Unfortunately, many separations end in hostile disputes over money. A common situation when trying to resolve property matters is when one partner makes a considerable dent in the family finances by squandering assets or racking up additional debt.
A bitter ex-partner may go on a spending spree, ignorant of the consequences. Alternatively, he or she may have been reckless during the relationship either through risky business ventures, gambling or other addictions.
Whether the wastage has occurred before or after the relationship ends, the potential for a fair split of the assets after separation may seem flawed. Fortunately, the Family Court is empowered to use discretion to achieve a just outcome. These discretionary processes have traditionally included the concept of ‘add-backs’.
This article explains how a family law financial settlement may be dealt with when one party independently deals with property to the detriment of the other.
Dealing with property matters generally
It is first useful to outline the steps a Court takes to determine how property should be divided. The process involves:
- identifying the assets, liabilities and financial resources of the parties;
- assessing the parties’ respective financial and non-financial contributions;
- evaluating the parties’ future needs taking into account their relative earning capacities, state of health and the need of the primary carer of children to provide a suitable home;
- in all of the circumstances, making orders that are ‘just and equitable’.
Notional property and add-backs
The Court’s approach is to consider the parties’ circumstances with the objective of providing an outcome that is fair and just. The court has considerable power and can alter property interests to achieve this objective.
Adding back property means including into the pool of assets a notional value for property or funds that have been prematurely disposed of for the benefit of one party or a third party.
The ‘notional’ property will form part of the asset pool from which a division of property is made. The purpose is to bring back the value of assets that would otherwise have been available to both parties, had the other party not caused the asset to be depleted.
The starting point is that assets accrued or losses sustained (whether jointly or individually) during the course of the marriage or relationship should be shared between the parties, although not necessarily, equally. In exceptional circumstances it is appropriate for the Court to deviate from this principle in the following circumstances:
- losses incurred as a result of a party’s deliberate efforts to diminish or deplete the value of assets, such as a premature distribution of assets;
- losses sustained by a party’s reckless, negligent or wanton conduct;
- where a party has used joint funds to pay for his or her own legal costs.
Premature disposition of assets
Occasionally, a party deliberately sets out to diminish the matrimonial assets, making them unavailable for distribution. This may occur by selling or transferring property to a third party or making extravagant or lavish gifts.
To justify an add-back, the Court will need to assess the reasonableness of the expenditure in light of the surrounding circumstances, including an assessment of the overall asset pool and the amount spent. For example, in one case, the wife assisted her adult daughter by gifting $15,000 as a deposit to purchase a property. The Court considered that it was not unusual for parents to assist their children and, given the magnitude of the asset pool, it was unreasonable for that amount to be added back.
In another case the husband sold his taxi licence and vehicle, which had been used to operate a business throughout the course of the marriage. He benefited from the proceeds and the Court determined that the value of the funds received should form part of the asset pool for distribution between the parties on the basis that the wife had a legitimate interest in the taxi business.
Reckless conduct and waste
Money wasted on individual pursuits or gambling addictions during or after the relationship may be added back to the asset pool. The conduct of the spendthrift party will be relevant in determining such cases and the Court plays a discretionary role in deciding whether or not the losses should be borne individually or jointly. Considerations may include whether the person has an underlying illness, his or her attempts to obtain help and whether the non-spending party had any knowledge of the spendthrift’s actions. Generally, the non-spending party will not be able to recover the losses of the gambling party if they also enjoyed some of the ‘winnings’ during the relationship.
Wasted money cases are not just limited to partner gambling but can also include failed business ventures. Again it is important whether the venture was hidden from the other party and whether the investment as reckless, negligent or wantonly.
Adding back legal costs
Parties are required to fund their own legal costs and outstanding legal fees do not constitute a liability forming part of the asset pool.
Money taken from a joint account by one party to pay his or her legal fees may be subject to an add-back. This however is a matter for discretion and will depend on the particular circumstances – if the funds existed at the time of separation and both parties have an interest in them, then it is likely they would be added back. Conversely, if funds used to pay legal costs were sourced from a party’s own efforts or provided as a gift or loan post-separation, then it is unlikely these will be added back to the pool of assets.
- Separating couples should share financial wins and losses during the relationship unless those losses result from one party’s negligence, recklessness or intentional conduct to reduce or deplete matrimonial assets.
- Each case will turn on its merits and the entire circumstances of the expenditure is considered when assessing its reasonableness.
- Funds existing at the time of separation and subsequently used for reasonably necessary living expenses are not added back to the asset pool.
- Clear evidence is required of assets and expenditure before and after separation and separating parties should take care to record assets and liabilities at the time of separation and thereafter.
High Court cases such as Stanford v Stanford  HCA 52 and Bevan v Bevan (2013) FLC 93-545 suggest that concepts of add-backs and notional property may have become outmoded and their application more the exception than the rule. Kowaliw & Kowaliw (1981) FLC 91-092 indicates that losses like gains should be shared during the relationship, unless the losses are incurred ‘recklessly, negligently or wantonly’ by one party.
There is no guarantee that a dissipated asset will be notionally ‘returned’ to the asset pool on a dollar for dollar basis. However, and as confirmed in subsequent cases, the Family Court has discretion to adjust property interests by considering a myriad of factors and on a just and equitable basis.
It is important to obtain good legal advice before or soon after you separate from your spouse or de facto partner. An experienced family lawyer can assist in preserving hard-earned assets, preventing wastage and maximising your chances of a fair property settlement.
If you or someone you know wants more information or needs help or advice, please contact us on 02 6201 7243 or email [email protected].