court, the Court may place a great deal of weight on these factors or it can choose to decide they have a minimal impact. The Court will apply an adjustment in favour of one or other of the parties to compensate for any difference in their future circumstances.

Step 4: Just and equitable requirement

Unless the property settlement is fair, the arrangements should not be finalized. This requirement is the fourth step in the four step process of determining a property distribution as provided by the case Hickey and Hickey. What is just and equitable depends on the circumstances of the particular case.

What is just and equitable in family law proceedings?

After assessing steps 1, 2 and 3, the Court must decide whether the final result is fair for each of the parties. To achieve this aim it is important for both parties to know their obligations and entitlements. What is just and equitable depends on the circumstances of the particular case.

Case: Husband receives $1M out of a $66M property pool

An example of the just and equitable considerations being applied can be seen in the case of Cook v Langford. Here, the total property pool was $66 million, however, the Court found that the husband was only entitled to $1 million based on his overall position and contribution to the assets. This was considered as neither unjust nor inequitable.

Deciding what is just and equitable requires:

• considering the effects of the findings of the first two steps (specifically Step 1: What assets are in the asset pool? Step 2: What contribution did each party make?);
• considering the effects of the determinations regarding the contributions of the party which are influenced by the s 75(2) additional factors (specifically factors such as the age and stage of health of each party, responsibility each party to care for a child, the income, property and financial resources of each party); and
• deciding what order is just and equitable taking into account all the circumstances of the parties.

This final step recognizes that calculation of percentages or an equal distribution is not necessarily the fairest outcome. For instance, one party may have an amount in superannuation that is equal to the property in the asset pool. If this party receives the superannuation and the other party receives the property in the asset pool the distribution is equal. However if the superannuation cannot be used for several years, the outcome is unfair. It is for the judge to decide what is just and equitable, with the main concern being the present and future needs of both parties.

Click here to apply sample percentage divisions of your asset pool using the Byron Bay Family Law & Mediation Specialists Asset Pool Calculator.