Australia: Family Law Accountants’ Update - Assessing Initial Contributions

Readers of this newsletter will probably be aware that in dividing the property of a marriage between the parties, the Family Court generally follows a four-step approach.

In the first step, the Court seeks to establish the extent of the net property pool. The second step involves the Court assessing the contributions to those assets of each of the parties; the third step requires the Court to consider the matters set out in s 75(2) of the Act (often broadly, though inaccurately, described as assessing the parties' future needs); while the fourth step requires the Court to carefully examine the justice and equity of any proposed order.

For the purposes of this article, we will be focussing on a very specific issue that often arises in relation to the second step: namely, the fate of significant initial contributions to the relationship asset pool. There are two issues that tend to rise above other considerations when examining this problem, and these are timing and quantum.

Timing is important because there will be different consequences for the treatment of an initial contribution depending on the length of the relationship. All things being equal, we generally expect that in very short term relationships (say, less than about 5 years) the parties will take from the relationship what they brought in.

On the other hand, in very long term marriages (around 25 years plus) initial contributions take on much less significance. Why this should be so is a matter of considerable superstition, and will be dealt with in detail below. Having said this, the major headaches in this area largely arise in relationships of between five and 15 years' duration.

Quantum is important because the larger the initial contribution, generally the greater the impact it will have on future property settlements.

Clearly, there is an interaction effect between the two issues: a large initial contribution is more resilient to the passage of time; a small initial contribution will be less relevant sooner.

There has been considerable confusion over the years as to why an initial contribution might have less of an effect after a long relationship than after a short relationship. One argument that seems intuitively correct is that initial contributions are somehow eroded over time, presumably by the winds and rains of shared existence. Despite the superficial charms of this geologically inspired explanation, the Full Court of the Family Court has been very clear over the years that erosion plays no part in the matter. Another, less obviously flawed, but nevertheless incorrect view is that over time the initial contributions of one party can be presumed to be matched by the ongoing contributions of the other.

The actual solution to the conundrum lies in the fact that Family Law is administered by courts that follow an evidence-based path in applying that law to real factual situations. While the court can be said to take a somewhat fuzzy, broad brush approach to balancing claims derived from homemaker contributions, the establishment of contributions is nevertheless an evidence based process, and the court tends not to presume contributions, but requires hard evidence that they have actually been made.

Accordingly, while it is possible that over time the initial direct contributions of one party might be matched by contributions made by the other, there is no presumption that this is so in each and every case. Parties must actually prove their contribution cases (generally by the filing of affidavits), rather than relying on the court to assume that they have made those contributions. If an initial contribution is modest, and a long relationship ensues, it will plainly be easier to suggest that the contributions have evened out over time. However, if there has been a very substantial initial contribution by one party, there would need to be a very good reason to ignore that contribution, all other contributions being equal.

This is seen typically in cases where one party might bring into a relationship a substantially unencumbered parcel of real estate that appreciates in value over the course of time. The other party may well be able to suggest that they performed or paid for maintenance work to be carried out on that property; they might allege that they increased their homemaker contributions to enable their spouse to perform that work, or that they made other contributions to the relationship to balance things out. But they would need to point to some evidence, other than mere lapse of time, to justify less weight being placed on their spouse's initial contribution, particularly where that initial asset directly and substantially contributes to the increase in wealth of the parties by, for example, appreciating in value.

The correct position is well summarised in the following extract from the recent case of Norman & Norman [2010] FamCAFC 66 at paragraph 29:

As was said to counsel during the hearing of the appeal, we consider the reference to "offsetting" contributions, as with references to "erosion", to be unhelpful. The better approach is that to which this court referred in Pierce & Pierce (1999) FLC 92-844 at 85,881:

... it is not so much a matter of erosion of contribution but a question of what weight is to be attached, in all the circumstances, to the initial contribution. It is necessary to weigh the initial contributions by a party with all other relevant contributions of both the husband and the wife. In considering the weight to be attached to the initial contribution, in this case of the husband, regard must be had to the use made by the parties of that contribution. ...

This is clarified further in Williams & Williams [2007] FamCA 313 where the Full Court said at paragraph 26:

We think that there is force in the proposition that a reference to the value of an item as at the date of the commencement of cohabitation without reference to its value to the parties at the time it was realised or its value to the parties at the time of trial, if still intact, may not give adequate recognition to the importance of its contribution to the pool of assets ultimately available for distribution towards the parties.

Thus where the pool of assets available for distribution between the parties consists of say an investment portfolio or a block of land or a painting that has risen significantly in value as a result of market forces, it is appropriate to give recognition to its value at the time of hearing or the time it was realised, rather than simply pay attention to its initial value at the time of commencement of cohabitation. But in so doing it is equally as important to give recognition to the myriad of other contributions that each of the parties has made during the course of their relationship.

For more information on how the court will interpret the contributions of each party in a family law dispute, or how your clients' assets may be divided in the event of a split, speak to one of our experienced family law practitioners on ph: 02 9635 6422.

Assessing Initial Contributions: It's all in the evidence

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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