To be or not to be: Notional Add-Backs in Property Proceedings

When determining what assets comprise the pool of assets available for division between a separated couple in the Family Court, it has been the practice of the Family Court and the profession for some time to have regard to what may be described as “notional assets”, with which many people may be more familiar with the more colloquial description of “add backs”.

As to the issue of add backs the Full Court, in its decision of HDM & MM & SJM (2006) Fam CA47 (14 February 2006) accepting the decision of Omacini v Omacini (2005) FLC 93-218 found, without limiting the possibility of other categories, that 3 clear categories of cases have emerged where the Court has determined it is appropriate to notionally add back assets that no longer exist, namely:

a)             Where parties have expended money on legal fees;

b)             Where there has been a premature distribution of matrimonial assets (see Townsend & Townsend (1995) FLC 92-567); and

c)             In the circumstances outlined by Baker J in Kowaliw (1981) FLC 91-092 at 76,644.

There has been a number of considerations by the authorities in the Family Court as to how one should determine whether (in the case of a premature distribution of assets) there should be an “add back”, and the considerations that the Court must have regard to or should have regard to when taking into account an asserted “add back” argument.

The Full Court in GVC v HPC (1998) FamCA 143 (at paragraph 46)held (per Nicholson C J, Ellis & Kay JJ): ‘Whilst not seeking to place a fetter upon the exercise of discretion of a Trial Judge in individual cases, it seems to us that the concept of adding monies reasonably disposed of back into the pool, ought be the exception rather than the rule. The parties are entitled to reasonably conduct their affairs post separation in a manner that is consistent with properly getting on with their lives.’

Marker v Marker, unrep (1998)Fam CA42, per Baker, Kay and Chisholm JJ (quoted at P79, 314 of Chorn v Hopkins (2004)FLC 93-204): ‘There seems to be no appropriate basis for notionally adding back monies that existed at separation but which have been subsequently spent on meeting reasonably incurred necessary living expenses. Neither the Family Law Act nor the case law requires that parties go into a state of suspended economic animation once their marriage breaks down pending the resolution of their financial arrangements. Parties are entitled to continue to provide for their own support. Whether any expenditure so incurred is reasonable or extravagant is a matter that can be determined by the Trial Judge.’

In the decision of Omacini v Omacini (2005) FLC 93-218, the Full Court stated as follows (at paragraphs 39 and 40):

39. (the learned Trial Judge) seems to be saying that the mere fact that a party has expended money realised from the disposition of assets that existed as at the date of separation, will result in that expenditure being added back ‘in the usual way’ as a premature distribution of assets with nothing more. If that is what (the Trial Judge) is saying, in our view, she is being unduly simplistic. In our opinion, it was a necessary requirement for Her Honour to examine and make some assessment of the reasonableness or otherwise of the expenditure. The need to satisfy that requirement was particularly critical in a case such as this because:

a)              The Appellant Husband had at least prima facie provided a full explanation and accounting as to how the money had been expended; and

b)             Much of the expenditure was incurred after the Appellant Husband had accepted a redundancy package.

            40. As (the Trial Judge) noted a redundancy package is intended to make up for future loss of earnings. Given that the package was frozen, the Appellant Husband had to meet expenditure from somewhere, which is  a matter that needed to be examined, particularly in view of the fact that his redundancy package was fully included in the asset pool available for distribution.’

The Full Court in SMB & MFB (2006) FamCA 46 (Bryant C J, Kay & Warnick JJ) held:

71. In the present case, no finding was made by the Trial Judge that the Wife had either embarked on a course of conduct designed to minimise the value of the matrimonial assets, or that her expenditure was reckless, wanton or negligent.

            72. Thus, we think that there is a fundamental flaw in the pool created by the Trial Judge which included a notional addback of the monies that the Wife had received on account during the hearing. Absent any negative finding about the Wife’s expenditure which she had detailed in her Affidavit and which she asserted to be her reasonable annual expenses, we cannot see any basis upon which His Honour ought reasonably to have added back the sum of $102,500.00 to the asset pool.’

Kouper & Kouper (No. 3) (2009) FamCA 1080 (17 November 2009) per Murphy J:

  • In the circumstances of this decision, His Honour was required to consider whether to notionally add back monies representing the proceeds of sale of matrimonial assets following separation, where there was a concession that such sum of money was under the heading ‘Necessary Living Expenses’. His Honour states (at paragraph 82): ‘It seems to me appropriate to regard those funds as necessary living expenses on the part of the Husband, and I decline to add back to the pool that sum.’
  • His Honour Justice Murphy then goes on to consider the relevant principles regarding the notional adding back of assets (see paragraphs 90 through 113 inclusive). His Honour states (at paragraph 108), after considering the authorities, as follows:’Whilst, clearly enough, the authorities make it plain that the manner in which any dissipation of funds should be dealt with is a matter for the Trial Judge’s discretion, and accepting that the discretion ought not, of course, be fettered, it nevertheless seems to me that (leaving aside the issue of paid legal fees) the authorities indicate that the issue can, conveniently, be approached by reference to 5 questions:

(a)           Is it contended that property (including money), that would otherwise be available for distribution between the parties if a Section 79 Order is made, has been dissipated with a consequential loss to the property otherwise potentially divisible between the parties at the date of trial?;

(b)           If so, is it alleged that the dissipation of property was in respect of things other than what, in the particular circumstances of this particular marriage, can be classified as ‘reasonable living expenses’?

(c)            If it is asserted that any loss to the divisible property results from dissipation of property other than in respect of such expenses, why is it asserted that the result should be a sharing of that loss by the parties other than equally?

(d)           If it is contended that this be the result, why should there be an addback (which brings to account, dollar for dollar, such past expenditure in current dollars) as distinct, for example, from there being an adjustment being made pursuant to Section 75(2)(o)?; and

(e)            How should either any ‘addback’, or adjustment pursuant to Section 75(2)(o), be quantified?’

Hackshaw & Hackshaw (2010) Fam CA1123, per Murphy J:

In this decision, his Honour Justice Murphy has regard to paragraph 108 of His Honour’s decision in Kouper & Kouper (supra) and the ‘5 questions‘ which his Honour states that the authorities indicate is the approach to be taken regarding addbacks.

The decision in the matter of Stanford v Stanford (2012) 293 ALR 70 has relevance to the determination as to addbacks. In Stanford, the Full Court has offered what it has called 3 fundamental propositions (at paragraphs 78 and 79). The first is that ‘It is necessary to begin consideration of whether it is just and equitable to make a property settlement order by identifying, according to ordinary, law and equitable principles, the existing legal and equitable interests of the parties in the property.’ The second was that (Section 79 of the Act), ‘is a not a power that is to be exercised according to an unguided judicial discretion’ but must be exercised in accordance with existing legal principles. The third proposition is as follows: ‘To conclude that making an order is ‘just and equitable’ only because of and by reference to various matters in Section 79(4), without a separate consideration of Section 79(2), would be to conflate the statutory requirements and ignore the principles laid down by the Act.’

His Honour Justice Murphy in the decision of Watson & Ling (2013) FamCA 57 states (at paragraph 29): ‘Where, but for the disposal of money or other property by one party, legal or equitable interests in it would have been part of those existing at trial, it may be possible to assert, in the particular circumstances of a case, that the money or property is nevertheless to be considered as part of the existing legal or equitable interests of the disposing party (‘sham’ transactions and circumstances where it can be established that the properties held, for example, on trust by another for the disposing party are examples). The investigation of issues of that type might be seen to be part of the establishment of the existing legal and equitable interests at trial…’

His Honour Justice Murphy in Watson & Ling went on to review the existing case law on how addbacks might be dealt with if not treated as notional property (at paragraphs 33 and 34):

‘First, consistent with existing authority, it can be recognised pursuant to s 75(2)(o) (cf s 90SF(3)®) (see, for example, Omacini & Omacini [2005] FamCA 195;(2005) FLC ¶93-218, Browne & Green [1999] FamCA 1483(1999) FLC ¶92-873 and Cerini[1998] FamCA 143). Secondly, it might be contended that it might be recognised within the assessment of contributions. This Court has long eschewed the notion of “negative contributions” (see, for example, Antmann & Antmann (1980) FLC ¶90-908). Nevertheless, it might be argued that the “non-dissipating party” can be seen to have made a disproportionally greater indirect contribution to the existing legal and equitable interests (for example to their preservation) if it is established that, but for the other party’s unilateral dissipation, those existing legal and equitable interests would have been greater or had a greater value.

The assessment of the circumstance under discussion is, ultimately, a matter of discretion (see, for example, Cerini at [46] and Townsend at 81,654). Equally, however, authority dictates that it will be “the exception rather than the rule” (Cerini at [46]) that a direct dollar adjustment equivalent to the amount of the alleged dissipation of the pool is made to the otherwise entitlement of a party.’

We note the Full Court decision in the recent case of Bevan & Bevan (2013) 116 (per Bryant CJ, Finn and Thackray JJ) where the following was said in relation to add backs at (79):

            “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 an equitable outcome when dealing with the unilateral disposal of property”.

So, and whilst it has been a common practice amongst the family law profession for “add backs” to be provisionally included in the pool assets as arguments to be advanced to include such notional assets, having regard to the premature distribution of the assets to which those “notional add backs” relate, we are able to see from authorities:

  1. That each property case needs to be examined on its own particular facts;
  2. That the Court is guided by the principle that the parties are entitled, post separation, to continue to arrange their financial affairs and expend moneys in an ordinarily fashion;
  3. In respect of add backs, the task is “to examine and make findings about the particular circumstances surrounding expenditure and to determine, within that context, the manner in which the overall justice and equity indicates the diminution in the pool ought be treated. The task is ‘…to examine and make findings about the particular circumstances surrounding expenditure and to determine, within that context, the manner in which overall justice and equity indicates the diminution in the pool ought be treated.’ (Kouper & Kouper per Murphy J at paragraph 113);
  4. That in the exercise of the Court’s discretion in regard to whether or not an add back should be included, the “reasonableness” of the expenditure and dissipation of existing matrimonial assets is a matter which the Court must consider;
  5. Often parties to family law proceedings and particularly to property proceedings will be at odds as to whether a specific “add back” will be included in the consideration of the Court when adjusting property between them.  Whilst it has been a practice adopted amongst the profession for some time to consider such add backs, they often represent little more than notional assets and the Court has not had an invariable practice of doing so, and there appears to be no statutory warrant to adjust property interests in non-existent property.  The concept of so called add backs has been employed by some as a means of informing the Court as to what might be a just and equitable result but their consideration is only “consideration of the history of the marriage” and, as part of that, the source and application of funds, and often the Court will find it inappropriate to accept the invitation proffered to include so called add backs in the adjusted property.
  6. The determination of a just and equitable entitlement is not a question dependent for its determination on accounting for non-existent assets in an accounting way.  That does not mean that the Court won’t take those matters into account in its considerations (and may do so, not on a “dollar for dollar” basis of the amount asserted to have been dissipated or disposed of, but perhaps under Section 75(2) of the Family Law Act, 1975 when the Court determines what further “adjustment” should be made, having regard to “any other relevant matter” per Section 75(2)(o) and, in particular, the source and application of funds by each of the parties.

We of course take great care in advising you as to the particular circumstances of your case, and as to the particular circumstances of any premature disposition of assets and the manner in which that will be taken into account for the purposes of property adjustment, should that become an issue.

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