Australia: Family Law Accountants’ Update - Assessing contributions

Assessing contributions: global or asset-by-asset approaches

Determining how to divide the assets of a marriage or de facto relationship under the Family Law Act is typically a four-step process:

  1. Identification of the available net pool of property available to be divided;
  2. Determination of the contributions each party has made to that property pool;
  3. Evaluation of, among other things, the future needs and other available resources of the parties;
  4. The Court considers the justice and equity of any proposed order.

Each of these steps can entangle the parties and their advisors in webs of complexity. So for present purposes we will limit ourselves to one aspect that often arises in connection with the second step: the evaluation of contributions.

Clients will often want to distinguish the financial contributions they or their former partner have made to specific assets, particularly if the parties' asset portfolio is complex. Nevertheless, over the years the Family Court has expressed a definite preference for the assessment of contributions in most cases to proceed on a global, rather than an asset-by-asset basis.

Perhaps the clearest statement of this preference came from the 1986 High Court case of Norbis v Norbis (1986) 161 CLR 513. Significantly, the High Court considered that neither alternative was inherently more just or equitable than the other. For instance, Justices Wilson and Dawson noted that:

the legislation confers a discretion upon the court which, provided the required matters are taken into account, does not dictate the employment of any particular method in the formulation of an appropriate order for the alteration of property interests. The matters which are to be taken into account will sometimes require the division of the assets, or some of them, upon the basis of their individual values, but in other cases no more than an overall division will be required. In some cases either approach may be adopted in part or in whole.

Nevertheless, according to Chief Justice Mason and Justice Deane, although

it is natural to assess financial contributions reference to individual assets, it is also natural to assess the contribution of a spouse as homemaker and parent either by reference to the whole of the parties' property or to some part of that property. For ease of comparison and calculation it will be convenient in assessing the overall contributions of the parties at some stage to place the two types of contribution on the same basis, i.e. on a global or, alternatively, on an "asset-by-asset" basis. Which of the two approaches is the more convenient will depend on the circumstances of the particular case. However, there is much to be said for the view that in most cases the global approach is the more convenient [emphasis added].

So here's the rub: when assessing contributions, the Family Court is doing more than simply assessing the direct financial contributions of the parties. Particularly in longer relationships, the Court is also engaged in evaluating homemaker and parenting contributions, and since these are not generally able to be conveniently tied to a particular asset, they are uniquely suited to the global approach. So that we're comparing apples with apples, it therefore makes sense in cases where homemaker contributions will take on a significant role to also look at the direct and indirect financial contributions on a global basis.

So what about relationships where homemaker contributions are less significant?

In In the marriage of McMahon (1995) FLC 92-606, the Full Court of the Family Court noted that in their view

[t]he short duration of and the unhappy nature of the marriage, coupled with the parties' strict division of assets and their method of dealing with them lent itself to an asset-by-asset approach, particularly where they had separately identified another group of assets as joint.

Nevertheless, this doesn't amount to a fixed rule, as the recent case of Zagari & Habib [2010] FamCAFC 159 clearly shows.

This case was an appeal from a decision of a Federal Magistrate in which a global approach was applied, even though the facts were similar in many respects to McMahon. The husband said the marriage lasted three years, while the wife argued that it was less than two, and although both parties had made inadequate disclosure of their financial affairs, it was fairly clear that they had conducted their financial affairs somewhat separately. Nevertheless, the Federal Magistrate felt that it was more appropriate for her to adopt a global approach.

On appeal it was submitted that all of the criteria referred to by the Full Court in McMahon were met here, namely:

  • a short marriage;
  • separate finances; and
  • separate ventures.

According to the submissions of the wife (who had been seeking an asset-by-asset approach):

the parties had kept, and intended to keep, their finances separate during the marriage. Both parties engaged in investment activities, for example buying properties, and it was submitted that each were involved in different activities without reference to or input from the other party. The parties also neither opened a joint bank account nor acquired any joint assets during the marriage. On one occasion when the husband sought financial assistance from the wife, the parties were careful that this be at arm's length and it was clearly defined that the monies advanced by the wife were to be repaid.

Furthermore, there were apparently no significant home maker or parent contributions to be taken into account here, since:

  • there were no children of the marriage,
  • the wife variously studied and worked, and
  • the husband worked.

Nevertheless, the appeal judge noted that the Federal Magistrate had clearly considered which approach was to be adopted and concluded that due to findings she had made regarding the date of the parties' separation and generally regarding the parties' evidence, a global approach was more appropriate. Because the discretion available under the Family Law Act is so broad, the Federal Magistrate's decision did not constitute appealable error.

Helping client's with their disclosure obligations

One of the criticisms of both parties in Zagari & Habib referred to above, was that neither party had properly disclosed their financial affairs to the Court. So what are the obligations of a party to disclose these matters in Family Law proceedings?

In both the Family Court and the Federal Magistrates Court there are stringent rules applying to parties' obligations to fully and frankly disclose their financial position. Using the Family Law Rules as an example (note that Rule 24.03 of the Federal Magistrates Court Rules imposes similar obligations), Rule 13.04 provides that a party to a financial case must make full and frank disclosure of the party's financial circumstances, including:

  1. the party's earnings, including income that is paid or assigned to another party, person or legal entity;
  2. any vested or contingent interest in property;
  3. any vested or contingent interest in property owned by a legal entity that is fully or partially owned or controlled by a party;
  4. any income earned by a legal entity fully or partially owned or controlled by a party, including income that is paid or assigned to any other party, person or legal entity;
  5. the party's other financial resources;
  6. any trust:
    1. of which the party is the appointor or trustee;
    2. of which the party, the party's child, spouse or de facto spouse is an eligible beneficiary as to capital or income;
    3. of which a corporation is an eligible beneficiary as to capital or income if the party, or the party's child, spouse or de facto spouse is a shareholder or director of the corporation;
    4. over which the party has any direct or indirect power or control;
    5. of which the party has the direct or indirect power to remove or appoint a trustee;
    6. of which the party has the power (whether subject to the concurrence of another person or not) to amend the terms;
    7. of which the party has the power to disapprove a proposed amendment of the terms or the appointment or removal of a trustee; or
    8. over which a corporation has a power mentioned in any of subparagraphs (iv) to (vii), if the party, the party's child, spouse or de facto spouse is a director or shareholder of the corporation;
  1. any disposal of property (whether by sale, transfer, assignment or gift) made by the party, a legal entity mentioned in paragraph (c), a corporation or a trust mentioned in paragraph (f) that may affect, defeat or deplete a claim:
    1. in the 12 months immediately before the separation of the parties; or
    2. since the final separation of the parties; and
  1. liabilities and contingent liabilities.

This is a very comprehensive list, and is augmented by Rule 12.02, which provides for some specific documents that must be exchanged with the other party at least two days prior to the first court date.

All of this disclosure needs to be planned and carefully documented, particularly in cases where clients have extensive or complex asset portfolios. A well organised, informed approach to disclosure can assist clients not only in reducing their legal fees, but can fend off suspicions that vital information is being withheld. On the other hand, poorly organised, delayed and sloppy disclosure is always sure to ring alarm bells, both for the other party's lawyers and for the Court. And this can lead to disastrous outcomes for the non-disclosing client.

So what are the consequences of failing to adequately disclose?

In the 1993 case of Weir and Weir [1993] FLC 92-338, one of the leading cases dealing with non-disclosure, the Full Court of the Family Court noted that:

It seems to us that once it has been established that there has been a deliberate non-disclosure ... then the Court should not be unduly cautious about making findings in favour of the innocent party. To do otherwise might be thought to provide a charter for fraud in proceedings of this nature.

The threat of the Court not being 'unduly cautious' about accepting the other party's case is not an idle one. In another leading case (Black & Kellner (1992) FLC ¶92-287) then Chief Justice Alistair Nicholson expressed the following somewhat intimidating view of a non-disclosing party who complained of having his contributions assessed at a level of 6.3% when they probably fell within a range of 15-20%, and when he was pushing for a figure of 33%:

I would have been disposed to find that the husband was entitled to nothing, and certainly would not have interfered with a decision by his Honour dismissing the husband's claim entirely. Indeed it may well be that he was fortunate to get the award that he did.

Even if it is difficult to identify with precision the quantum of assets withheld from the disclosure process, it is generally not rocket science to identify that there has been a non-disclosure. Given the potentially disastrous consequences, it is always advisable that the disclosure requirements be honoured to the letter, and that any battle that is to take place relies on legal principle rather than stealth.

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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