The Treatment of Property that is Gone!
August, 2009
One of the challenges that often arises between separating couples is the preservation of property.
Property has a wide definition, it is not limited to just real estate.
It is not uncommon (before or after separation) for a spouse to take property (i.e. take money out of a bank account, draw down special repayments of a mortgage, run a credit card to its limit, try and sell a house (in their name) or a car, take valuable collections or take pieces of art work, etc. Sometimes these events happen with the best intentions, but quite often not!
How to preserve property is a topic for another day. This article focuses on how a property settlement is determined when one spouse has independently taken property and the property is gone.
As set out in our June 2009 article 'The How to' of Property Settlement" the first step the Court takes is to identify and value the property. Therefore, where an item of property is gone the Court has had to come up with a creative way of assessing the "property pool" to minimise any injustice to the other spouse. This missing property is commonly described as "notional property" because it no longer exists and its inclusion in the asset pool is imaginary.
Over the last couple of decades case law has developed that now enables Courts to include notional property (by way of an "add-back") in the property pool as an asset that one party has already had the benefit of.
The 3 categories of add-backs
To date, the Court has identified 3 categories of cases where it is appropriate to notionally add-back into the parties' property pool assets that no longer exist.
1. where parties expended money on legal fees
The normal approach taken by the Court is to notionally "add back" into the property pool any matrimonial money already spent by the parties on legal fees. It should be noted that neither spouses' outstanding legal fees are included in the 'property pool' as a liability.
Recently, the Full Court determined that, in exercising its discretion to add-back notional property, it should have regard to the source of the funds spent on legal fees, in that:
- If the funds used to pay legal fees existed at separation and both parties have an interest in them, then such funds should be added back as a notional asset of the party who has had the benefit of them; or
- If the funds have been generated by a party post-separation from his or her own endeavours or a loan, they generally would not be added back as a notional asset or liability in the calculation of the net property of the parties. However, funds generated post-separation from assets or businesses that both parties had made significant contributions to or have legal entitlements in, may need to be looked at differently from other post-separation incomes, or acquisitions.
The treatment of funds used to pay legal costs ultimately remains a matter of the discretion of the Court.
2. where there has been a premature distribution of assets
In a leading case on "add-backs", the Court considered a situation where the Husband sold a taxi license and the taxi cab that he had operated as a business during the marriage and used the proceeds for his own benefit. In that case the Court said:
"... what occurred in this case ... was, in fact, a premature distribution of a proportion of the matrimonial assets. What the Husband did was distribute to himself an asset in which the Wife had a legitimate interest ... It seems to me that the Husband has had the benefit of that money. Had he retained, for example, the taxi license instead of selling it, that would have been brought into account as an item of property which would have been dealt with in the same way as the remaining items of property in this case. Accordingly, I am of the view that the correct way in which to deal with the Husband's receipt of those moneys is to bring them into the pool of assets on a notional basis and make a distribution accordingly."
3. where one of the spouses has undertaken reckless investments or deliberately set out to diminish the value of the property pool
Money wasted or spent by one spouse on their own pursuits such as, gambling, the purchase of extravagant gifts or lavish holidays should be added back into the pool of assets. The Court has clearly stated its position in such situations, saying:
"Financial losses incurred by the parties or either of them in the courts of the marriage whether such losses result from a joint or several (individual) liability, should be shared by them (although not necessarily equally) except when:
1. one of the parties has embarked upon a course of conduct designed to reduce or minimise the effective value or worth of the matrimonial assets; or
2. one of the parties has acted recklessly, negligently or wantonly with matrimonial assets, the overall effect of which has reduced of minimised their value."
summary
- Monies reasonably spent by a spouse in the conduct of their post-separation lives will not usually be added back into the property pool.
- The treatment of funds used to pay legal costs remains ultimately a matter for the discretion of the Court, who will have regard to the source of funds.
- Parties should maintain accurate records of the source utilised for the payment of legal fees as the Court can only make findings based on evidence.
- As far as possible, legal fees should be paid from post separation income. If fees are paid in this manner, then those monies should not be added back into the pool of property. That submission may not be available where that income is derived from a business or asset build up during the marriage.
- The best course is to get Specialist Family Law advice (ideally, prior to separation) on how to preserve property.
If you have any questions about this article or would like to make an appointment to discuss your personal circumstances please telephone us on 3221 4300 or email us at law@mlynch.com.au
Disclaimer
The information contained on this site is for general guidance only. No person should act or refrain from acting on the basis of such information. Appropriate professional advice should be sought based upon your particular circumstances because the application of laws and regulations undergo frequent changes. For further information, please do not hesitate to contact Michael Lynch Family Lawyers on law@mlynch.com.au.