Risk is a fundamental component of a financial or business investment. Adopting risk can reward the investor with higher returns, or it may result in a significant loss or waste of assets. During a relationship, risk is shared by both partners, but on separation any subsequent investments are subject to assessment as part of the division of assets in property settlement proceedings.
The Family Courts will divide property on a just and equitable basis, which may require an adjustment to be made where one party has prematurely wasted assets on separation. An adjustment may be done by adding back the value of those assets to the property pool.
Add-backs, wastage and negative contributions
Traditionally, when determining what assets make up the parties’ property pool of a former relationship, the Court has considered the current assets and liabilities of the separated couple and what has been termed “add backs” or “notional assets” or “notional property”.
The general rule has been set out in the case of Kowaliw v Kowaliw (1981). The rule states that financial losses incurred by the parties throughout the course of the marriage, whether jointly or otherwise, should be shared by both parties. Where one spouse has deliberately or recklessly disposed of assets after separation but before final property settlement, the value of those assets can be added back to the asset pool. This is known as granting an ‘add-back’.
Courts have historically recognised various types of wasted assets including:
- funds withdrawn from bank accounts and spent;
- funds gambled or lost in poor investments;
- money or other property, such as land, given away to friends or family members; or
- assets sold for below market price.
The Court will determine whether the money has been wasted or spent inappropriately and may add it back into the asset pool of the parties before finalising property orders.
There are no fixed rules about what will be added back but the Court has determined that parties are entitled to cover the cost of reasonable living expenses. The Court will however add back monies where joint monies or assets are distributed to one party in detriment to the other, or are spent paying for legal fees.
Reluctance in granting add backs
Generally, the Courts consider that wastage occurs where a party acts recklessly or negligently resulting in the loss or reduction in value of those assets or where the actions of one of the parties reduces the value of assets of the relationship.
Recently, courts have expressed reluctance to grant add-backs for the waste or loss of assets. For example, in the Federal Circuit Court decision of Owen & Owen [2015], soon after the parties separated in 2013, the wife received an inheritance sum of $305,000 from her first husband’s aunt. The wife then distributed $50,000 of the inheritance to her son and $255,000 to her daughter. The wife maintained that there was an existing agreement that the bulk of the inheritance would go to her children, therefore she did not waste the $305,000. The husband contended that the wife had chosen to give $305,000 to her children and that that sum should be added back to the matrimonial pool.
The Court found that 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.
The rule was tested again in the 2017 case of Charles v Charles, which was an appeal to the Full Family Court. The wife asserted that money lost by the husband in unprofitable share trading, and notional adjustments relating to mortgage payments made by the husband should be added back to the asset pool. The wife argued but for the husband’s conduct there would have been more money available for division between them.
The Court rejected the wife’s claim that the amounts should be added back, finding that the husband’s share trading had not been designed to reduce or minimize the parties’ wealth and he had not acted recklessly, negligently or wantonly.
What happens if one partner has lost or wasted money?
Cases specifically dealing with wastage from gambling underline the need to prove that a loss is significant before the court will make any adjustment. The courts have suggested that, just as a spouse may spend unproductive time on a yacht or other recreation, gambling may be characterised as entertainment.
A loss is considered in relation to the size of the asset pool: the court formulates a proportionate response to a finding that one party has wasted the assets of the relationship. If it is merely a recreational activity without any extreme loss or diminution in the parties’ pool of property to be distributed, a party will find it difficult to establish a case of “wastage”.
Discussions in the case law about “negative contribution” have decided that behaviour which may be characterised as negative to the financial relationship of the parties must significantly minimise the value of the parties’ assets and financial resources.
The Full Court of the Family Court has rejected consideration of negative contributions under the Family Law Act 1975. However, if the negative behaviour creates a greater burden for the other party, this could be considered.
Conclusion
The Courts have wide discretionary powers in determining whether assets should be added back to the property pool to allow for a just and equitable property settlement, each case being decided on its merits.
Recent cases indicate a potential modification of a long-settled precedent, which allowed the courts to adjust for one party’s unilateral expenditure or waste of assets. In practice, where assets have been 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. This represents risk for the many couples who, often for legitimate reasons, allow significant time to pass between separation and beginning their property settlement negotiations.
Contact us if you or someone you know needs advice or assistance about the treatment of waste in a Family Law property settlement.
