Calculating interest on judgment debts in Family Law Proceedings – it is simple
When the Court makes an order for the payment of money by one party to another, unless otherwise ordered, interest is payable on that sum of money. The Court has the discretion to set the rate of interest and the date on which interest is to accrue. If the order does not specify the interest rate or the date on which interest is payable, then interest is calculated in accordance with section 117B of the Family Law Act 1975 (Cth) and r.17.03 of the Family Law Rules 2004 (Cth).1 The rate of interest for the Federal Circuit Court Rules 2001 (Cth) is the same as the Family Law Rules.2
These provisions shed light on three aspects of the calculation of interest:
- Interest is payable from the date on which the order is made or the date on which the order takes effect, whichever is later;
- Interest is calculated in six-month periods: 1 January to 30 June; and 1 July to 31 December; and
- The rate of interest is 6% above the cash rate last published by the Reserve Bank of Australia prior to the commencement of the six-month period for which interest is being calculated.
What is not explicit in the provisions, however, is whether interest is compounded daily, weekly, monthly, annually, or at all. There is limited authority on whether in the absence of specificity in an order for a payment of money, interest should be calculated as simple interest or compound interest.
In W & H  FMCAfam 67, Baumann FM, as his Honour then was, was called upon to determine on what basis should interest on childbearing expenses be assessed. Prior to the issue of interest arising, the parties agreed that the father would pay to the mother $11,319.16 for child support arrears. After identifying the power to make an order determining the method of calculation of interest attracted to a judgment debt, his Honour commented that it is “usual for interest to be calculated on a simple interest basis on the amount unpaid from time to time”. Relevantly, his Honour “found no authority which would support a view that over such a long period of time interest on a compounding basis is appropriate.
In Stelzer & Wallace (2017) 56 Fam LR 547 Benjamin J considered an argument that money paid to reduce a judgment debt to which interest is attracted, must be directed first to pay any outstanding interest before the principal debt. In rejecting that argument, his Honour applied the “first in, first out” principle deriving from Devaynes v Noble  EngR 77 (Clayton’s Case), noted that interest does not generally accrue on interest, and, referring to the Federal Court decision of Jackson v Conway  FCA 1530, his Honour denounced the application of compound interest:
- The effect of applying payments first to interest then to principal must, in effect, compound the interest.
Carchar & Hbenum  FamCA 496 concerned a consent order made in 1991 which provided for the husband to pay the wife the sum of $25,000 by a specified date and, failing payment, after which interest would accrue at a rate of 18 per cent per annum adjusted monthly. Cronin J considered an argument that failing payment by the specified date the interest payable on the sum ought to be calculated as compounding monthly. In rejecting that argument his Honour said (at ):
… the appropriate provision of interest is a flat rate rather than compound interest. Compound interest has always been described as interest upon interest (see Codelfa Construction Pty Ltd v State Rail Authority of NSW  HCA 24; (1982) 149 CLR 337). Nothing in the order in 1991 provided for compound interest and nothing in s 117B to the extent that it might apply indicates that such a provision should apply when interpreting orders such as this.
His Honour’s position was that “If it were otherwise, a capitalization process would give rise to an interest on interest arrangement. The order did not contemplate that or if it did, it would have to be clearly articulated and it was not”.3
The summation of the above is simple. Without an order specifying the method of calculation of interest, you are stuck with simple interest. That is, if you have an order for the payment of money by one person to another, then you have interest calculated in accordance with s.117B and r.17.03 based on simple interest. If you are yet to obtain an order for the payment of money, then consider applying for compounding interest on whatever payment of money is ordered. The Court has the power to make an order for compounding interest, although it will need to be satisfied that an exercise of its discretion to do so is warranted (for example, for punitive measures). It might be necessary to establish why compound interest is preferable to a higher interest rate.
- Stephens & Stephens & Anor (2009) FLC 93-425, . In our view, where a property settlement order provides for the payment of money, then in the absence of an order to the contrary, interest is payable at the rate prescribed by the Rules from the date on which the order is made, or the date on which the order takes effect, whichever is later, on so much of the money as is from time to time unpaid. However, the court that made the property settlement order may order that interest is not payable or may order that interest is payable at a rate specified in the order, being a rate different from the rate prescribed by the Rules, or that interest is payable from a date specified in the order.
- Federal Circuit Court Rules 2001 (Cth), r.22.01.M