Court reconsiders its approach to ‘add backs’

Recent cases indicate the courts are moving away from the long-standing principle that certain assets, including money spent, dissipated or wasted after separation but before final property settlement, can be added back to the property pool on a notional basis.

The recent decision of the Federal Circuit Court in Owen & Owen [2015] FCCA 2823 highlights a clear trend against add backs in family law. When a party prematurely distributes an asset (that is, before there are final orders about property settlement), the courts are now reluctant to add the value of the asset back to the property pool.

What is an ‘add back’?

Historically, it was often successfully argued where one spouse had disposed of or distributed assets before final property settlement but after separation, the value of those assets should be added back to the current value of the property pool available to be divided between the couple.

For example, the courts had found in the past the present total of the matrimonial pool should be increased by the value of amounts no longer in existence, such as:

• funds withdrawn from bank accounts and spent;
• money or other property such as land given away to friends or family members;
• funds gambled or lost in poor investments; or
• assets sold for below market price.

Traditionally, the courts took the approach that, if a party had deliberately or recklessly embarked on a course of conduct designed to minimise the value of the property pool, then the amount dissipated or wasted could be added back on a notional basis.

As an alternative, the courts had also found money not spent on normal living expenses could be a partial property settlement in the hands of the spouse who had expended the money.

Recent trend against add backs

In Stanford v Stanford (2012) 247 CLR 108, the High Court cast doubt on whether add backs were warranted. The High Court commented that property settlements are concerned with the alteration of ‘parties’ existing current legal and equitable interests in property’. Accordingly, add backs should not form part of the property pool because the parties no longer have an existing interest in that specific asset.

This view was confirmed in the case of Bevan & Bevan (2013) FLC 93-545:

“notional property”, which is sometimes “added back” to a list of assets to account for the unilateral disposal of assets, is unlikely to constitute “property of the parties to the marriage or either of them,” and thus is not amenable to alteration under s 79. It is important to deal with such disposals carefully, recognising the assets no longer exist, but that the disposal of them forms part of the history of the marriage – and potentially an important part … Section 79(4) and in particular section 75(2)(o) [which allow an adjustment in one party’s favour] gives ample scope to ensure a just and equitable outcome when dealing with the unilateral disposal of property.

Background facts of Owen & Owen

The parties began living together in 1989 and married in 1991. This was both parties’ second marriage – the husband was divorced and the wife was widowed. The wife had children from her first marriage. The parties separated in September 2013. Soon after, the wife received an inheritance of $305,000 from her first husband’s aunt, Ms C. The wife distributed $50,000 of the inheritance to her son, Mr G, and $50,000 to her daughter, Ms J. Subsequently the wife gave the remaining $205,000 to her daughter, Ms J. The wife maintained that there was an agreement that the bulk of the inheritance would go to her children. She said she did not dissipate the $305,000 as it was never really her money; it always really belonged to her children.

The husband’s case was that the wife had chosen to give $305,000 to her children and that that sum should be added back to the matrimonial pool.

Decision

Judge Riley found that the agreement alleged by the wife was extremely vague. At some points she indicated that all of the money inherited from Ms C was to go her children and at other points she said it had been agreed that most of it was to go to her children. The wife did not explain why she had initially given each of her children $50,000 and only later gave her daughter the remaining $205,000. Her Honour found that there was in fact no agreement of the kind alleged and the wife had chosen to give $305,000 to her children.

Her Honour said that following Stanford it is no longer appropriate to treat dissipated funds as an add  back. As the $305,000 had been given to the wife’s children, it was no longer an asset owned by either of the parties and could not be included in the parties’ combined assets. However, following Bevan, it could be dealt with as a relevant consideration when the Court decided what adjustment of the current net property pool, if any, was appropriate in one party’s favour.

Significance of the Owen decision

Following Stanford and Bevan, the decision of Owen affirms that funds or assets used or spent by one party, even without the consent of the other post-separation, are highly unlikely to be added back to the property pool.

This reverses a long-settled precedent, which allowed the courts (or spouses themselves by agreement) to adjust for one party’s unilateral expenditure or waste of assets by way of their final property settlement.

In practice, if money has been spent or assets lost, the court may award the other party a higher percentage of the remaining pool, but the value of the lost asset will not be added back. In most cases, a small percentage adjustment in favour of one spouse cannot compensate for the disappearance of a valuable item from the bottom line into the hands of the other spouse.

This represents a significant risk for the many couples who, often for legitimate reasons, allow a long time to pass between separation and beginning their property settlement negotiations.

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