How does the family court treat assets and debts incurred after separation?

Clients are often surprised that the asset pool is not calculated at the date of separation but at the date of when parties get final court orders, consent orders or enter into a binding financial agreement. That means debts and assets acquired after separation are included in the property pool.

In this article we will discuss what happens to post separation assets and post separation debts.

Are all debts post-separation included in the property pool?

No, if a debt is considered to be unreasonable, illegitimately incurred or not a debt at all, the court will add the value of the debt back into the property pool. When a party takes on the unreasonable debt it is known as dissipating the asset pool.

What is dissipating the asset pool?

Dissipating assets in family law is misusing, lavishing, and/or squandering the asset pool with or without an intention to make sure the other spouse doesn’t get it. It’s called wastage. It’s not uncommon for lawyers to make wastage arguments on behalf of the spouses who are having their share of assets wasted while they wait for a formal property settlement/financial separation to occur. This is why it’s so important to try to finalise your agreements sooner rather than later.

When has the court considered it dissipating the asset pool?

However, the court won’t find it wastage if it is a reasonable expense or if it is not appropriate to do so.

When a party lets others use assets of charge and gets into debt from a failing business
Kowaliw and Kowaliw (1981) FLC 91-092

Facts of the case

The facts of the case are as follows:

  • In short, the Husband had lost money by permitting a prospective purchaser of the former matrimonial home (who ended up not purchasing the property), to reside in the home of rent or contribution to outgoings for about a year.
  • Additionally, the husband had lost money and had been left with certain liabilities as the result of the failure of the business from which he had derived his income during the majority of the marriage.

The Issues

The primary issue in this matter is the issue of taking ‘waste, destruction or the dissipation of assets’ into account in a property settlement matter.

Holding

In this case, the court held that the husband had “embarked on a course of conduct designed to reduce or minimise the effective value or worth of the matrimonial assets”. The court considered that generally, financial loss incurred during the marriage should be shared between the parties, except where one party has committed an act designed to reduce the assets or where they “acted recklessly, negligently or wantonly with matrimonial assets, the overall effect of which has reduce or minimised their value”.

Rationale

In this case, Federal Magistrate Judy Ryan best summarised the principles that arise from this case and its line of precedents as follows:

  • The principle in Kowaliw is not a fixed code, however, Kowaliw is a useful guideline for dealing with cases involving lost assets or income.
  • In cases, such as Kowaliw, whereby waste is involved, there must be a proper reason for adopting a non-Kowaliw approach.
  • If the losses had occurred in the course of the pursuit of the objectives of the marriage, then such losses should be shared by the parties although these may not necessarily equally considered.
  • The economic consequences of wasted must be dealt with in a just and equitable manner. Therefore, the economic consequences (loss) may be treated as a premature distribution of the asset pool and notionally added back as the asset of the party who had its sole benefit.
  • Taking the premature distribution into account in a general way pursuant to s 75(2)(o) and applying the cumulative outcome of the s 79(4) and s 75(2) findings to the small depleted asset pool may then offend the notions of justice and equity per s 79(2).
  • Where the asset pool had been seriously depleted it may be that only by giving the premature distribution its full dollar value that justice can be given. The premature distribution is not restricted to post separation transactions.
  • Where the monies have been shown to have been reasonably disposed of the notional add back approach should be exception and not the rule.
  • Notional adjustments are not limited to wasted assets, even if the precise value is not known.

In short, if the loss does not involve waste, the economic consequences of a significant reduction in the asset pool must be considered. 

Gambling

There are several cases where gambling debts or funds spent gambling have been considered as wastage.

In AB & GB (No. 2) [2005] FMCAfam 402 the Husband received $400,000 in workers compensation and wasted $80,000 to gambling. The parties were on small incomes and could not afford this waste.

What if the gambling is a real problem and existed throughout the marriage and now as a real ongoing issue?
Crampton and Crampton

Facts of the case

The parties had an asset pool of over 1.5 million dollars, the wife had a gambling problem.

Gambling issue

The wife on her own admission stated she had lost about 100,000 to her gambling problem. The court found it was probably likely to be 140,000.

The husband argued that the money should be added back to the pool and it was “reckless, negligent and wanton” loss of assets. 

The wife argued the husband knew of her issue throughout the marriage, she had made several attempts to get help in the marriage and after separation. The gambling evolved into a full illness where she completely isolated herself. The wife gave psychiatric reports to prove she had a disorder caused by the gambling and the psychiatrist found that the disorder may not improve.

Outcome

The court found it would not be appropriate to adjust the property assets in this case.

Selling assets and spending the money

It’s often one party will sell assets and spend the money.

Townsend (1994) 18 Fam LR 505: FC

Facts

The husband sold a taxi for $148,000 and spent the funds.

Issue

The taxi contributed significant income so selling it prematurely was wasteful.

The spending reckless and not reasonable.

Outcome

The court agreed that it was a premature distribution of joint property and it would be unjust to see it as anything but an add back to the pool.

Reasonably incurred living expenses

The court is generally reluctant to add back assets where the money is spent reasonable for living expenses. Parties are generally entitled to live separately and independently using joint funds. Gallings & Scott (2007) FLC 93-319

While it could be argued this is a reasonable living expense there have been cases where the court thought it appropriate to add back funds spent from joint accounts. Marriage of Farnell

What if a debt considered waste what happens?

It might be appropriate to add the property back to the property pool as if it was never spent or it might be more useful to add it as a contribution under S75(2). It depends on numerous factors as to what the judge or lawyer might argue.

However, it is important to note it is generally quite hard to argue waste, and it is also difficult to add back things that don’t exist. The cases discussed in this article are not the full facts and each case will be examined on its own as to wastage. Therefore you should seek legal advice early if you suspect your spouse might go to sell assets or misuse, many things can be done like caveats and interim distribution orders to avoid the wastage argument altogether.

What about Post-Separation Assets? 

Property to which a party is entitled was said in 1835 in an English case Jones v Skinner to be “the most comprehensive of terms (to describe) every possible interest a party can have”. The court has the power to alter the parties’ interest in all their property, regardless of when or how it was acquired nor whose name it is owned. Therefore either party can have a claim on any property of the other party until final orders are made or an agreement is reached.

Property acquired after separation but before divorce? 

Yes property acquired post-separation and before divorce, could still form part of the property pool. Divorce nor the waiting period for divorce impacts the property settlement time limit.

What about property acquired after divorce but before property settlement?

Yes property acquired after divorce but before a property settlement can be included in the property pool, up until 12 months after the divorce order.

What about property acquired outside of the property settlement time limits?

There are ways to bring an application for a property settlement outside of this twelve-month limit, however generally, any property you acquire after twelve-months of being divorced or after a property settlement is finalised, then that property will be protected.  

Can you buy a property while separated? 

While it is not uncommon for one partner to buy a new property to live in after a relationship dissolves, this is generally not recommended until a formal property settlement has been done or you are outside of the property settlement time limits. If you buy a new home your former partner may be able to claim an interest in your new home.

What about super accumulated after separation? 

Just like tangible property, superannuation forms part of the property pool of a relationship. If you have earned superannuation after separation and before your property settlement, it can be included in the property pool too.

An exception to the rule for post separation assets

It’s important to remember that not all cases are the same and sometimes post separation assets might even be left completely out of the pool, like in Famer and Bramley.

A review of Farmer and Bramley (2000) FLC 93-060

Facts of the Case

The essential facts of this case are as follows:

  • The parties commenced a de facto relationship in January 1983, married in April 1984 and separated in January 1995.  The relationship was the second for both and spanned (10) years duration.
  • The parties each had children to previous partners and had one child together (S), born in March 1985.
  • At the time of separation, the parties had no property of any value.
  • When the parties separated in January 1995, their child S had remained living with the wife until December of 1995, when she went to live with the husband. S remained with the husband through 1996 and 1997, but she returned to live with the wife in December 1997.
  • On 3 September 1996, the husband won five million dollars in a lottery.  The wife became aware of this shortly thereafter.
  • On 28 September 1997, the wife re-married.
  • On 15 January 1998, the husband filed an application regarding residence of the couple’s child (S).  The wife filed a response to the application seeking orders for the child and additionally, seeking an order that the husband pay her the sum of $1,000,000 by way of a property settlement from the post-separation lottery winnings.
  • The husband resisted the wife’s claim on the property including the lottery win and the matter ran to a trial on that issue.  

Issues

The issue for the Court was to determine whether the former husband was responsible to provide the former wife a property settlement from funds received post-separation via a lottery win.  

The Court decided

In the first trial, the Court decided that the wife should receive a property settlement in the amount of $750,000, which represented 15% of the overall net property pool of the parties.

The Husband appealed to the Full Court of the Family Court, which ultimately decided in favour of the wife and the decision at original trial was not disturbed.

The Court reasoned that the wife had made a contribution to the property pool and assessed the contribution as being valued at 12.5% of the net property pool because of her contributions to the welfare of the family during the marriage.  Additionally, the Court assessed her future needs factors as being valued at 2.5% of the net property pool the result of her higher ongoing caring for the couple’s child.

Rationale

The adjustment of the husband’s property in the wife’s favour was because of her having made higher contributions throughout the marriage to the welfare of the family, including caring for the child and at the same time:-

  • supporting the husband whilst he was unemployed;
  • supporting the husband while he studied;  and
  • supporting the husband while he battled a heroine addiction.

But for the lottery win, the property pool of the parties was nominal at the end of the relationship, largely the result of the above factors including lesser contributions of the husband.

The case highlights that direct financial contribution to an asset (the lottery win) is not required for an adjustment of overall property interests in circumstances where other contributions have been made, such as contributions to the welfare of the family.  The future needs including ongoing care of the child was also given weight when determining that an adjustment of the parties’ assets was just and equitable.

Luke Cudmore

Principal Family Lawyer at Cudmore Legal Family Lawyers Brisbane Co. Luke is experienced in family law matters ranging from divorce to child custody. He is a skilled negotiator and strategist and fights zealously for his clients family law rights.