A fundamental component of a financial or business investment is risk. Adopting risk can reward the investor with higher returns, but at other times it may result in a significant loss or waste of assets. During a relationship, this risk is shared by both partners, but upon separation any subsequent investments are subject to assessment as part of the division of assets in property settlement proceedings.
The Family Court will divide property on a just and equitable basis, which may require an adjustment to be made where one party has prematurely wasted assets upon separation. An adjustment may be done by adding back the value of those assets to the combined property pool. It is important to understand the doctrine of waste and recent trends in the application of add backs by the court.
What happens if one partner has lost or wasted money?
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 before final property settlement but after separation, 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- funds that have been withdrawn from bank accounts and spent;
- money or other property, such as land, that has been given away to friends or family members;
- funds gambled or lost in poor investments; or
- assets sold for below market price.
Reluctance in granting add backs
Recently, courts have expressed reluctance to grant add-backs for the waste or loss of assets. This trend was demonstrated in the decision of the Federal Circuit Court in Owen & Owen .
In Owen & Owen, 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 decision of Charles v Charles, which was an appeal to the Full Family Court. In this case, 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 Full Court found 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, therefore rejecting the wife’s claim that the amounts should be added back.
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.
If you would like further information regarding property division, please do not hesitate to contact Etheringtons Family Lawyers in North Sydney on 02 9963 9800 or via our contact page.