Risk is a fundamental element of any financial or business investment. The investor may receive increased returns by adopting risk, or it may lead to a substantial loss or the squandering of assets. Risk is shared by both partners during a relationship; however, any subsequent investments are subject to evaluation as part of the asset division in property settlement proceedings upon separation.
In the event that one party has prematurely wasted assets during the separation proceedings, the Family Courts may need to make an adjustment in order to divide property in a fair and just manner. Returning the value of those assets to the property pool may serve as an adjustment.
Add-backs, wastage, and negative contributions
The Court has historically considered the current assets and liabilities of the separated couple, as well as what has been referred to as “add backs,” “notional assets,” or “notional property,” when determining the assets that comprise the parties’ property pool coming from a former relationship.
The general rule has been established in the case of Kowaliw v Kowaliw (1981). The rule stipulates that both parties should be responsible for any financial losses that the parties incur during the marriage, regardless of whether they were incurred jointly or not. The value of assets that one spouse has deliberately or negligently disposed of after separation but prior to the final property settlement can be reincorporated into the asset pool. Granting a “add-back” is the term used to describe this.
The courts have historically acknowledged a variety of squandered assets, such as:
- funds that are withdrawn from bank accounts and subsequently spent;
- funds that are either wagered or lost in poor investments;
- money or other property, such as land, that is given away to friends or family members;
- or assets that are sold for less than their market value.
Before finalising property orders, the Court will ascertain whether the funds have been inappropriately spent or wasted. If so, the Court may add them back to the parties’ asset pool.
The Court has established that parties are entitled to compensate for reasonable living expenses, although there are no established rules regarding what will be added back. However, the Court will add back monies in cases where joint earnings or assets are distributed to one party at the expense of the other or are used to pay for legal fees.
Reluctance in granting add-backs
The Courts typically view wastage as occurring when one party’s reckless or negligent actions lead to the loss or decrease in value of assets, or when one party’s actions diminish the value of the relationship’s assets.
Recently, courts have shown reluctance to approve add-backs for wasted or lost assets. For instance, in the Federal Circuit Court case of Owen & Owen [2015], after the parties separated in 2013, the wife received a $305,000 inheritance from her first husband’s aunt. She then distributed $50,000 to her son and $255,000 to her daughter. The wife argued that there was a pre-existing agreement to allocate the majority of the inheritance to her children, thus she did not waste the $305,000. However, the husband claimed that the wife voluntarily gave the $305,000 to her children and that this amount should be added back to the matrimonial pool.
The Court determined that it is no longer suitable to treat dissipated funds as an add-back. In the Owen & Owen case (2015), the wife received a $305,000 inheritance and distributed it to her children. Since the funds were given away, they were not considered part of the couple’s combined assets and could not be added back to the matrimonial pool.
The rule was once again put to the test in the 2017 case of Charles v Charles, which was an appeal to the Full Family Court. The wife contended that the asset pool should be added back with the money that the husband lost in unsuccessful share trading and the notional adjustments related to mortgage payments that the husband made. The wife contended that there would have been an increased amount of money accessible for the couple to divide had it not been for the husband’s business decisions.
The Court denied the wife’s statement that the amounts should be added back, concluding that the husband’s share trading was not intended to minimise or reduce the parties’ wealth and that he had not acted recklessly, irresponsibly, or deliberately.
What happens if one partner has lost or wasted money?
The significance of demonstrating the severity of a loss before the court will make any adjustments is underscored by cases that specifically address wastage from gambling. The courts have proposed that gambling may be classified as entertainment, similar to how a spouse may spend unproductive time on a yacht or engaging in other leisure activities.
A loss is determined in relation to the asset pool’s size: the court determines a proportional response to a decision that one party has wasted the relationship’s assets. Attempting to establish a case of “wastage” will be challenging for a party if the activity is merely recreational and does not result in any significant loss or reduction in the parties’ pool of property to be distributed.
The case law has determined that behaviour that may be classified as detrimental to the financial relationship of the parties must substantially diminish the value of their assets and financial resources. This is evidenced by the discussions surrounding “negative contribution.”
The Family Court’s Full Court has declined to evaluate negative contributions in accordance with the Family Law Act 1975. Nevertheless, this could be taken into account if the negative behaviour puts a greater burden on the other party.Ensure a fair property settlement with experienced legal support. If you’re dealing with asset waste issues, Quill Legal is here to provide you with the knowledgeable representation you need. Reach out to us today at 02 8999 3743 for a free consultation to secure your financial future and achieve a just resolution.
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