A common misconception that I see regularly amongst family law clients is that once you have separated, you don’t have to explain or account for your post separation finances. Many clients mistakenly believe that only the assets which existed at separation are taken into account and that an examination of what occurred after separation is irrelevant. If only it was that simple.
In reality there is a lot of “accounting” that takes place after separation, but before a property settlement can be achieved. A property settlement takes into account all of the assets of the parties as at today, whenever today is. It is for this reason that, as a family lawyer, I (generally) advise clients to attend to their property matters sooner, rather than later. In my experience, leaving things can often make settlements messy and, on occasions, unduly complicated.
Disclosure is an important step which must be undertaken before negotiations can really take place. The exchange of bank statements (amongst other documents) allows parties to demonstrate that they have taken steps to minimise the disruption separation has on the family’s finances. It is an unfortunate reality that separation means parties now have two households to maintain, with the same amount of income that was previously applied to the one family home. This often leads to parties becoming frustrated at what they see as reckless spending on the part of their former spouse/partner.
Issues With Post Separation Spending
Post separation spending is a very contentious issue. For example at separation you have $15,000 in savings, perhaps sitting in a joint offset account reducing the interest payable on the home loan. Then your former partner/spouse withdraws $10,000 from the account. Do they have to pay it back into the pool? What if they use that money to pay bond, rent and purchase some basic furniture and effects? Another example might be; what about if they (the other party) sells a real property or business that is registered in their sole name and keep the profits after the loans associated with the asset are paid? What if they don’t pay out the debts associated with the asset at all? Do such things need to be accounted for in the property settlement? The answer isn’t always simple and, since the High Court decision of Stanford, the answer is even more uncertain than ever before.
The Court’s Perspective
Historically the family law courts have taken the view that if a party has taken steps to reduce the value of the property pool or they have acted recklessly with matrimonial assets, then the Court can take that behaviour into account and can reallocate the loss to the person who caused the loss. An example of this occurring is where Spouse A allows a person to live in a rental property without paying rent as opposed to tenanting the property with someone who can pay fair market rent for occupying the property.
Stanford added to the complexities of “add-backs” and “wastage” arguments – because that case changed the way that that we are required approach all family law property cases. Now the starting point for determining a family law property settlement is a consideration of whether it is just and equitable to alter the existing legal or equitable interests of the parties. From a legal point of view, if step one of the process is to consider the existing legal and equitable interests of the parties, how do you account for an asset which no longer exists? It follows (logically in my view) that if we don’t take into account the sale of an asset and its subsequent use by that person to the exclusion of the other spouse / partner, it is unfair to the person who has not sold or dissipated an asset that it not be accounted for in the property settlement.
Case law demonstrates that if a party applies money to general living expenses, it is not appropriate to notionally add back that sum into the property pool. If we return to the example above where the spouse removes $10,000 from the joint offset account, and that party applied those funds to paying rent on a new property (having left the former home), paying the ordinary expenses of food, cleaning supplies, electricity, fuel, insurance and the like, in my view it is highly unlikely that the Court would notionally add that sum of money back into the property pool. However if those funds were applied to pay legal fees, they are highly likely to be notionally added back into the pool. “Notionally added back” means the Court treat the asset as still existing when they calculate the property pool before it is divided between the parties and allocated to the person who had the benefit of it (i.e. used/disposed of it).
Decision On Add Backs
A Full Court decision of Talbot shows how the issue of add backs is still alive, and uncertain. In that case, the husband successfully appealed a decision which notionally added back into the matrimonial property pool some $252,251 which he had received shortly prior to separation. The husband had sourced those funds from the sale of a real property which he then used to purchase a business and meet his general living expenses after separation. In this case the wife argued that the net sale proceeds of the house amounted to a premature distribution of property to the husband and should be “notionally added back” into the property pool. The Trial judge agreed with her; however the Appeals Court did not, taking the view that the Court needed to look at how the money was spent by the husband before determining whether the money spent should be treated as though it still existed (that is, treated as an “add back”). In this case, whilst some of the money was applied to the purchase of the new business, evidence demonstrated clearly that the balance was applied to general living expenses such as food, health care and the like. Unfortunately the case was remitted for rehearing and, as at the date of preparing this article, the outcome is unknown.
In my view it is in all clients’ best interests to get legal advice as soon as practicable. Sometimes this means getting advice before you actually separate. Regardless, obtaining sound advice early on means that you can implement strategies which work in your short, mid and long term best interests. It also means that you understand what (if any) impact your decisions may have on your ultimate property settlement.
Knowing those consequences can make all the difference between an uneventful, cost effective settlement and protracted litigation.
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This article is for your information and interest only. It is not intended to be comprehensive, and it does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.