Shnell & Frey (2021) FedCFamC1A 55

The Full Court Decision of Shnell & Frey [2021] FedCFamC1A 55 is a good refresher on the processes that the court considers and that the parties must prepare for.

A first instance property settlement order produced an effect that the wife retain roughly 52% of the net assets and the husband roughly 48%.  It was in effect that each party retain to the exclusion of the other all property currently in their possession or control with no super split.

The wife could not ascertain this and complained how the Primary Judge dealt with the value of the husband’s interest in a family trust, the disparity of gifts and inheritances of the parties and latent capital gains tax in her real estate.

Of interest to the writer is the concern for latent capital gains tax in the wife’s real estate.

An appeal was allowed.

The court re-exercised their discretion.

The parties had married in January 1980 and separated late in June 2015.  At the time of trial, the husband was 70 and employed as a professional, and the wife was 64 and employed as an adviser for a company providing financial services with a history of making decisions that were advantageous to the husband’s career. She worked part-time, took maternity leave, and was the primary homemaker and parent throughout the marriage with the husband assisting to the extent possible given his longer working hours.

The parties had received various inheritances.

In 2009, she inherited $60,000.

During the marriage, the husband received by way of gifts and inheritances sums totalling $2,015,638 which were expended upon the acquisition and improvements of the assets and on the family generally.

After the parties divorced in July 2017, the wife in 2019 received an inheritance that is reflected on the parties’ trial Balance Sheet of $2,550,026.

After separation, the wife had earned more than the husband. Their respective salaries in 2019 were:

• Wife – $175,203; and
• Husband – $99,991.

The parties had at the date of trial, joint net assets of $8,623,296.  The trial result meant the wife received $324,530 more than the husband.

The wife’s investment property at latent capital gains tax liabilities of $290,029.

The husband’s trust interests, which excited the wife’s attention, had net assets of $4,683,297 and he and his brother and sister were joint appointors and joint directors of the corporate trustee.

The husband had received regular distributions of one-third of the income of the trust since 2011, together with the right to occupy a beach house from time to time.

The primary judge viewed this trust as intergenerational having been established by the husband’s parents and that it was not the current intention of the husband or his siblings to vest the trust and distribute its capital.

The wife had wanted a $2 million adjustment from the husband, and the husband had wanted $162,200 adjustment from the wife.

The trial judge identified the major issues as follows:

1. How to treat the husband’s interest in the trust;
2. The weight, if any, to be taken into account by the introduction of the husband’s small initial equity in the former matrimonial home;
3. The value and weight to be attached to the husband’s inheritance;
4. The value and weight to be attached to the wife’s inheritance;
5. The GST on the wife’s real estate; and
6. What adjustment should be made for prospective considerations.

The trial judge dealt with the controversies as follows:

1. The husband had no control of the trust and no value should be ascribed to the interest in the trust;
2. The wife’s concern that her capital gains tax liability should be placed on the Balance Sheet was rejected;
3. The husband had conceded his initial equity in the former matrimonial home was one of a myriad of contributions over a 35 year marriage;
4. Recognising the husband’s inheritance was received progressively after the death of his mother in 2011; and
5. Rejected the wife’s submission that her inheritance should be quarantined in a second pool and her contributions to it considered on an asset by asset basis.

The primary judge recognised that her inheritance had been greater but that the myriad of contributions should be assessed as largely equal, slightly favouring the wife because of the disparity of the inheritance and the timing of her inheritance.

The Judge added a heading “Whether and, if so, what adjustment should be made having regard to the following relevant factors in ss 79(4)(e) and 75(2)” and then did not answer the question posed in the heading.

In the appeal, the court had to consider whether the primary judge’s reasons were adequate to explain the approach taken.

Inadequacy of reasons is really based on whether the Appeal Court can work out the reasoning upon which the decision is based, or if justice is not seen to have been done.

Reasons should let people identify the basis of the decision and the extent to which their arguments have been understood and accepted.

The Hickey & Hickey & Attorney-General for the Commonwealth of Australia [2003] FamCA 395 case was considered, and paragraph 39 of that Judgment was recorded. The case law reveals there is a preferred approach to the determination of an application brought pursuant to the provisions of section 79.

“39. The case law reveals that there is a preferred approach to the determination of an application brought pursuant to the provisions of s.79. That approach involves four inter-related steps. Firstly, the Court should make findings as to the identity and value of the property, liabilities and financial resources of the parties at the date of the hearing. Secondly, the Court should identify and assess the contributions of the parties within the meaning of ss.79(4)(a), (b) and (c) and determine the contribution based entitlements of the parties expressed as a percentage of the net value of the property of the parties. Thirdly, the Court should identify and assess the relevant matters referred to in ss.79(4)(d), (e), (f) and (g), (“the other factors”) including, because of s.79(4)(e), the matters referred to in s.75(2) so far as they are relevant and determine the adjustment (if any) that should be made to the contribution based entitlements of the parties established at step two. Fourthly, the Court should consider the effect of those findings and determination and resolve what order is just and equitable in all the circumstances of the case”

This of course is only a preferred approach.

What’s important though, is it is imperative to be clear about what step you reach at Step 2 as to a proper consideration of section 75(2) matters.

Following the preferred approach allows prospective factors to be considered after the outcome of the contributions analysis is known – see Keskin & Keskin and Anor [2019] FamCAFC 236 at [44].

This Full Court agreed that the Hickey approach was not mandatory.

While there was no direct reference to the four step approach, it is evident from the reasons that were published that there was that structure.

While there was an assessment that the contributions were largely equal, although “slightly favouring the wife”, there was a view that it was appropriate to not make any further adjustment. As the Full Court said, “It is unclear what slightly favouring means” (paragraph 36).

The primary judge had also referred to the timing of the wife’s inheritance.

Paragraph 37 of the Full Court Judgement said:

“˜There is also ambiguity about what the primary judge meant about the “timing of the wife’s inheritance”.’

Applying the Hickey approach, the Full Court determined that the primary judge had not expressed the result of her assessment of the parties’ contributions as a percentage of the net value of the property of the parties. Also, although the primary judge posed the question as to what adjustment should be made, it was not answered.

The parties looked for clarity, it was absent from the Reasons.

The Full Court determined that the primary judge gave reasons as to why a property settlement order should be made.

The Full Court discussed the husband’s interest in the trust.

The Full Court said Grounds 3 and 8 complain about the weight the primary judge attributed to the financial resource. A challenge based on weight faces a high bar (Gronow & Gronow [1979] HCA 63).  It is apparent the primary judge was not prepared to assume the husband’s interest in the trust was worth anything like one-third of the underlying net assets of the trust. However, given the reasons, it is not possible to say how the consideration was weighted.

Another appeal ground was the treatment of the wife’s inheritance. This is an important topic in this appeal because there are many, many, many occasions of a late in the marriage inheritance or a post-separation inheritance. It is helpful for lawyers to have guidance.

The wife argued a Bonnici and Bonnici [1991] FamCA 86 approach which was that a global approach presented difficulties and suggested adopting an asset-by-asset approach.

Within paragraph 62 and 63 of the Reasons and the court, at [63] considered the contribution of the inheritance was one of the myriad of contributions made by each party during the long marriage.

What troubled the Full Court was paragraph 62 where the Court said:

“62. This case is distinguishable from Bonnici…..most importantly because in this case each party received an inheritance – the husband’s towards the end of the marriage and the wife’s after separation. Even if a two pool approach were adopted, the husband’s contribution of his inheritance would have to weigh heavily in favour of the husband in “˜pool one’ and wife’s inheritance in “˜pool two’ would have to be taken into account under s 75(2)(b) as property of the wife not otherwise included in “˜pool one’.”

The Full Court determined that the treatment of the inheritance couldn’t succeed independently of the challenge to the adequacy of the primary judge’s Reasons.  In other words, it wasn’t clear what had been in the trial judge’s mind.

The primary judge indicates at paragraph 74 that she took the latent CGT into account when adjusting prospective factors.

The court considered Rosati v Rosati [1998] FamCA 38.

The Full Court referred to paragraph 6.36 of that Judgment.

“6.36 It appears to us that although there is a degree of confusion, and possibly conflict, in the reported cases as to the proper approach to be adopted by a court in proceedings under s.79 of the Act in relation to the effect of potential capital gains tax, which would be payable upon the sale of an asset, the following general principles may be said to emerge from those cases:-

(1)     Whether the incidence of capital gains tax should be taken into account in valuing a particular asset varies according to the circumstances of the case, including the method of valuation applied to the particular asset, the likelihood or otherwise of that asset being realised in the foreseeable future, the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to that asset.

(2)     If the Court orders the sale of an asset, or is satisfied that a sale of it is inevitable, or would probably occur in the near future, or if the asset is one which was acquired solely as an investment and with a view to its ultimate sale for profit, then, generally, allowance should be made for any capital gains tax payable upon such a sale in determining the value of that asset for the purpose of the proceedings.

(3)     If none of the circumstances referred to in (2) applies to a particular asset, but the Court is satisfied that there is a significant risk that the asset will have to be sold in the short to mid term, then the Court, whilst not making allowance for the capital gains tax payable on such a sale in determining the value of the asset, may take that risk into account as a relevant s.75(2) factor, the weight to be attributed to that factor varying according to the degree of the risk and the length of the period within which the sale may occur.

(4)     There may be special circumstances in a particular case which, despite the absence of any certainty or even likelihood of a sale of an asset in the foreseeable future, make it appropriate to take the incidence of capital gains tax into account in valuing that asset. In such a case, it may be appropriate to take the capital gains tax into account at its full rate, or at some discounted rate, having regard to the degree of risk of a sale occurring and/or the length of time which is likely to elapse before that occurs.”

In relation to the capital gains tax, the Full Court, at paragraph 72, extracted relevant cross-examination of the wife as to her intentions.

The wife accepted that she “will have…the investment property” and further she accepted that she will formulate a final determination that “that will be, will it not, having regard to your best interests financially at that point in time?“.

The appeal was allowed because of the inadequacy of the Reasons.

In the appeal, the wife wanted $1.8 million from the husband without the additional $200,000 superannuation she had sought at the beginning of the trial.

The husband was willing to retain the Judgment of the primary judge.

The Full Court accepted that the capital gains tax should have been added back to the pool as a liability for which the wife is responsible.  The wife had abandoned the submission that the husband’s interest in the trust had a value which could or should have been considered.

The Full Court agreed with the trial judge that the contribution assessment could be conducted on a global basis and they considered the assets in one pool.