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29 May 2008 Family Law Update

By Greg Parker, Partner

This was a case of a long marriage, the parties having met in 1978 and married in 1986. They separated in 2003, after a marriage of 17 years, and divorced 2 years later. There were 4 children of the marriage, aged 19, 17, 16 and 13 at the time of trial. The younger 3 were still at school and all were living with the wife.

Both parties had legal qualifications, although only the husband had pursued a career in law. By the time of hearing, the husband was the managing partner of a major Perth law firm. The wife had worked part-time in different legal capacities, while also performing the role of primary homemaker and parent. At the time of hearing, there was a significant disparity in the parties’ earnings, with the wife earning approximately $22,000 per annum and the husband’s partnership income exceeding $550,000 per annum, and as much as $870,000 per annum a few years previously.

Notwithstanding the husband’s high income, the parties’ ages (the husband was 50 and the wife 46 at the time of hearing) and the length of the parties’ relationship, the matrimonial assets were modest. They comprised:

  • Equity in the former matrimonial home of $485,000;
  • The wife’s Honda motor vehicle, which she sold postseparation for $17,000. Even though the wife used those sale proceeds to pay her legal costs, the trial judge did not add them back to the pool of assets;
  • The parties’ holiday home worth approximately $146,000;
  • The husband’s interest in his legal partnership. The trial judge did not accept the expert evidence of the wife’s valuer, but accepted the husband’s submission that his partnership interest had a value of $348,000, with a corresponding liability of $195,000. The wife’s expert had valued the husband’s partnership interest at $942,000 on the basis of a “capitalised super profits” valuation. The trial judge rejected that valuation on the basis that it was based on a notional salary for the husband, which the trial judge did not accept as accurate. Ultimately, the trial judge accepted the husband’s evidence that the value of his partnership interest was represented by the balance of the husband’s current account and equity fund, less a loan;
  • Income tax and CGT liabilities exceeding $196,000;
  • The husband’s car and boat, subject to a loan;
  • The husband’s share portfolio worth approximately $15,000;
  • Small amounts of superannuation held by each party (namely $19,000 for the wife and $54,000 for the husband).

In addition, the trial judge added back to the pool of assets $72,000 spent by the husband on his new partner’s property from the husband’s post-separation income.

Before the trial judge, the parties had agreed that their respective financial and non-financial contributions during the marriage and after separation were equal. It did not fall to the trial judge, therefore, to assess contributions, but only to consider section 75(2) or future needs factors. Not surprisingly, the trial judge found that those factors weighed heavily in the wife’s favour, especially given the significant disparity in the parties’ earning capacities and that the wife would have the ongoing care of the children. The trial judge ordered that the wife retain:

  • The former matrimonial home, with the husband to pay out the mortgage of $274,000 over “several years”;
  • Her car, subject to its loan;
  • The furniture & contents at the former matrimonial home and her jewellery;
  • Her superannuation; and
  • Combined spouse maintenance, child support and adult child maintenance totalling $100,000 per annum, in addition to which the husband was ordered to pay the children’s private school fees and related expenses.

The husband was left with:

  • His partnership interest, with a net value of $153,000, but which he could not sell;
  • His car;
  • A boat, subject to its loan;
  • A share portfolio worth approximately $15,000;
  • A small amount of superannuation;
  • Net tax debts of $49,000;
  • A liability to pay the wife’s mortgage of $274,000; and
  • Ongoing obligations for spouse maintenance, child support and adult child maintenance exceeding $100,000 per annum, once school fees and related expenses were taken into account.

The effect of the trial judge’s orders was that the wife was to receive 93% of the net asset pool, as calculated by the trial judge, including the $72,000 spent by the husband on his new partner’s property and added back into the pool. The trial judge found that it was just and equitable to award a 43% adjustment to the wife for future needs factors on the basis of the small size of the asset pool. Had the asset pool been larger, it is likely that the wife would have received a smaller overall percentage of the net assets.

The husband appealed, raising the following main grounds:

  1. That the $17,000 proceeds of sale of the wife’s car, which she spent on her legal costs, ought to have been added back and treated as an asset already distributed to the wife. The Full Court found that, although there is authority for the proposition that money that existed at separation which was subsequently spent on legal costs ought to be added back into the pool of assets, the decision not to do so in relation to the whole of either party’s legal costs was within the trial judge’s wide discretion and should not, therefore, be overturned.
  2. That the $72,000 spent by the husband on his new partner’s property from his post-separation income should not have been added back. The Full Court agreed, finding that the husband was “free to do with his income as he pleased”, including in furthering his new relationship, so long as he was at the same time properly meeting his obligations towards his wife and children, which he was. The Full Court found that there was no obligation on the husband to accumulate assets after separation. Further the husband was entitled to spend his post-separation income on appropriate accommodation for himself, especially given that he was also paying the wife’s mortgage. The Full Court deducted the $72,000 from the asset pool.
  3. That the trial judge ought to have treated as a relevant liability a quarterly income tax instalment of the husband’s of $88,000, which related to tax payable at the time the trial was being conducted. The trial judge was not prepared to regard that post-separation tax as a joint liability. The Full Court disagreed and found that there was no reason for that liability to be excluded from the asset pool, particularly as it was tax on income that had been used, at least in part, to provide support for the wife and children post-separation.
  4. By removing the added back $72,000 and deducting the $88,000 tax liability, the Full Court reduced the asset pool by $160,000, from $870,000 to $710,000. The effect of the trial judge’s orders would, therefore, have been to leave the wife with approximately 115% of the reduced net asset pool, or about $100,000 more in assets than there were assets available for distribution. One of the husband’s grounds of appeal was that it was not open to the court to make an order which would leave one party with in excess of 100% of the net assets. The Full Court agreed.

The Full Court ultimately awarded the wife approximately 98% of the asset pool. Like the trial judge, the Full Court found that it was appropriate to award a significant future needs adjustment given the small size of the asset pool and the other relevant future needs factors. The Full Court varied the trial judge’s orders by requiring the husband to discharge only $150,000 of the wife’s mortgage, leaving her responsible for the balance of that mortgage of $124,000. The Full Court did not disturb the trial judge’s orders for combined spouse maintenance, child support and adult child maintenance of $100,000 per annum.

The trial judge had ordered the husband to pay one half of the wife’s costs, on the basis that the trial judge’s orders very closely resembled an offer that the wife had been prepared to accept. The trial judge thought that the husband should have settled on that basis and so ordered him to pay some of the wife’s costs.

The Full Court’s orders were more favourable to the husband than the offer. In addition, the Full Court did not find that the parties’ financial circumstances warranted a costs order in either party’s favour. That is, when considering the parties’ respective financial circumstances, the Full Court weighed up the vast disparity in the parties’ earnings against the court ordered obligations on the husband to continue to support the wife and children and to reduce the wife’s mortgage by $150,000. Ultimately, the Full Court set aside the trial judge’s costs order and left each party to pay their own legal costs.

For further information please contact:

Greg Parker, Partner  |  Phone: +61 2 9233 5544  |  Email: gpp@swaab.com.au

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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