Legal costs paid – an adjustment factor?

Legal costs paid from capital and income – are either or both adjustments?

Parkes & Parkes [2015] FamCA 44 (5 February 2016)

…..Counsel for the husband submitted that there should also be an adjustment in favour of the husband pursuant to s 75(2)(o) because the wife had paid the sum of $80,000 towards her legal costs from the remainder of a term deposit account which was part of the property of the marriage, while the husband had paid his legal fees from his post separation income.

8. In reply to the submission that the wife’s legal costs, if not added back, should be taken into account under s 75(2)(o) either against her or in the husband’s favour, counsel for the wife submitted that the fact that the wife paid her legal costs from a “cash reserve which was present during the marriage is totally irrelevant – this is the position generally speaking and also on the specific facts of this case.” Counsel relied upon what he referred to as the general rule that the assets of the parties are assessed at the time of the trial. He submitted that if an “add-backs argument” were accepted, then the wife’s legal costs cannot be added back without also adding back the legal costs of the husband, noting that the legal costs of both parties are substantially the same. Counsel for the wife pointed to the fact that the reason that the husband was in a position to pay his legal costs from his post separation income rather than capital was because in the post-separation period he was living rent-free in the house purchased by the wife’s parents. In contrast, the wife incurred rental expenses as well as expenses in re-furnishing.
9. The submissions on behalf of the husband focused upon the financial contributions made by the husband at the commencement of the marriage and his financial contribution by way of salaried income during the marriage. At the commencement of the marriage the husband owned a property at G Street, Suburb H (“the Suburb H property”). This was sold soon after the parties married and the net proceeds of $265,000 were invested. Counsel for the husband emphasised that the wife has benefited from the generosity of her father and continues to have a good relationship with him which is likely to continue into the future for her benefit. He relies upon the establishment of the company E Pty Ltd for the proposition that the wife’s parents intended to benefit the children by way of a testamentary trust and that as one of two children it was an ordinary expectation that the wife would benefit from her father. Counsel for the husband submitted that this is a s 75(2)(o) factor which should be taken into account in favour of the husband.
10. Counsel for the husband also submitted that interpreting the evidence of the wife’s expert witness Dr I, the wife was capable of full-time work where she might earn a gross income of $105,000 per annum. In contrast he submitted that the husband was vulnerable in his employment and his continued employment was uncertain. He emphasised the disparity between the parties’ qualifications, submitting that the wife has the capacity to explore other options in employment whilst the husband’s options in the future for employment were limited by his lack of tertiary qualifications and his age.

THE ISSUES

15. The issues identified by the parties for determination were as follows:
    • Whether there should be a splitting order so as to effect an equalisation of the parties’ superannuation. This would require a payment of approximately $44,000 from the wife’s superannuation fund to the superannuation fund of the husband;
    • The weight which ought to be afforded to the parties’ respective financial contributions pursuant to s 79(4);
    • What adjustment should be made, if any, on the basis of s 75(2) factors for each party;
    • The approach to the alteration of property interests and whether it should be made on the basis of the global total assets of the parties or the total non-superannuation assets of the parties; and
    • The quantum of funds to be paid by the wife to the husband (the husband claiming $825,798 and the wife conceding $350,000).

THE APPROACH

35. Counsel for the husband relies upon the decision in Singerson & Joans [2014] FamCAFC 238 (“Singerson & Joans”) in support of the proposition of an avoidance of an overly mathematical approach and instead considering overall the justice and equity of any alteration.
36. In Bolger & Headon (2014) FLC 93-575, the Full Court emphasised that
    s 79(4) of the Act requires a holistic assessment of the parties’ contributions. The Full Court referred to the authorities and the well-established recognition that s 79 requires the Court to exercise a wide discretion, and not perform a mathematical or accounting exercise. The Full Court cautioned against “over-zealous attention to the ascertainment of the parties’ contributions”.^[1]
37. The approach I have taken is to consider the contributions of the parties by determining the nature, form and characteristics of all contributions across the whole of the marriage and post-separation. In Marsh & Marsh (2014) FLC
    93-576, Murphy J observed at 79,075:

The expression “post-separation contributions” has, of course, been used widely in many authorities within the context of discussions about the assessment of contributions. But, importantly, it is not the fact of separation or when contributions are made that is the delineator. It remains crucial to analyse and weigh that nature, form and characteristics of all contributions across the whole of the period under consideration.

38. It is not possible to ascribe a mathematical value with any precision to the comparable weight of the differing contributions between the parties and this would be inconsistent with the holistic approach required by s 79.
39. There are a number of factors to be taken into account under s 75(2) of the Act when considering what, if any, order should be made under s 79. These factors are considered later in these reasons.
40. The parties are in dispute about whether the alteration of the parties’ property interests should be made by apportioning a percentage of the total property including superannuation or whether the superannuation property should be considered in isolation from the non-superannuation property.
41. The wife contends for a single pool approach. The husband relied upon the decision in Coghlan & Coghlan [2005] FamCA 429; (2005) FLC 93-220 (“Coghlan’s case”) for the proposition that a two pools approach is not mandatory but preferable.
42. Counsel for the husband argued that the superannuation should be equalised or, “at worst, remain where it is”, but strenuously opposed an approach of an alteration of property interests based on the total assets comprising superannuation and non-superannuation assets which was urged by counsel for the wife. He relied upon Coghlan’s case in support of the two pools approach being appropriate because of the difference between the respective characteristics of superannuation and non-superannuation assets. He submitted that the effect of the wife’s proposal in treating the total assets of the parties as comprising both non-superannuation and superannuation assets would mean that the husband would owe the wife money. He submitted that the single pool analysis proposed by counsel for the wife would result in unfairness for the husband.
43. Counsel for the husband submitted that both parties had contributed to the superannuation funds during the marriage, including by way of salary sacrifice, and there was no basis for an adjustment of 70/30 for the superannuation.
44. The husband’s proposal was that there should be an equalisation of the parties’ superannuation which would result in the amount of approximately $44,000 being paid from the wife’s superannuation fund to his superannuation fund.
45. I have considered the outcome on either scenario. Including the superannuation benefits in the joint property pool would result in the wife paying a lump sum to the husband which would be less than what would be required if the superannuation is removed from the property pool.
46. I accept the submissions of counsel for the husband about treating the superannuation interests of the parties separately from the net non-superannuation assets. I have adopted that approach referred to in Coghlan’s case and treated the superannuation entitlements separately from the non-superannuation assets of the parties. Different considerations apply to the assessment of the respective contributions to the net non-superannuation assets and non-superannuation benefits. I have considered the relationship between the years of fund membership and the marriage, the actual contributions made by the parties to the superannuation funds at the commencement of the marriage, during the marriage and the fact that there was a salary sacrificing of the wife’s income which contributed to her superannuation fund.

Is it just and equitable to make an order?

47. There were no submissions regarding Stanford and the trial proceeded on the basis that both the husband and the wife are satisfied that it is just and equitable for orders to be made altering the existing legal and/or equitable interest in the property. I note that page 17 of the husband’s case outline provides: “Both parties seek an alteration of property interests and agree that it is just and equitable in the circumstances to make such an adjustment”, referring to Stanford.
48. It is clear that both parties agree that the property arrangements that existed during their marriage are at an end and there will no longer be ongoing common use of the former matrimonial home. They both wish to put an end to their financial relationship by way of a distribution between them of their property. In these circumstances I have no hesitation in finding that it is just and equitable under s 79(2) of the Act to make orders for adjustment of property interests between the parties. The Suburb C property is registered in joint names but both parties propose that the husband transfer his interest in that property to the wife upon payment of a lump sum by way of property settlement. Upon payment of a lump sum by the wife, it is agreed that the husband contemporaneously vacate the property.

Section 75(o) factors – legal fees

166. In Bevan, the Full Court (Bryant CJ and Thackray J) observed at 87,233:

We observe that “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. As the question does not arise here, we need say nothing more on this topic, save to note that s 79(4) and in particular s 75(2)(o) gives ample scope to ensure a just and equitable outcome when dealing with the unilateral disposal of property.

167. The husband sought that the legal fees of $80,000 which the wife conceded she paid from joint funds should be taken into account in his favour under s 75(2)(o).
168. In relation to his post-separation expenditure, the husband confirmed that he withdrew $34,000 from his daily operating account towards his lawyers’ costs, repairs and daily living expenses. Specifically, the husband gave evidence that $5,000 was spent on lawyers, $2,500 – $3,000 on repairs, and the remainder used for living expenses. When put to the husband why he needed to utilise the remainder of that $34,000 for living expenses when he was earning post-separation, the husband’s evidence was that his income was applied to legal costs.
169. Counsel for the wife argued that because the husband paid no rent post-separation whilst the wife had paid rent and furnished new accommodation, the husband therefore could pay legal fees from post separation income, whilst the wife was required to withdraw money from her investment fund because she was devoting her post-separation income to living expenses.
170. The table (Exhibit C) prepared by counsel for the wife referred to legal fees to be taken into account.
171. It was common ground that early in the year of separation, a joint TCU term deposit account of the parties was divided equally and they each received $241,243 from that account. Each party invested those funds in a DB term deposit account which forms part of the agreed property pool of non-superannuation assets. The wife gave evidence that she drew down from her term deposit to pay her legal fees of around $80,000. This resulted in her depleting that term deposit account so that the remaining funds are $140,000.
172. In contrast the husband retains $218,131 from the amount of $241,243 which he received. The wife conceded that the husband had paid legal fees from his post separation income. Accordingly the wife’s term deposit contribution to the total pool is $78,131 less than the husband’s.
173. In Chorn v Hopkins the Full Court examined a range of decisions regarding the approach to legal costs and confirmed that the proper time for consideration of the impact of costs is when considering s 117 after proceedings have concluded. The Full Court, in affirming that whether to take into account payment of legal fees is a matter of discretion, noted that it is necessary to “consider when and how the funds used to pay the fees have been accumulated”.^[18]The Full Court emphasised the relevance of the source of the funds. At paragraphs 56 – 58 the Full Court stated:

56. In summary, we consider that the above mentioned decisions of the Full Court establish that, while the treatment of funds used to pay legal costs remains ultimately a matter for the discretion of the trial Judge, in determining how to exercise that discretion, regard should be had to the source of the funds.
57. If the funds used existed at separation, and are such that both parties can be seen as having an interest in them (on account, for example, of contributions), then such funds should be added back as a notional asset of the party, who has had the benefit of them.
58. If funds used to pay legal fees have been generated by a party post-separation from his or her own endeavours or received in his or her own right (for example, by way of gift or inheritance), they would generally not be added back as a notional asset; nor would any borrowing undertaken by a party post-separation to pay legal fees be taken into account as a liability in the calculation of the net property of the parties. Funds generated from assets or businesses to which the other party had made a significant contribution or has an actual legal entitlement may need to be looked at differently from other post-separation income or acquisitions.

FINDINGS ABOUT CONTRIBUTIONS

184. On the undisputed evidence, I find that the wife’s parents made a significant financial contribution on her behalf to the property of the marriage by purchasing the Suburb C property and paying all associated acquisition costs including stamp duty. This property was settled about six months after the marriage, on 3 February 2006 and registered in the joint names of the parties. The total contribution made on behalf of the wife including purchase price, stamp duties and fees for the acquisition amounted to $1,036,104.
185. I am satisfied that the wife’s parents also paid the rent on the property where the parties lived for six months after the marriage and before the settlement of the Suburb C property. This is a direct initial financial contribution made on behalf of the wife which has not been quantified but which was not challenged.
186. The use of a motor vehicle owned by her father’s company E Investments Pty Ltd throughout the marriage and the payment of registration and insurance was also a contribution made on behalf of the wife which benefitted both parties.
187. This gift by the parents of the wife to the parties allowed them to live rent-free, without the need to pay a mortgage or interest for their accommodation for the duration of the marriage. This contribution allowed the parties to use their disposable income to accumulate an asset base. It also provided for the husband to live in the Suburb C property rent-free post separation for a period of just over two years. During the same period the wife has paid rent since May 2014 of approximately $46,800. The post-separation rent-free accommodation provided to the husband must be a factor which is taken into account under s 75(2)(o).

197. The wife did not dispute that she made additional contributions to her superannuation fund during the marriage and by way of salary sacrifice. This had the effect of reducing the available joint income pool. The evidence does not allow me to make any findings as to the quantum by which this reduced her available income for joint purposes. However I am satisfied that the wife has made a greater contribution to her superannuation fund than the husband and that this would have been made at some expense to the joint household income despite tax concessions. The wife’s superannuation has accumulated to $438,362 whilst the husband’s superannuation fund is $350,176.
198. This is an additional reason why in these circumstances it is just and equitable to treat the superannuation contributions of the parties distinct from the non-superannuation contributions.^[19]

FINDINGS ABOUT S 75(2) FACTORS

202. As a result of the property settlement, the husband will be required to find and finance accommodation. This is a fact which the justice of the case requires to be taken into account under s 75(2)(o). However the husband has lived in Suburb C property post-separation for over two years without the need to pay any rent whilst the wife has expended funds for her own accommodation. This is also a matter to be taken into account under s 75(2)(o).
203. I find that the proceeds of the sale of the Suburb H property were deposited by the wife into a term deposit with the DB. In May 2013 the wife divided that term deposit equally between the parties so that each retained the sum of the $241,243. From that amount the wife has paid legal fees of $80,000 and other expenses reducing her deposit to $140,000. The husband has paid legal fees from post separation income and the remainder of his term deposit account is $218,131. Because the wife has paid some $80,000 in legal fees from the pool of assets of the parties, I am satisfied that it is just and equitable to take account of this amount in favour of the husband under s 75(2)(o).
204. In the circumstances of this case I do not propose to exercise my discretion to take account of the fact that the husband has paid legal fees from post separation income. This is not a factor to be taken into account here following the decision of the Full Court decision in Chorn v Hopkins referred to earlier.

CONCLUSION

207. I am satisfied that a fair assessment of the contributions of the parties to the non-superannuation assets is 75/25 in the wife’s favour taking into account the financial contributions made on behalf of the wife by her parents. I accept the submissions made on behalf of the wife regarding the contributions made on her behalf by her parents. In my assessment, that contribution is significant in the context of a non-superannuation pool of $2,666,742. The parties acquired and conserved their non-superannuation assets as a joint enterprise which includes a significant contribution by the wife’s parents.
208. On the other hand, they each entered the relationship with an existing superannuation benefit. The wife’s superannuation benefit was significantly more than the husband’s superannuation benefit at the commencement of the relationship.
209. I reject the husband’s case regarding the wife’s capacity for full-time employment. On the balance of probabilities accepting the evidence of Dr I I am satisfied that the wife does not have the capacity to work full-time.
210. The evidence about the husband’s psychological health was not challenged and I accept that he suffers from depression. However there is no evidence that the husband’s psychological condition has prevented him from working full-time. The report indicates that his employment may be a protective factor albeit the husband has insecurities about that employment continuing because of his age, lack of qualifications and mood.
211. I accept that there is a disparity between the parties in terms of their qualifications and that the husband’s age and the fact that he has received two offers of redundancy which were ultimately withdrawn means that his continued employment may be uncertain. There was no independent evidence adduced to support the husband’s evidence but the wife conceded that there was a letter of redundancy around 2006 which was later withdrawn.
212. The husband will need to pay for accommodation when he vacates the Suburb C property and does not have any of the financial benefits of the family support which is likely to be enjoyed by the wife such as the use of the German motor vehicle, registration and insurance for which will be paid by E Investments Pty Ltd.
213. The wife is 3 years younger than the husband but because of the wife’s inability to work in a full-time capacity, I consider that the s 75(2) factors regarding the respective health of the parties which I have referred to earlier, are balanced equally between them. There should therefore be no adjustment for the health of either party.
214. The wife has paid $80,000 from her half share of the investment deposit which forms part of the agreed table of assets of the parties. This resulted in the wife’s term deposit contribution to the total pool being $78,131 less than the husband’s.
215. I am satisfied that it is just and equitable and appropriate to make an adjustment of 5 per cent in favour of the husband to take account of his need for accommodation, his lack of qualifications, and the payment by the wife of $80,000 in legal fees from the parties’ joint funds.
216. I am satisfied that it is just and equitable to make a distribution of non-superannuation assets of 70/30 in favour of the wife.
217. I am satisfied that it is just and equitable to alter the interests of the parties having regard to the total non-superannuation assets of $2,666,742. Accordingly the wife’s entitlement of 70 per cent of the non-superannuation property amounts to $1,866,719. By agreement, the wife is to retain non-superannuation property of $2,359,175. The husband’s entitlement of 30 per cent of the total non-superannuation property amounts to $800,023. By agreement he is to retain non-superannuation property valued at $307,567.
218. This determination requires therefore that the wife pay the husband $492,456 by way of property settlement on the transfer of the husband’s interest in the Suburb C property to the wife.
219. I am satisfied that it is appropriate and just and equitable to equalise the superannuation of the parties having regard to the duration of the marriage, and the fact that the wife began salary sacrificing from 2010 during the marriage which increased her superannuation. This would require the wife to pay from her superannuation fund $44,093 to the husband’s superannuation fund. I am satisfied that the wife’s superannuation fund has been accorded procedural fairness.^[20]
220. With an equalization of the superannuation I have considered whether the alteration is just and equitable. In considering the entire settlement I have taken into account that the husband will receive a total of $1,194,292 in non-superannuation assets and superannuation which represents approximately 35 per cent of the total pool. The wife will receive a total of $2,260,988 in non-superannuation assets and superannuation which represents approximately 65 per cent of the total pool. The settlement overall is just and equitable.